Forefiedl Disability Insurance Basics

Miles B. Kessler, CFP®Investment Representative

870 Kipling StreetSuite A

Lakewood, CO 80215-5826Direct: 303-290-8942

Branch: [email protected]

Disability Insurance Basics

January 28, 2016 of 8, see disclaimer on final page

The Fundamentals of Disability InsuranceDisability insurance pays benefits when youare unable to earn a living because you aresick or injured. Most disability policies pay youa benefit that replaces a percentage of yourearned income when you can't work.

Why would you need disabilityinsurance?

Your chances of being disabled for longerthan three months are much greater than youmay realize. According to the Social SecurityAdministration, 1-in-5 Americans live with adisability. More than 1-in-4 20-year-oldsbecome disabled before reaching retirementage*. The possibility of not being able to earna living due to a disability increases your needto protect your income with disabilityinsurance.

Consider what might happen if you sufferedan injury or illness and couldn't work for days,months, or even years. If you're single, do youhave other means of support? If you'remarried, you may be able to rely on yourspouse for income, but you probably alsohave many financial obligations, such assupporting your children and paying yourmortgage. Could your spouse's incomesupport your whole family? In addition,remember that you don't have to be working ina hazardous position to need disabilityinsurance. Accidents happen not only on thejob but also at home, and illness can strikeanyone.

If you own a business, disability insurance canhelp protect you in several ways. First, youcan purchase an individual policy that willprotect your own income. You can alsopurchase key person insurance designed toprotect you from the impact that losing animportant employee would have on yourbusiness. Finally, you can purchase adisability insurance policy that will enable youto buy your partner's business interest in theevent that he or she becomes disabled.

What do you need to knowabout disability insurance?

Once you become disabled and apply forbenefits, you have to wait for a certain amountof time after the onset of your disability beforeyou receive benefits. If you are applying forbenefits under a private insurance policy, thisamount of time (known as the eliminationperiod) ranges from 30 to 365 days, althoughthe most common period is 90 days. Groupinsurance policies through your employer willgenerally have a waiting period of no morethan 8 days for short-term policies that paybenefits for up to six months, and 90 days forlong-term policies that pay benefits up to age65.

You can purchase private disability incomeinsurance policies that offer lifetime coverage,but they are very expensive. Most people buypolicies that pay benefits up until age 65;however, two- and five-year benefit periodsare also available. Because many injuries orillnesses do not totally disable you, manypolicies will offer a rider that will pay you apartial benefit if you can work part time andearn some income.

Where can you get disabilityinsurance?

In general, disability insurance can be splitinto two types: private insurance (individual orgroup policies purchased from an insurancecompany), and government insurance (socialinsurance provided through state or federalgovernments).

Private disability insurance refers to disabilityinsurance that you purchase through aninsurance company. Many types of privatedisability insurance exist, including individualdisability income policies, group policies,group association policies, and riders attachedto life insurance policies. Depending on thetype of policy chosen, private disability policiesusually offer more comprehensive benefits toinsured individuals than social insurance.Individually owned disability income policiesmay offer the most coverage (at a greatercost), followed by group policies offered by anemployer or association. Check with youremployer or professional association to see ifyou are eligible to participate in a group plan.If not, contact your insurance broker to lookinto individual coverage.

In general, disabilityinsurance can be split intotwo types: private insurance(individual or group policiespurchased from aninsurance company), andgovernment insurance(social insurance providedthrough state or federalgovernments).

*Source: Social SecurityAdministration, The FactsAbout Social Security'sDisability Program, SSAPublication No. 05-10570January 2015

of 8, see disclaimer on final page

Workers' compensation and Social Securityare two well-known government disabilityinsurance programs. In addition, five states(California, Hawaii, New Jersey, New York,and Rhode Island) have mandatory disabilityinsurance programs that provide disabilitybenefits to residents. If you are a civil serviceworker, a military servicemember, or other

federal, state, or local government employee,many disability programs are set up to benefityou. In general, however, governmentdisability insurance programs are designed toprovide limited benefits under restrictiveterms, and you should not rely on them (asmany people mistakenly do) as your mainsource of income if you are disabled.

