How to get insurance if you can’t work

By Christopher J. Gearon, Kiplinger’s Retirement Report

As you approach your final 10 or so years of work, did you ever think how you’d pay the bills if you became seriously ill for an extended period? Whether you are self-employed or work for a company, perhaps you should consider a long-term disability insurance policy.

Such a policy protected Steve Silverman’s income when Lyme disease and meningitis sidelined the Baltimore trial lawyer from work for a year. “It was really debilitating,” says Silverman, who is approaching 50. “My income was literally cut in half.” He was able to work part-time, and the policy covered a portion of his lost income. “It really made the difference in being able to sustain the obligation I made to my kids’ education,” he says. The policy from Paul Revere Life Insurance Company is designed to kick in if his income drops below 20 percent of his pre-disability income, and it covers up to 67 percent of his income up to the first $80,000 and decreases slightly for income above that threshold.

Workers who are in their 50s and 60s are likely to be pulling down the highest salaries of their lifetimes — and they’re at the age when they face the greatest chance that illness or injury can strike. “The higher incidence of claims is among people 50 and older,” says William Franklin, managing principal at Franklin Financial Group, in Hunt Valley, Md., which sells insurance policies to small firms and individuals. According to Guardian Life Insurance Company, 90 percent of claims are due to illness, and 10 percent to injuries. The most common disability claims involve back, knee, hip and other musculoskeletal problems, as well as cancer and heart-related issues.

Only about half of workers have some form of longer-term disability coverage, says Phil Bruen, vice-president of product development for life and disability products at MetLife. While most states require employers to provide disability coverage for a few weeks or months, many employers stop there.

When companies do provide long-term coverage, the policies typically limit coverage to 50 percent of income. If employers offer supplemental coverage, workers pay for it out of pocket. Such coverage typically doesn’t include loss of commissions, bonus compensation or stock-options-related income, Bruen says. He adds that a majority of claims involve someone unable to work for two to three years.

If your employer offers coverage, you will need to decide whether to purchase the company’s supplemental plan or buy individual coverage. You will pay income tax on any benefits you receive from a company-offered disability plan; payouts from an individual plan are tax-free. But employer-based supplemental coverage, which is offered at group rates, costs about one-third less than individual policies, says Jim Edholm, president of Business Benefits Insurance of Andover, Mass., a group insurance broker. Plus, you will not need to undergo medical underwriting if you buy through your employer (you will if you buy individual coverage).

If you’re self-employed or your workplace does not offer long-term disability, you’ll need to consider the individual market. Coverage, availability and price depend on your age and health, and on whether you smoke. Premiums will also depend on your occupation and the level of income you want to replace. Insurers may exclude coverage for a preexisting condition, or they may charge you more or deny you a policy. (Silverman bought an individual plan when he was self-employed, and he decided to keep it after he built up his law firm.)

The younger you are when you buy, the cheaper the premium. A comprehensive ProVider Plus policy from Guardian that pays a $5,000 monthly benefit through age 65 for a 50-year-old healthy male runs $2,722 a year. A 55-year-old who buys the same policy will pay $3,264 a year.

Women have higher rates of disability than men and could pay 30 percent more for a policy than men pay. A look on PolicyGenius, an online insurance pricing tool, shows that a healthy 50-year-old man will pay from $2,844 to $3,840 a year for a policy similar to one that costs from $3,696 to $5,004 for a healthy 50-year-old woman.

Most policies sold are “issue age,” meaning the premiums can’t rise because of your age. You’ll want to look at all of your sources of income and then tally up expenses to figure the amount of coverage you’ll need. Policies typically cover between 50 percent and 70 percent of gross income. Here are other things to consider:

Definition of disability. Franklin says you should buy “own occupation” coverage, which means the policy will pay as long as you can’t perform the duties of your own job. If you buy “any occupation” coverage, the policy may not pay if you’re able to work in a different kind of job. For instance, an accountant could be denied benefits if she were able to work as a cashier. Franklin says there are different versions of “own occupation,” so make sure you understand the definitions. Own-occupation costs more, but it is well worth the money.

Elimination period. This is the amount of time you’ll have to wait from the start of your disability to the point when benefits begin. Waiting periods typically run 60, 90, 180 or 365 days. The longer the period, the less you’ll pay. Experts advise 90 days for most people.

Benefit period. Policies typically offer monthly payments over periods of two, five or ten years — or up to retirement age, which a policy could define as 65 or 67. The longer the period, the more you’ll pay. A five-year benefit period would cover the average duration of most long-term disabilities, according to PolicyGenius.

Residual coverage. This option also pays benefits for partial disabilities that cause a loss in income, allowing you to continue working part-time or in a lower-paying position and collect a benefit to make up for lost income. There’s a higher chance of partial disability than total disability, so residual coverage could be worth the extra cost — about $50 a month for a 55-year-old male.

Noncancelable policy. With this feature, the insurer can’t cancel your policy or raise your premium. If you go instead with just “guaranteed renewable,” you may pay less upfront, but over time the premiums could increase if the insurer gets state approval to raise rates for all policyholders of a specified type of policy. At the very least, get the guaranteed renewable policy, but the noncancelable route offers more predictability.

The insurer you use should have top ratings from A.M. Best, Moody’s Investors Service or Standard & Poor’s. Rather than buy directly from a company, it’s best to deal with an agent who has access to policies from several companies.

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