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Buying Insurance
The following excerpt is from David Bach's book,
Smart
Women Finish Rich.
You Need to Protect Your Income with Disability Insurance
(Step 5: Practice Grandma's Three-Basket Approach to Financial
Security)
I used to think disability insurance was a waste of money.
I was wrong. Although far more people have life insurance
than have disability insurance, the chances of your becoming
sick or hurt are much greater than the chances of you dying
prematurely. Without disability insurance you are playing
Russian roulette with your income.
Consider the following statistics. In one year...
- 1 out of every 106 people will die.
- 1 out of every 88 homes will catch fire.
- 1 out of every 70 cars will be involved in a serious accident.
But...
One out of every eight people will suffer a serious
disability!
What this means to you and me is that the greatest threat
to our ability to finish rich may be the risk we all face
of serious injury or illness! And the younger you are, the
greater your risk actually is. Indeed, it has been reported
that between the ages of 35 and 65, the chances of suffering
a disability serious enough to prevent you from working is
1 in 2. That's twice the chance of dying at that age.
Other than your health, your income is probably your most
important asset. Lose it and you could be losing your primary
means of financial security. That's why we all need disability
insurance.
How Much Disability Insurance Do I Need?
Disability insurance is not designed to make you rich. Rather,
it is a protection plan for your current earning power. Ideally,
therefore, an adequate disability policy is one that would
pay you the equivalent of your current take-home pay.
Most disability plans offer a benefit equal to about 60%
of your gross (or before-tax) income. That may not sound like
much, but if you've paid for the disability policy yourself,
any income you receive from it will be tax-free, so 60% of
the gross probably will be enough to maintain your standard
of living. (After all, 60% of the gross is about what most
of us actually took home after taxes.)
If your employer pays for your disability insurance, any
benefits you receive from it will be taxed. This means that
if the policy pays only 60% of your gross income, you're going
to come up short. Indeed, once you've paid the taxes on your
disability benefit, you're likely to find yourself with only
a fraction of your normal take-home pay. To guard against
this, you should consider purchasing what is known as a "gap
policy" to make up the difference.
Questions To Ask Before You Sign Up
- Is the disability plan portable and guaranteed renewable?
If you purchase your policy through your employer, you must
make sure that you can take the policy with you if you leave
the company. You also want a policy that is guaranteed renewable;
there is no bigger ripoff than an insurance company that
makes you "qualify" each and every year. This is how a bad
insurance company gets out of having to pay you when you
file a claim!
- Under what circumstances will the policy pay off?
Specifically, you want to know whether the policy will cover
you in the event you're no longer able to do the work you
currently do, or whether it pays off only if you are rendered
unable to do the work of any kind. In the insurance industry,
this is known as "owner occupation" and "any occupation"
coverage. Make sure you buy an owner-occupation policy.
Why? Well, take me, for example. I happen to make my living
talking on the phone to clients. Now, if I lost my voice
and couldn't talk, I would, for all intents and purposes,
be out of a job. But unless I had owner-occupation coverage,
the insurance company could say to me "So what if you can't
talk on the phone? There are plenty of other jobs you could
do-like digging ditches. So we are not going to pay you
any disability benefits." With owner-occupation coverage,
they can't do that to me. This sort of coverage is more
expensive, but it is much, much safer.
- How long does it take for the coverage to kick in?
Most disability policies start paying benefits within three
to six months after you've been declared disabled. The easiest
way to reduce the cost of a disability policy is to lengthen
that waiting period. The more cash you have in your security
basket, the longer you can stretch it out.
- How long will the policy cover me?
Ideally, your disability policy should pay you benefits
until you turn 65 at least.
- Is my coverage limited to physical disability, or are
mental and emotional disorders also covered?
A major cause of disability these days is stress. Not all
disability policies cover it, however. If you are in a high-stress
occupation, make sure yours does.
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