How Much Disability Income Insurance ShouldYou Have?The amount of individual disability incomeinsurance you should buy depends on threethings: how much income you'll need if youbecome disabled, how much money you canafford to spend on premiums, and how muchinsurance you'll be able to purchase under theinsurance company's guidelines.

Determine how much incomeyou'll need if you becomedisabled

It's hard to know exactly how much incomeyou'll need after you suffer a disability, butyou'll probably need more than you think. Mostof your fixed expenses won't change, and youmay save money on work-related expensessuch as clothing, automobile costs, andlunches out. However, you'll also spend moreon other items, including the following:

Medical expenses: You can expect yourmedical expenses to rise when you suffer adisability. Assuming that you have healthinsurance, you'll probably have to satisfy adeductible as well as an out-of-pocketmaximum, which may increase your expensesimmediately after your disability occurs. Inaddition, if you suffer a long-term disability andare forced to quit your job, your group medicalinsurance coverage may be terminated. If youwork for a large enough employer, you may beable to continue coverage on your employer'splan through the government regulation knownas COBRA, but you'll have to pay the premiumyourself, and the coverage cannot last beyond18 months in most cases. This can addhundreds of dollars to your budget. You mayalso need to buy medical equipment orsupplies, or even renovate your house toaccommodate your disability.

Living expenses: What if you can't drive, cleanyour apartment or house, mow the lawn, orcook for yourself after you become disabled?Will you need to hire household help to takecare of day-to-day activities that you can nolonger do? Hiring help can be a substantial,unexpected expense when you becomedisabled.

Child-care expenses: If you have youngchildren and both you and your spouse work,you know how expensive child care is. Canyou afford it if you or your spouse becomesdisabled and unemployed? The disabledpartner may be able to care for the children athome, but not if his or her disability is toolimiting. On the other hand, if you currentlystay at home with your children, you may beforced to return to work if your spouse isdisabled, and you may have to contend withan unforeseen additional expense.

Find out what disability benefitsyou're already entitled to

You may already be covered by somedisability income insurance through youremployer. This may be short-term coverage,long-term coverage, or both. Short-termcoverage pays a weekly benefit, usually afterthe first day of an accident or the eighth day ofan illness, for a period of 13 or 26 weeks.Long-term coverage pays a monthly benefitthat begins after the short-term period expires.The benefits are usually paid until age 65. Ifyou have one type only, you should look intobuying a private policy for the type ofcoverage that your employer does not provide.If you have both short-term and long-termcoverage, you are probably ineligible to buyany additional coverage, unless youremployer's plan limits the maximum benefit toan amount that is less than 60 percent of yourannual income.

You could depend on getting disability benefitsfrom Social Security, if you pay into thesystem. However, relying on this type ofinsurance can be dangerous. Social Securitypays benefits only under strict definitions ofdisability, making it very difficult to qualify.Also, benefits are limited and may not beadequate for your needs. Review thecoverage available to you, take a look at thespecifics of any group disability policies youalready are covered by, then decide whetheryou need more disability coverage.

It's hard to know exactlyhow much income you'llneed after you suffer adisability, but you'llprobably need more thanyou think.


How Much Disability Insurance Can YouBuy?

Note: If policy premiums are paid withafter-tax dollars, the benefits will be receivedtax free. Premiums paid with pretax dollars,usually through your employer, may cause thebenefits to be taxable when received.

If you need more disabilityincome insurance, how muchshould you buy?

Once you've decided that you need to buymore disability income insurance, you shouldaim to cover a significant portion of the incomethat you will lose if you become disabled.However, you may not be able to buy as muchcoverage as you want. The insurancecompany determines the maximum amount ofdisability income insurance you can purchase,based on your income, health, age, and theamount of other disability benefits you'reentitled to. Most companies will sell youinsurance that replaces 50 to 70 percent ofyour monthly pretax earnings (of course, youcan opt to buy less than this amount).

