PC-ES Disability Insurance-Print

RISK MANAGEMENT

DISABILITY INCOME INSURANCE

Determining the Need for Disability Income Insurance: How Much Is Enough?

Most people believe that they are adequately insured against disability because they think they have coverage through their employer or through the government. That’s probably why 80 percent of Americans don’t own private disability income insurance coverage. However, assuming that you’re covered against disability through your employer or through the government is a mistake. Although 50 percent of employers cover short-term disability, only 40 percent cover long-term disability. Government programs, such as Social Security and workers’ compensation, may pay you benefits, but you qualify for benefits only if you meet a strict definition of disability. Example(s): Chris worked for a major electronics company and was severely injured in a motorcycle accident on his way to work. He assumed that he was covered for disability under workers’ compensation, but his employer told him that because his accident wasn’t directly work-related, he wouldn’t be eligible for workers’ compensation disability benefits. His employer did tell him, though, that he was covered for short- term disability under the employer’s group plan, and he received those benefits for a year. At the end of that year, however, his benefits expired. Unfortunately, Chris still was not able to work and was left without income to pay his mortgage or his bills. There are many types of Disability Insurance Policies which are differentiated by how the policies define whether or not the insured individual is disabled, and therefore whether or not they are entitled to receive benefits under their disability policy. The two most common are Own Occupation and Any Occupation. TYPES OF POLICIES When you purchase disability insurance, you should pay close attention as to how the policy defines disability. Not only will the disability definition determine, in part, how much the policy will cost, but it will also determine how you can qualify for disability benefits. In general, to be considered disabled, you must be unable to work and earn income; however, many policies narrow down this definition quite a bit. They may specify whether you must try working in another occupation if you can’t do your own job, or they may pay benefits if you can do some but not all of the duties of your own occupation. Other policies aren’t concerned with occupation at all; they consider you to be disabled when, because of illness or injury, you experience a loss of earnings.

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RISK MANAGEMENT

DISABILITY INCOME INSURANCE

TOTAL DISABILITY COVERAGE Disability policies that pay benefits according to an occupational definition of disability are called total disability policies. You qualify for benefits under these policies if you are totally unable to work and earn income. Several types of total disability coverage exist: own occupation coverage, any occupation coverage, split definition coverage, and presumptive disability coverage. OWN OCCUPATION COVERAGE In general (see note below), an own occupation policy defines disability as the inability to perform the usual and customary duties of one’s own occupation. This is a liberal definition of disability, because even if you can work in another occupation, you will still receive disability benefits. Because it is relatively easy to qualify for benefits under this definition of disability, insurance companies are limiting the availability of own occupation coverage, either by making it extremely expensive or by restricting coverage to individuals that are unlikely to file a claim. Example(s): Cynthia was an artist who purchased own occupation disability coverage. When she developed carpal tunnel syndrome in her right hand (the one she used to sketch with), she began receiving disability benefits because she was unable to perform the duties of her own occupation. Even though she went to work selling real estate a few months after she began receiving benefits, her ability to work in another occupation did not affect her eligibility for disability benefits, and she continued to receive them for another year. ANY OCCUPATION COVERAGE An any occupation policy defines disability as the inability to perform the duties of any occupation. This definition of disability is strict; to receive benefits according to this definition, you have to be unable to work in any gainful occupation, not just your own. Occasionally, however, the wording is modified to take into consideration your earnings level, education, training, and experience. Example(s): Audra bought an insurance policy that defined disability as the inability to perform the duties of any occupation for which she was reasonably suited by reason of her education, training, or experience. A few weeks later, she suffered a heart attack and was unable to continue practicing law. Because she loved to teach, she began teaching at a local college. However, she no longer continued to receive disability benefits. SPLIT DEFINITION COVERAGE Many disability policies incorporate both an own occupation definition of disability and an any occupation definition. You purchase a policy that provides own occupation coverage for a limited period of time, then Tip: The terminology used to define disability will vary from policy to policy.

RISK MANAGEMENT

DISABILITY INCOME INSURANCE

after this period ends, you must meet the any occupation definition of disability in order to continue receiving benefits. This is sometimes known as short-term own occupation coverage. Example(s): Stephen bought an insurance policy that used a split definition of disability to determine when benefits would be paid. When he was hurt in a car accident and was unable to go back to his teaching job, he found a telemarketing job and continued to receive disability benefits. Two years later, when the own occupation disability coverage period ended, Steve’s disability benefits ended because he was able to work as a telemarketer and didn’t meet the stricter any occupation definition of disability that now covered him. Another differentiator is the percentage of income that would be replaced in the event of a disability; a typical policy might replace 60% of income up to a maximum benefit of $10,000 per month. For example an individual who earns $200,000, would receive the highest possible benefit of $120,000, 60% of $200,000. While it is extremely uncommon to see disability policies which insure 100% of compensation, because they are cost prohibitive, they may be available for specialized occupations such as a surgeon. Essentially, individual disability policies which offer the most liberal definition of disability, as well as the highest percentage of income replacement, are very expensive. The most common form of Disability Insurance is a group policy, offered through one’s employer. BENEFITS FROM GROUP DISABILITY INSURANCE If you work, you may have purchased (or your employer may have supplied) disability insurance. However, don’t assume that because you own a group policy your income will be protected if you become disabled. Often, benefits from a group plan are short-term and may be restricted to specific types of disabilities. If you purchased group insurance through a trade association, you may have been able to add on riders or other options that make your plan more flexible. At this point, you should carefully review any group disability coverage you may already own and decide whether it offers you adequate protection. How much benefit will you receive? When will benefits begin? How long will they last? How do you qualify for benefits?

Contact a Commerce Trust advisor today to discuss your unique situation and explore your options. 1-855-295-7821 | commercetrustcompany.com

Wealth | Investments | Planning Commerce Trust Company

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

Commerce Trust Company is a division of Commerce Bank.

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