unravel disability insurance

July 20, 2007 11:41 AM

Tell me about disability insurance. I am self employed, 31 and would like to protect my income in the event of a disability. What are some pitfalls in the language of contracts that I need to look out for? Is disability insurance as important or more important than health insurance?
posted by __ to work & money (6 comments total)

This primer from the fool.com was really helpful when I was trying to evaluate whether I needed additional disability insurance beyond what my job offered. I'd start there.
posted by iminurmefi at 12:18 PM on July 20, 2007

Disability insurance is not as important as health insurance, but it is a good thing to have. As a group product, it's priced relatively inexpensively and is a good thing to expect from an employer as an employee benefit.

As a self employed person, it is possible to get an individual disability policy, but it will be very expensive. In general, the things you want to check for in a long term disability contract are:

-Benefit Maximum: $5,000 is probably the most you can get on an individual policy.
-Proof of Good Health: find out whether proof of good health is required and for what benefit amount. It's likely that you'll have to provide proof of good health (a questionnaire and paramed exam) for coverage.
-Elimination period: this is the number of days you need to be disabled before the payments start - 90 or 180 days are standard.
-Definition of Disability: own occupation to social security normal retirement age is the best you can get. On an individual contract, the best you'll get is maybe 5 year own occupation, but probably 2 year own occupation. This means that for the first two years of your disability, you're disabled if you can't do your own job. After that, you're disabled if you can't do any job you're suited for by education or training.
-Pre-Existing Conditions Exclusion: 3/12 -- 3 months previous to coverage, 12 months treatment free -- is standard for group contracts. For individual contracts, it's likely to be much worse if they'll even cover your pre-existing conditions. I seem to remember individual coverage mostly being a rolling 24. That is, you have to be treatment free for 24 consecutive months to be covered for that condition. Any treatment and the clock starts again.
-Self-Reported Conditions: 24 months for all sorts of things. It's probably not going to be a choice for individual insurance.
-Tax-Free Benefit: if you pay the premium yourself, which you will certainly do if you buy individual insurance, the benefit will be tax free. Something to keep in mind when figuring out how much insurance you want to buy. Any social security benefit will offset.

Those are the big ones. You should also read the exclusions to see what new and inventive ways they've discovered not to pay. Met is a reasonably good individual carrier. I don't quote individual disability much, but be prepared for at least $1,000 a year for a decent plan.
posted by MarkAnd at 12:18 PM on July 20, 2007 [2 favorites]

I'm self employed. I talked to a financial advisor a couple years ago and he said it would be way too expensive to be worth it for me. YMMV, I guess.

IMO, disability insurance is much less important than health insurance.
posted by adamrice at 12:20 PM on July 20, 2007

One item you should fully understand is called the "own-occupation" clause. Without it your disability coverage may be worthless. And some insurance companies are putting weasel words into their "own occupation" clause to water it down.

Own occupation means that you will be paid if you become disabled for your own occupation at which you worked when the disability occurred. Without this, it means that a surgeon that loses the use of his hand would not be considered disabled if he were capable of sorting clothes working at the Goodwill store.
posted by JackFlash at 12:43 PM on July 20, 2007

Supplemental disability insurance can be a terrific deal -- modest premiums for a benefit that would be very valuable if you became too sick or injured to work. (Here we're talking about optional coverage, not talking about federal SSI or basic group disability from work.)

However, whether or not you can get such a deal is going to be case by case. To a much greater extent than life insurance, supplemental disability insurance is heavily rated: your occupation, age, income, gender and health history will dramatically impact the premium you're charged and the benefit you're offered. Different groups of people have dramatically different disability rates, and even more dramatically different adverse selection history (the tendency of people to seek coverage when they know they're unusually likely to be making a claim). If you're in a category with a bad rating history, you will get offered only uneconomic deals -- you'd be much better off simply increasing your savings rate.
posted by MattD at 3:41 PM on July 20, 2007

Individual (that is, not group) disability insurance is increasingly difficult to acquire. The underwriting is more and more stringent, as the industry has lost a ton of money over the last 15 or so years. (It's a fairly stupid industry -- the underwriting changes implemented are not at all tailored to the reasons for the losses, but that's another story.)

That's a long way of saying -- don't be surprised if you are rejected despite a long and successful work history and relatively modest medical concerns. But if you qualify, it's a good benefit.
posted by ClaudiaCenter at 11:18 PM on July 20, 2007