Disability Insurance after Divorce
Finances: Should You Have Long-Term Disability Insurance in Divorce?
Determining all of your insurance coverage needs is partly a matter of playing a worst-case scenario ‘What If?’ game. For example, what if you get into a car accident, or what if there’s a fire in your home? How would this impact your finances? What level of financial risk are you willing to live with in regard to your health, car, or home, for example?
If you’re recently divorced, acquiring your own insurance is probably one of the many items of your to-do list as you establish your independence and create a plan to protect your finances, should something unexpected happen. When you sit down with your insurance agent, be sure to ask about long-term disability insurance and how you could benefit from this type of coverage.
Most people who believe in protecting themselves and their assets by acquiring insurance coverage opt for health insurance, automobile insurance, homeowner’s insurance and life insurance. However, while health insurance will cover your doctor or hospital visits should you become injured or ill, what happens if something unexpected happens and you’re unable to work for several months or even years?
If you’re not working, you’ll have no income. Your savings will quickly be depleted, and your bills will accumulate. How would you financially survive? This is the scenario that long-term disability (LTD) insurance covers. Should you wind up unable to work for an extended period due to a back or spinal injury, psychiatric or emotional problem, neurological problem, heart problem, blood disorder, or cancer, for example, LTD insurance would help you pay your every day living expenses while you’re unable to work due to a covered long-term illness or injury.
The money you receive from LTD insurance can be used to pay your everyday living expenses, including your mortgage payments, car payments, and utility bills. The money can also be used pay for food and clothing, and any medical or rehabilitation expenses not covered by your health insurance. If you suffer some type of injury or disability, this insurance could mean the difference between your long-term financial stability and bankruptcy.
“When discussing disability insurance, it is important to distinguish between coverage offered through an employer, which is known as group ‘long-term disability [LTD] insurance,’ and coverage that individuals purchase on their own, called ‘individual disability income [IDI] insurance,'” explained Brian Leet, supervisor of Individual Disability Income Insurance Sales and Marketing at The Standard, a provider of long-term disability insurance. When looking to acquire LTD or IDI coverage, it’s important to understand that not all policies are alike. Shop around for the best coverage, and based on a recommendation from your insurance agent, choose a policy that provides the coverage and benefits that specifically meet your unique needs.
The following are five things to consider when shopping for LTD or IDI insurance:
1. The waiting period associated with when the coverage kicks in.
LTD coverage generally has a 90-day to one-year waiting period associated with it,” said Michael Fradkin, vice president of disability product management at MetLife. Your savings will have to cover your expenses between when the disability or injury occurs, and the time your financial benefits kick in. The shorter the waiting period, the higher your premium for the insurance will be.
2. Determine exactly how each insurance company and policy defines what disabilities or injuries are covered.
Definitions of covered disabilities vary greatly. A disability can be defined as your ability or lack of ability to do your current job, or it could be defined as your ability to hold any job. Whether the insurance is provided through your employer, or if it’s an individual policy, will make a difference in how the term ‘disability’ is defined by the insurance company,” added Fradkin. What specific disabilities or types of injuries that are covered will vary considerably between policies.
3. The amount of coverage you receive and for how long.
Some policies will provide 80 to 100 percent of your current salary, but the premiums for these policies will probably be costly. If, however, you opt to a policy that provides you with a benefit equal to only 50 to 60 percent of your current monthly salary, how would this impact your standard of living and ability to cover all of your living expenses? Your premiums will be set based on the amount of coverage the policy is for, and whether or not the policy will have a benefit limit (measured as a dollar figure or time interval). For example, some policies will pay benefits for only three to five years, until you reach age 65 (or until your retirement age under Social Security), or until you reach the policy’s pre-determined coverage limit.
4. Determine if the policy’s benefits will increase over time, based on cost-of-living increases.
For example, if you receive a benefit of $4,500 per month today, in 10 to 15 years, the value of that $4,500 monthly payment will be considerably lower due to inflation.
5. The monthly, quarterly or annual premium associated with the policy.
This is how much you’ll pay for the coverage and peace of mind. If the long-term disability is provided by an employer, the cost is several hundred dollars per year, per employee. For IDI insurance, the cost can be up to three times higher,” said Fradkin. Leet explained that premiums for an LTD or IDI policy are determined by the policy holder’s age, the benefit amount, the benefit period, the waiting period after an injury or illness (before the benefits are paid), your current health, whether or not you’re a smoker, the types of disabilities that are covered by the policy itself, your occupation, and what optional benefits you add to the policy (such as a prevision for cost-of-living increases).
Acquire LTD or IDI coverage as early in your professional life as possible. The older you get, or if you wait until a problem arises, the costs go up considerably and the insurance is much harder to get. Most folks vastly underestimate the likeliness of becoming disables. One in three Americans will become disabled for at least 90-days, before age 65,” stated Fradkin. Most people, however, believe that nothing will happen to them until something actually does. In addition to injury, serious illness can cause someone to be out of work for extended periods.”
Before signing up for an LTD or IDI policy, determine the insurance company’s reputation and financial stability. Standard & Poor’s Insurance Rating Service (www.standardandpoors.com), along with A.M. Best Company (www.ambest.com), are two online resources that can be used to conduct unbiased research about insurance companies. With the odds of an American experiencing some type of long-term disability during his or her working years being as high as one in five, according to Leet, the need for this type of insurance definitely exists, especially if you’re a single parent raising children and you rely solely on your own income to survive.
Like many types of insurance, LTD or IDI insurance is entirely optional, and paying the premiums represents yet another expense that will be deducted from your paycheck. However, what this type of policy offers is peace of mind. Should something unexpected happen to you, you’ll know that you’ll remain financially stable and be able to pay your bills until you can return to work.