Published September 2007

Plan for the Unthinkable

By Valerie Greene (page 20)

Disability insurance protects what is probably the most important asset you have: your ability to work and earn an income.

A young entrepreneur was doing well. She owned a business, lived in a beautiful home, and was in excellent health.

She worked out several times a week with a personal trainer and was fit as a fiddle. She never smoked, never had high blood pressure, and never took prescription medications. The thought of being disabled never entered her mind — until at age 30 she suffered a massive stroke that left her paralyzed and unable to speak.

Life can change in a split second and everything you’ve worked so hard to accomplish can be gone. Today you’re healthy and busy operating your business — but what would happen to you and your family if tomorrow you suddenly were unable to work? How would you pay your bills? Who would support your family? What would happen to the business? The answer to those questions is disability insurance.

Everyone is vulnerable

Most people, especially small business owners, don’t want to think about the possibility of a setback, but the fact is that we are all vulnerable. If you suffer a disabling injury or illness at a relatively young age, disability insurance may be the only thing that keeps you afloat financially through your recovery.

But before you rush out and buy the first policy you see, realize that not all plans are the same. Choosing the right disability insurance policy can be complex and time-consuming. Here are some points to consider as you investigate various policies:

Definitions versus rates. Every disability policy is different: This is not a product where you simply shop for the lowest rate. Buying the cheapest policy may be like throwing money away. Your chances of being paid a benefit under a cheap contract are much lower than with a quality contract.

Know the exact definition of “disability.” Does the policy use the words, “own occupation,” or “any occupation”? There is a big difference. For example, depending on the carrier and the contract, if you typically work at a desk doing computer or paper work, and you became paralyzed from the waist down, you could still do your job and would not be considered disabled. However, if you were a Broadway dancer and you became paralyzed, you would be disabled. Know what you’re buying.

Know payout time limits. Aside from policy definitions, two time factors determine your rate. The first involves how soon you want payments to begin after you become disabled. The options are 30, 60, or 90 days. Base your decision on how much savings you have set aside. If you were to become disabled, how long could you survive on your savings until insurance kicked in?

The other time factor is how long you want to receive payments. The options are usually five years, until age 65, or lifetime. If you provide the sole income for your family, you’ll probably want benefits for longer than five years. Choose the time span that makes sense for your lifestyle and situation.

Educate yourself. Before buying, you need to understand fully what you’re getting. In general, should you become disabled, insurance will replace 45 to 60 percent of your gross income. Additionally, the benefits can be set up on a tax-free basis.

In most cases, the younger you are, the less disability insurance costs, and you can lock in that low rate forever. The only thing that increases is the amount of coverage you want. As your income goes up, you may want to increase coverage, and when you do, your premium will likely increase.

Be aware of riders. Just a health insurance policy may include riders or policy enhancements for non-covered items, your disability policy may include riders. In this case, you can add the riders you feel are warranted, such as a cost of living increase, a residual rider in the event you become partially disabled, or a Social Security rider, which augments what Social Security might pay you. Some riders may lower your premium.

Protect your future

Disability insurance is essential for any entrepreneur or business owner. Think about it: We insure our homes in case of fire or theft; we insure our cars in case of accidents; we insure our health in case of sickness. Since our ability to earn an income is our greatest asset and is what enables us to own a home and car and take care of our families, it only makes sense to insure our ability to work. If your ability to earn income went away, what would you do? Life can, and often does, change in a split second.

If cost is a stumbling block, guaranteed renewable disability plans offer a lower premium than normal disability policies, and many carriers offer substantial discounts for list-billed policies. As you investigate disability insurance, seek the advice of a professional advisor who can explain the coverage options and definitions. And always use a highly rated, established carrier.

Take the steps necessary to protect yourself and your income. Even though you hope never to use your disability insurance, you can rest easier knowing that you have it.