Young work­ers should ex­plore dis­abil­ity in­sur­ance

USA TODAY US Edition - - MONEY | PERSONAL FINANCE - Robert Pow­ell

The odds of be­ing un­able to work be­cause of sick­ness or ac­ci­den­tal in­jury are greater than the odds of a pre­ma­ture death. That’s un­likely to be some­thing mil­len­ni­als ever think about when plan­ning for re­tire­ment. But they should.

And that means they should con­sider dis­abil­ity in­come in­sur­ance, as bor­ing as it sounds.

The ques­tion any work­ing per­son needs to an­swer, says Kevin Lynch, a fac­ulty in­struc­tor at The Amer­i­can Col­lege of Fi­nan­cial Ser­vices, is this: “How will you sup­port your­self the day you wake up but are un­able to get up?”

To be sure, young work­ers – if a dis­abil­ity arises from a work-re­lated ac­ci­dent or ill­ness – will likely re­ceive work­ers’ com­pen­sa­tion. And many em­ploy­ers do pro­vide group short- and longterm dis­abil­ity cov­er­age as a ben­e­fit.

But they might also need to pur­chase an in­di­vid­ual dis­abil­ity in­come pol­icy to sup­ple­ment a group plan or pro­vide ad­di­tional cov­er­age if a group plan is un­avail­able.

So, what should mil­len­ni­als con­sider?

Don’t think it won’t hap­pen to you

In­juries hap­pen, says Yan Katz, a fi­nan­cial ad­viser with The Bulfinch Group. Ill­nesses hap­pen. “We’ve all heard of some­one who has got­ten into a bad car ac­ci­dent or bat­tled cancer,” he says. “To think it can­not hap­pen to you is plain ... lu­di­crous.”

Your great­est as­set?

Your best as­set when you’re a young worker is your earn­ing po­ten­tial. “Mil­len­ni­als of­ten need to be re­minded that their abil­ity to earn an in­come is their big­gest as­set,” says Jen­nifer Lane, a cer­ti­fied fi­nan­cial plan­ner with Com­pass Plan­ning As­so­ci­ates.

Con­sider: A 30-year-old earn­ing $100,000 a year will gross $3.5 mil­lion over the course of their work­ing years, ac­cord­ing to Katz. And if that money can­not be earned due to sick­ness or in­jury, the po­ten­tial for fi­nan­cial fail­ure rises greatly. “With­out in­come, one can­not spend, save, in­vest or do­nate,” he says.

How much to pur­chase

In gen­eral, in­sur­ance com­pa­nies limit the amount of cov­er­age to re­place in­come. Poli­cies typ­i­cally pro­vide about 66 per­cent of gross wages. Ac­cord­ing to Katz, the right ben­e­fit amount to pur­chase is straight­for­ward. “It would be any por­tion of your cur­rent pay­check, in­clud­ing com­mis­sions and bonus, not cov­ered by your em­ployer’s ben­e­fit plan,” he says.

If you have an em­ployer-spon­sored plan, learn what it cov­ers as well as the def­i­ni­tion of what “cov­ered earn­ings” is, says Katz. De­ter­mine, too, what per­cent­age of your earn­ings is cov­ered as well as the monthly cap. Check whether in­come you re­ceive from your dis­abil­ity in­come in­sur­ance pol­icy is tax­able or not. Once you do all that, you should be able to de­sign a plan to “fill the in­come gap” of your cur­rent earn­ings not cov­ered by your em­ployer plan, says Katz.

The def­i­ni­tion of dis­abil­ity

There are many def­i­ni­tions of dis­abil­ity, in­clud­ing own-oc­cu­pa­tion, mod­i­fied own-oc­cu­pa­tion, any-oc­cu­pa­tion, and mod­i­fied any-oc­cu­pa­tion.

The def­i­ni­tion is the most crit­i­cal is­sue to ad­dress when con­sid­er­ing an in­sur­ance pur­chase, says Lynch of The Amer­i­can Col­lege of Fi­nan­cial Ser­vices. “The ‘gold stan­dard’ is called ‘own occu- pa­tion – non-can­cellable,’ ” he says. “This pol­icy ba­si­cally guar­an­tees that once is­sued, as long as you pay your pre­mi­ums, which can­not be in­creased, your pol­icy will re­main in ef­fect.”

Ac­cord­ing to Lynch, “own-oc­cu­pa­tion” means you will be con­sid­ered dis­abled if you are un­able to per­form each and ev­ery re­spon­si­bil­ity of your cur­rent po­si­tion.

By con­trast, the more com­mon def­i­ni­tion found in poli­cies is “any-oc­cu­pa­tion,” says Lynch, which says you are dis­abled only if you are un­able to per­form the re­spon­si­bil­i­ties of any oc­cu­pa­tion, he says. “By that def­i­ni­tion, the vast ma­jor­ity of work­ing Amer­i­cans would never be con­sid­ered dis­abled.”

Katz also says find­ing a contract that of­fers a “par­tial” ben­e­fit is very im­por­tant un­der def­i­ni­tions. A “par­tial” ben­e­fit, he says, will pay you if you can­not work and suf­fer a loss of in­come as a re­sult of be­ing un­able to per­form at prior ca­pac­ity be­cause of in­jury or ill­ness.

Choose an elim­i­na­tion pe­riod

The elim­i­na­tion, or wait­ing pe­riod, is the stretch of time – typ­i­cally 30 days to one year – you have to wait be­fore re­ceiv­ing in­come from your dis­abil­ity in­sur­ance plan.

Ac­cord­ing to Katz, choos­ing an elim­i­na­tion pe­riod comes down to two is­sues: How many days of in­come are you able to cover from your per­sonal re­sources. And cost.

“The longer you ex­tend your wait­ing pe­riod, the lower your pre­mi­ums will be,” Katz says. “The sweet spot for most plans is gen­er­ally around 90 days.”

Equally im­por­tant, pur­chase a plan that pays ben­e­fits for as long a pe­riod as pos­si­ble – five years, 10 years, to age 67, or life­time.

Got ques­tions about money? Email Bob at rpow­ell@allth­ingsre­tire­ment.com.

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Your best as­set as a young worker is your earn­ing po­ten­tial.

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