Published September 2007

Consider Disability Insurance

By Valerie Greene (page 82)

Imagine what could happen to your business or income if you’re suddenly unable to work due to injury or illness.

As a young entrepreneur, I was doing well. I owned my own business, lived in a beautiful home, and was in excellent health. I worked out several times a week with a personal trainer and was fit as a fiddle. I never smoked, never had high blood pressure, and never took prescription medications. The thought of being disabled never entered my mind … until, at age 30, I suffered a massive stroke and was left paralyzed and unable to speak.

Life can change in a split second, and everything you’ve worked so hard to accomplish can be gone. Even though you’re healthy today and busy operating a septic system pumping or portable sanitation business, 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?

Most people, especially busy small business owners, don’t want to think about the possibility of a setback, but the fact is we are all vulnerable. The only thing that kept me afloat financially throughout my five-year recovery was the disability insurance I had secured for myself. If you think you might never need disability insurance, you might want to reconsider it as a hedge against disaster caused by unexpected, debilitating illness.

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 a complex and time-consuming assignment. As you investigate various disability policies, keep the following considerations in mind:

Compare definitions versus rates

Every disability insurance policy is different, and this is not a product where you want to simply shop for the most competitive rates. Buying the cheapest policy might be like throwing money away. Your chances of being paid a benefit under a cheap contract are much lower than receiving benefits from a quality contract. Know the exact language of the definition of “disability.” Does the policy use the words “own occupation,” or “any occupation” to define the definition of disability? There’s a big difference between the two phrases.

For example, depending on the carrier and the wording of 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 from your job. Know what you’re buying.

Know payout time limits

Aside from policy definitions, two other factors determine your rate, and both involve time limits. Your 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 the duration 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 on how your plan works

Each disability policy is different, so you need to fully understand what you’re getting for your money. In general, though, should you become disabled, disability insurance will replace 45 to 60 percent of your gross income. Additionally, the monies/benefits you receive can be set up on a tax-free basis should a sickness or illness prevent you from earning an income in your occupation. Best of all, in most cases, the younger you are when you buy disability insurance, the less it costs, and you can lock in that low rate forever. The only thing that increases is the amount of coverage you’d want to obtain. That is, as your income goes up, you may want to increase coverage to cover your higher income. At that point, your premium will likely increase.

Be aware of riders

Just like your health insurance policy, which may include riders or policy enhancements for non-covered items, your disability insurance policy may include riders. In this case, though, you can add the riders you feel are warranted, such as a cost-of-living allowance, or COLA; 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 insurance premium.

Protect Your Future and Yourself

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 makes owning the homes and cars possible, it only makes sense to insure our ability to work too. After all, 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 options for disability insurance, seek the advice and counsel of a professional advisor who can explain the coverage options and definitions. And always use a highly rated, established carrier.

A good decision

Looking back, I know now that purchasing disability insurance was the best decision I ever made. Without it, I would have been financially crippled. So take the steps necessary to protect yourself and your income. And even though you will never want to actually use your disability insurance, you can rest easier knowing that you have it.