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Disability Insurance, Part Two

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March 26, 2012 by Milton Jones

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In the last column, we discussed the risks of Premature Death, Old Age, and Disability. One of these three gremlins is sure to take away your earning power, sooner or later. The Insurance & Health Insurance Industry offers policies to protect against all three. Life Insurance pays best when you die before your time. You can get an annuity policy, or utilize certain types of life insurance policies to provide retirement benefits. Finally, some companies offer policies that provide disability income. From the Insurance Company’s viewpoint, disability is the toughest of the three to cover.

When we think of disability, the stereotype is to visualize someone paralyzed and bound to a wheelchair. That extreme example is rela- tively easy to insure against, because it’s relatively black and white. But things like stress, fibromyalgia, or back pain are much more subjective. Stated differently, it’s sometimes hard to know whether it’s really disabling or just something to put up with.

With disability income policies, the definition of disability clause is really critical. A typical definition goes something like this: total disability is deemed to exist when the insured person is unable, by reason of sickness or injury, to perform all the important duties of his regular occupation. That standard may prevail for the first 24 months of the disability. Usually there is a stricter standard if payments are to go beyond two years. Then, the standard may be stated as the complete inability to perform the important duties of any occupation for which the insured is reasonably qualified by education or training …

Then there is the matter of how secure is your coverage. Ideally, the policy states that it is Guaranteed Renewable to age 65, subject to the company’s right to increase premiums as necessary. Better still if it states it is Non-Cancellable and Guaranteed Renewable (at least to age 65). In insurance jargon,”non-cancellable” means the company cannot in- crease your premiums. So, you have guaranteed renewable coverage and guaranteed premiums.

The above description applies to non-group personal disability policies which you can buy and control. Such personal policies are more secure than group disability coverage that is part of your employee benefits package. The general rule is that if you can’t hold the job, you can’t hold the benefits.

As you might imagine, personal disability coverage will cost more that a similar amount of group coverage. “Yes it costs more, but it’s worth more,” says the insurance man.

But someone will ask, “Why is the policy only good to you are age 65?”

The concept is that your earning power is what is being insured, and that after normal retirement age there’s nothing left to insure. Also, disability would be more difficult to measure if one is retired. After normal retire- ment age, the pension, Social Security, and other retirement benefits take over to protect against Old Age.

“Well,” you may say, “if one of the gremlins has to get me, I’d rather it be the “ripe old age.”

Amen to that.

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