A prospect worse than death Disability with no insurance can lead to financial ruin.

THE BALTIMORE EVENING SUN

If you're under 65, your chances of becoming disabled are much greater than of dying, experts say. In fact, if you're over 21, you have a nearly 1-in-3 chance of being disabled for some period before you retire, according to the Health Insurance Association of America.

What's more, being disabled can wreak more financial havoc than death. There's no life insurance to bolster the family assets, and the wage-earner still has living expenses even though he can no longer bring home a paycheck. In many cases there are extra medical expenses or added costs for home care.

Despite the disastrous consequences that would befall most Americans who lose their paychecks, most do not have disability insurance, which replaces a portion of lost income. And many of those who do may not be as well protected as they assume.

"Disability insurance statistically is more important than lif insurance," says Richard H. Wagener, a financial planner and owner of Financial First Advisors in Columbia. "The typical family that spends just about everything it makes should get the maximum."

Most companies with 100 or more workers generally provide some type of coverage. But employees of small companies or self-employed workers usually have to get their own policies. Blue-collar workers often have trouble getting coverage at all.

"It is so important for employees to find out the terms of their employer-sponsored policy," says Sally Leimbach, a vice president at RCM&D;, an insurance brokerage.

But too often employees don't know what the policy provisions are, or whether they are covered through a group insurance plan or a pension plan, or -- critically -- whether the benefit is taxable, says Bruce Mitchell of the Baltimore office of William M. Mercer Inc., a benefits consulting firm.

"One of the most common misconceptions is that employer-provided benefits are non-taxable," Mitchell says. "If the employer is paying for it, it's taxable."

A typical group plan, he says, pays 60 to 70 percent of the disabled person's salary offset by any other benefit, such as Social Security disability or workers' compensation.

If the employer pays the premiums, that benefit will be taxed as income. If the employee pays the premiums with after-tax dollars -- that is, income that has been taxed -- the 60-percent benefit is tax-free.

"It's not unusual for employers to sponsor plans and have employees pay for it. There's good reason," Mitchell says.

Still, employer-sponsored plans offer a big advantage even if the workers pick up the tab: The premiums are much cheaper than for individual policies.

Samuel Hoyle, also of RCM&D;, points out that a person's occupation determines the type of available coverage.

"The farther you go down on the occupational ladder, the more restrictive the language and the higher the premiums," he says.

And, as Leimbach says, "The better the benefit and the longer it pays, the higher the premium."

Here's a rundown on some of the critical points to consider for both group and individual coverage, including the policy's definition of disability, the amount and duration of benefits and .. the waiting period until benefits begin:

* Definition of disability.

Generally the more restrictive the definition, the lower the

premium.

"The average group plan often defines disability as not being able to perform your own job, but that often lasts only for two or three years,"Mitchell says. "Then it's 'responsibilities for which you are suitably trained.' "

That change in wording means you might have to take a job that pays much less. Other policies might not pay benefits as long as you can do just about any job.

In individual policies, the best coverage, called "own occupation," defines disability as not being able to work in your particular occupation. Generally that is available only to professionals or top corporate executives. Under that definition, a surgeon who lost the full use of his hands would draw his full disability benefit even if he could still function as a physician, say as a medical school teacher.

Be sure you understand exactly how your policy defines disability.

Wagener recommends a policy with an occupational definition that pays a residual benefit. Without a residual benefit, which pays proportionately for a partial disability, you would lose your benefit once you resume work. For example, if you were able to earn 50 percent of your income, you would get half the benefit. A residual benefit, Wagener says, is particularly suited for someonewho is self-employed.

AAlso, make sure your policy covers disability resulting from both accidents and illness.

* Waiting period.

Policies can begin to pay benefits anytime from the first day of disability to a year after the disability occurs. The longer the wait, the cheaper the premium.

"You don't want first-dollar coverage," Wagener says, because it's too expensive.

Group plans often have a three- or six-month waiting period, Mitchell says. Some companies will continue a person's salary during that time or provide short-term disability.

"There are also very fine employee-pay-all, employer-sponsored, short-term policies that would take a lot of risk off families," says Leimbach.

If you're buying individual coverage and have savings or other income that can tide you over for six months, you can save on premiums by buying policies with longer waiting periods.

Benefits normally begin to be paid 30 days after the waiting period is over.

* Benefit period.

The longer the benefit period, the higher the premium. Some policies may cover you for a year, some for 10 years, some until you're 65 or 72, and some for your lifetime. Group plans, Mitchell says, usually provide benefits until age 65 unless the disability occurs after age 60. In that case, the benefit may continue past age 65. Leimbach says RCM&D; normally recommends people buy policies that pay until age 65, when pension and Social Security retirement benefits kick in.

But, remember, if you become permanently disabled at 45, your pension benefits will be much less if you don't get pension credits for the years you are disabled.

Wagener says that if affordability is an issue it's more important to have more coverage up front and some lifetime benefit. That's because the chances are that you won't be permanently disabled. A person might want to hold an individual policy to cover the shorter term and depend on group coverage for catastrophic long-term protection, he says.

* Benefit amount.

"The rule of thumb is to replace 60 to 70 percent of income," says Leimbach. "Some executives have 75 to 80 percent."

In fact, says Wagener, many companies restrict you to 60 to 70 percent coverage, offset by any other benefits. Assuming you have paid the policy premium, 70 percent tax-free could come close to your former take-home pay.

Before you shop for an individual policy, you should figure out how much protection you will need. Tally up household expenses, rent, etc., and any other income, such as a spouse's salary. Consider any group policy or union benefits. You can check out what Social Security benefits would be.

But remember that these days it's very tough to get disability from Social Security. To qualify, you have to be unable to do any work, not just your own job. And the disability must be expected to last at least a year or to result in death. Assuming you do qualify, there is a five-month waiting period. The amount of your benefit depends on how much you have paid in. While the rules are complicated, the maximum for an individual is around $1,036, and around $1,554 for an individual with a family. The average is $587 for an individual and $1,022 for a family.

Group policies generally do not provide cost-of-living adjustments, or COLAs. Thus, if you are permanently disabled for a long period, inflation will chip away at the purchasing power of your benefit.

On some individual policies you can add an annual COLA benefifor an additional premium.

Other benefits also can be added for additional premiums.

Some newer policies, Leimbach says, will continue to make contributions to a disabled person's 401(k) or other retirement plan. Some may help with rehabilitation costs.

Leimbach offers these other recommendations:

* Look for a policy that waives the premium once you become disabled. Most do.

* Make sure the policy is guaranteed renewable. That means as long as you continue to pay the premiums, you remain insured regardless of your health.

* Check out the insurance company's reputation. It needs to bfinancially sound; conceivably, you could draw disability benefits for many years.

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