Income Protection Insurance

What is your most valuable asset? Your home? Its contents? For most working individuals, their ability to earn an income is worth far more than these physical assets. You insure your home. Do you also have income protection insurance? Why not cover your most valuable asset — your ability to earn an income?

According to a U.S. Census report, high school graduates stand to earn more than a million dollars over their lifetimes. Those with a bachelor’s degree will earn $2.1 million, while those with a professional degree will earn an average of $4.4 million over a lifetime.

However, one in seven American adults will be disabled and unable to work for five years or longer. Workers’ compensation will pay benefits for work-related disabilities. But what if a non-work injury or illness causes your disability? Disability income insurance can pay a portion of your lost income while you are unable to work, giving you one less thing to worry about during recovery.

Short Term and Long Term Income Protection Insurance

Your employer might provide paid sick leave or short-term disability insurance. Short-term disability pays income protection insurance for a maximum of six to 12 months. As the name implies, long-term disability (LTD) protects you from longer disabilities. An LTD policy will pay you monthly income protection insurance until you either return to gainful employment or reach the policy’s maximum benefit period, whichever comes first. Most individual policies will pay benefits up to age 65. But some will have shorter income protection insurance periods, from five to 10 years.

When you buy an LTD policy, you elect the amount the policy will pay every month while you’re disabled. Keep in mind that LTD policies will replace only a portion of your pre-disability pay, usually a maximum of 60 or 80 percent. This gives the disabled individual incentive to return to work. If you have some disability coverage through your employer, your insurer will generally coordinate your individual LTD insurance benefits with your group benefits, so you won’t receive more than 80 percent of pre-disability pay.

All types of disability insurance have an “elimination period” during which the insured must be disabled and unable to work (or partially disabled and suffering a loss of income) before benefits begin. For LTD policies, elimination periods range anywhere from three to six months of continuous total or partial disability. Generally, the longer the elimination period, the lower your premiums will be. If you have six months’ worth of living expenses saved or short-term disability benefits through your employer, you can elect a longer elimination period to save money. If you tend to live paycheck to paycheck, you will likely want a policy with a shorter elimination period.

How Do You Define “Disability”?

How your policy defines disability will determine when — or if — you receive benefits. The most comprehensive policies have an “own occupation” of disability. Such a definition considers you totally disabled when “…unable to perform the material and substantial duties of your regular occupation…”

Individuals with highly specialized skills, such as surgeons, might want to buy an “own occupation” policy. If they suffer a disability that prevents them from performing surgery, but they could still see patients and make diagnoses, their policy would consider them totally disabled and still pay benefits, making up for any lost income.

However, “own occupation” policies are becoming harder to find. Some insurers will offer own-occupation coverage for a limited period only, say two to five years. After this, the policy would consider you totally disabled only if “unable to perform the duties of an occupation to which you are suited by education and experience.” Others are writing policies with this type of modified own-income definition at the outset. A policy that defines total disability as being unable to work in ANY occupation provides the most limited benefits.

Renewal Provisions

The other most important thing to look at is your policy’s renewal provisions. A non-cancelable policy is the best income protection insurance. You receive the same benefits and level premiums for as long as you keep the policy in force. The insurer cannot cancel your policy for any reason except for nonpayment of premiums. Even if you develop a serious health condition after buying the policy, the insurer cannot cancel your policy or raise your premiums. A guaranteed renewable policy gives you the right to renew your policy with the same benefits. However, the insurer can raise your premiums, if it raises premiums for all policyholders in your rating class.

How much does a disability income policy cost? Your cost will vary depending on your age, gender, health and occupation; along with the benefits and features you choose. However, you can expect premiums to cost about 1-3 percent of your annual income. Considering that it’s insurance to protect your income, this is a wise investment!

Riders, or additions to your policy, provide additional income protection insurance for an extra charge. These include:

• partial disability or residual benefits, which will pay benefits proportionate to the drop in your income if you can return to work part-time but not full-time due to your disability. For example, if you could return to work half-time and your income dropped by half, you would receive half your monthly benefit.
• a cost of living adjustment, which will increase the amount of your monthly income protection insurance on either a flat percentage basis, or according to increases in the Consumer Price Index.
• waiver of premium, which allows you to stop paying premiums if your disability lasts longer than a specified period, such as 90 days.

For more information about income protection insurance, please read What You Know about Disability Is Probably Wrong.