Social Security Disability BenefitsLike most people, you probably don't expect tobecome disabled, but it can happen. That'swhy it's important to know what disabilitybenefits you may be entitled to under SocialSecurity.

The Social Security Administration (SSA)administers two programs that pay disabilitybenefits. The Social Security DisabilityInsurance (SSDI) program pays benefits toqualified individuals who are under age 65,regardless of their income. The SupplementalSecurity Income (SSI) program pays benefitsto qualified individuals with limited income.Only the SSDI program is discussed here.

To qualify for benefits, you mustmeet a strict definition ofdisability

Because the definition of disability that theSSA uses is strict, it's hard to qualify for SocialSecurity disability benefits. To receive benefitsas an adult, you must have a physical ormental impairment that has lasted or isexpected to last for at least 12 months or isexpected to result in your death. Yourimpairment must also be severe enough toprevent you from performing any "substantialgainful activity" or, in other words, the workthat you were doing when you becamedisabled or any other work.

The SSA has a list of impairments that are

enough.

When determining your ability to work, theSSA will consider your medical condition, age,education, past work experience, andtransferable skills. If you're working, theamount of income that you are able to earnalso plays a role. If your average monthlyearnings from work exceed a maximumamount set by the SSA, you generally won'tbe considered disabled for Social Securitypurposes. Special rules and income limitsapply if you're blind.

You'll also need sufficient workcredits to qualify

When you work and pay Social Security taxes,you earn credits that enable you to qualify forSocial Security benefits. You can earn up to 4credits per year, depending on the amount ofincome that you earn. The number of creditsthat you need depends on how old you arewhen you become disabled. For instance, ifyou're age 31 to 42, you'll need to haveearned 20 credits within the last 10 years,ending with the year in which you becamedisabled. If you're younger than 31, you'll needfewer credits; if you're older than 42, you'llneed more.

considered so severe that they automaticallydefine you as disabled. If your condition is noton the list, the SSA must decide if it's severe

You should apply forbenefits at a Social Securityoffice as soon as youbecome disabled, and itappears that the disabilitywill continue.


Your family members don't needwork credits

If you qualify for disability benefits, certainfamily members can also collect monthlydisability benefits based on your work record.Eligible family members may include:

• Your spouse age 62 or older, if married atleast one year

• Your former spouse age 62 or older (if youwere married at least 10 years)

• Your spouse or former spouse of any age,if caring for your child who is under age 16or disabled

• Your children under age 18, if unmarried• Your children under age 19, if full-time

students (through grade 12) or disabled• Your children older than 18, if severely

disabled

Each eligible family member may receive amonthly check equal to as much as 50 percentof your basic benefit. This is in addition to yourbenefit--your check doesn't get reduced.

The amount of money that you'llreceive depends on your SocialSecurity earnings record

The amount of your monthly disability check isbased on your average lifetime earnings.Generally, you'll receive an amount equal towhat you would receive were you to beginreceiving Social Security retirement benefits atfull retirement age. You can use one of thebenefit calculators available at the SSAwebsite, www.ssa.gov , to estimate thedisability benefit you may be eligible toreceive.

Eligibility for other state and federal benefitsmay affect the amount of your SSDI check.And because the SSA will periodically reviewyour case and decide whether you are stilldisabled, your disability benefits may stopaltogether. This will happen if your medicalcondition improves to the point that you're nolonger considered disabled, or if you are ableto earn a substantial amount of money.Finally, once you reach full retirement age,your disability benefits will automaticallyconvert to Social Security retirement benefits(the amount is usually the same).

