My guest in this episode of Your Wealth Curve is Scott Bunker, a general agent with Ameritas specializing in individual disability insurance policies. We asked Scott to join us today to delve deeper into the topic of disability insurance coverage, which was previously covered in Episode 2. Scott helps us to figure out the differences between individual coverage versus group or association coverage, and offers advice on how to examine what you may already own and how to decide on the type of coverage that best suits your needs.
After listening to Episode 2, you are convinced that the asset of your income and your potential to earn is the most important asset we have, and that it is no doubt worth protecting. You have listened to the statistics – 1 in 4 Americans in their 30s will become disabled by the time they reach the age of 65. Our income and our earning potential is the most underinsured asset, according to Scott, mainly because it is intangible – we tend to accept the need to protect our tangible assets and overlook the intangible ones. According to our Wealth Curve simulator, it takes just an average of 4 to 5 years for a disabled person to spend down their savings. You’re convinced – you need to incorporate a disability policy into your financial plan. Now where do you start?
Whether you are purchasing coverage for the first time or examining a policy you may already own through your employer or an association you belong to, Scott takes us through the key differences in owning individual versus group coverage and how you can decide which one makes the most sense for you. There are many similarities between these two types of coverage, but there are many differences as well, the first and most obvious being price. Typically, the premium for a policy purchased through a group is less, in fact almost half, than that of an individual policy. But Scott warns us not to be blinded by the difference in price – he says in the insurance world, you get what you pay for and goes on to explain some of the pitfalls of group coverage.
The Similarities between Individual versus Association Policies
Both policies work similarly and contain a few key elements. In both types of coverage, you will receive a monthly benefit when becoming disabled. There is a deductible, in this case a period of time, where you are disabled but are not eligible for coverage (typically 90 or 180 days). The benefit period is typically paid out until you reach retirement age (65 to 67 years) and there is a set amount of benefits based on what you earn. In some policies there is an inflation index, and most have the ability for you to add a catastrophic rider, which would increase your benefit provided you are able to meet two out of the six daily living activities. This means you are disabled to the extent that you cannot perform two of the six following activities for yourself – eating, bathing, going to the bathroom, transferring, dressing and incontinence, in which case the increase in benefits can be used to pay for in-home care or care in a facility. Catastrophic riders can also be triggered by cognitive disability, like Alzheimer’s.
The Pitfalls of Association Coverage
The main difference in the two types of coverage is premium – according to Scott the average price of an individual policy is $5500 per year and the association premium on average is $2200 per year. But Scott urges us to look at it this way – if it is half the cost, it is half the coverage. Plus, in an association plan, the cost typically rises every five years as the aspects of the plan are reevaluated based on the experience of the policy. In an individual policy, the rate remains unchanged. So when considering the difference in premium, Scott says we should try to consider the total cost of the policy from start to finish, incorporating all of the rate increases.
Another major difference in the two types of policies are the ability to “start and stop” the time period of your deductible. In an association policy, say you are out for two months, then return to work for a few weeks. Then you suffer a set back and have to be out of work again. The time period for your deductible resets, meaning the two months you initially took off are no longer applied to the 90 or 180 day waiting period for benefits. In an individual policy, those initial weeks off are still applied towards the deductible, and it would pick up when the second period of disability begins. Also, if you are partially disabled, meaning you are able to work but not in the full capacity you were before you became injured, an association plan may require “total disability” and not pay any benefits at all. In an individual plan, you would be eligible for partial benefits depending on the level of your disability.
An individual plan works well for the employee who is a results-driven earner, or someone who depends on their performance for bonuses or commissions. In an association plan, once you are back to work, the benefits cease. In an individual plan, you are entitled to benefits to cover the revenue lost when you return to work until you are making 85 percent of what you were earning before you were hurt. Also, in an association plan, there may be no coverage for a “self-reported” disability, or a condition that cannot be seen on an x-ray or other diagnostic test such as fibromyalgia or chronic fatigue. In an individual plan, these types of conditions are covered simply with a physician’s diagnosis.
If you are enrolled in an association plan, and then change jobs or decide not to renew your membership in the association, your coverage may end without the ability to be reinstated. In an individual plan, your coverage follows you between jobs and there is no employer involvement.
If you were receiving coverage through a group for a long period of time, and then change jobs, there is a chance as you age that you may be considered “uninsurable” in a new plan. This is why Scott stresses that people investigate all their options and seriously consider obtaining an individual plan while you are young and healthy. In an association plan, there is usually a cap on salary covered by the policy, which may preclude you from receiving benefits in line with what you actually earn. If a part of your earnings come from a bonus, often times these are not considered when the association plan is considering eligibility for benefits. Should there be a settlement related to your disability, often times an association policy will look to recover any benefits paid from money you receive from the case, as opposed to an individual plan, which would allow you to keep the settlement even after receiving benefits.
Scott says the message when it comes to disability insurance coverage is to make sure you carefully review with an advisor what you may already own and all of its moving parts. Get help understanding all the options for coverage that are out there and make an informed decision as to what will best provide you with the coverage you need. Remember, when comparing individual versus association coverage, you definitely get what you pay for, and the extra investment now can hugely pay off in the end should you become disabled.
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