You should apply for benefits assoon as possible

You should apply for benefits at a SocialSecurity office as soon as you becomedisabled, and it appears that the disability willcontinue. That's because there's a five-monthwaiting period before you'll get your firstcheck. You can file for benefits in person,through the mail, online, or over thetelephone. You'll be asked to provide thefollowing information:

• An original or certified copy of your birthcertificate (if you were born in anothercountry, you'll need to provide proof of U.S.citizenship or legal residency)

• An original or certified copy of your militarydischarge papers (DD 214) if you were inthe military

• A copy of your W-2 form (or, ifself-employed, a copy of your federal taxreturn for the past year)

• Workers compensation information,including date of injury, claim number, andpayment amount

• Social Security numbers of your spouseand children

• Your checking or savings account number• Name, address, and phone number of a

person who can get in touch with you ifnecessary

• Medical and job information, includinginformation about physicians who havetreated you, names of medicines you aretaking, medical records you have, and jobsyou worked in during the 15 years beforeyour disability began

Once your application is complete and hasbeen reviewed by your local Social Securityoffice, it will be sent to the DisabilityDetermination Services (DDS) office in yourstate. There, the DDS will determine whetheryou are disabled under Social Security rules. Ifyour claim is approved, you'll receive a lettershowing the amount of benefit that you'llreceive and when your benefits will begin. Ifyour claim is denied, you'll receive a letterexplaining the decision and telling you how toappeal if you don't agree with it.

For more information on Social Securitydisability benefits, visit your local SocialSecurity office, look at publications availableon the SSA website, or call the SSA at (800)772-1213.


http://www.ssa.gov

Individual/Group Disability Policy Alternatives

Individual policyDescription Conditions Advantages Disadvantages

A policy you buythrough yourinsurance agent thatpays you disabilitybenefits when you aresick or injured

You must meet theunderwriting criteriaset by the insurancecompany foroccupation, health,habits, avocations, etc.

• Benefits are taxfree if premiumspaid with after-taxdollars

• Flexible policybenefits andfeatures such aslifetime benefits,cost-of-livingincreases, partialbenefits, etc.

• Provides the mostcomprehensivecoverage

• Premiums generallycan't increase

• Generally, you can'tlose coverage ifyou pay thepremiums

Most expensive type

Group policy issued through an employerDescription Conditions Advantages Disadvantages

A disability benefit youreceive through youremployer; youremployer may or maynot pay part of thepremiums

You have to be amember of the group(in this case, a groupof employees) thatsponsors theinsurance

• Low group premium• Available as short-

or long-termcoverage (or both)

• Usually, you don'thave to proveinsurability

• Less flexible benefitdesign thanindividual disabilitypolicies

• Will terminate whenemployment ends(non-portable)

• Premium willincrease as you getolder

• Definition ofdisability may beless liberal thanindividual coverage

• Benefits will beoffset by SocialSecurity, workers'compensation, andsome other types ofdisability insurance


Group policy issued through an association or organizationDescription Conditions Advantages Disadvantages

A disability policypurchased through anassociation ororganization, such asthe New HampshireRealtors Association

You must be amember of the groupthat sponsors theinsurance (in thiscase, a tradeassociation ororganization)

• Low group premium• May have more

liberal underwritingrequirements,although notguaranteedacceptance as withemployer groups

• Less flexible benefitdesign thanindividual disabilitypolicies

• Definition ofdisability may beless liberal thanindividual coverage

• Contracts may becancelable byinsurance companyor association

• Premium willincrease as you getolder


Miles B. Kessler, CFP®Investment Representative

870 Kipling StreetSuite A

Lakewood, CO 80215-5826Direct: 303-290-8942

Branch: [email protected]

January 28, 2016Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

Specializing in benefits and retirement strategies for Federal employees.Personalized financial services designed to meet your individual needs and objectives.

Securities and investment advisory services offered through Royal Alliance Associates, Inc., memberFINRA/SIPC and a registered investment advisor. Insurance services offered through Kessler & Associates,Inc., which is not affiliated with Royal Alliance Associates, Inc.

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Forefiedl Disability Insurance Basics

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