Money Matters

Money Matters: What you need to know about disability insurance

CorrespondentFebruary 1, 2014 

Q. I have a real job! I graduated from college last year and have been working in various part-time jobs while searching for full-time work in my field.

I began my new job last week and have been handed a large packet containing benefit information. I have selected my health insurance; I chose a large deductible and low premium plan since I’m young and very healthy. I receive short-term disability and three times my income in life insurance at no cost. I don’t have a spouse or children, so I don’t think I need any of the additional life insurance they offer for a fee.

I don’t really understand disability insurance, but of course I’ll take what is offered for free. My questions for you are: Should I select the long-term disability option, and should I contribute to the 401(k) plan? If I was unable to work for 90 days, the long-term disability insurance would provide 65 percent of my salary for five years. The 401(k) plan offers a “50 percent match up to the first 6 percent.” I’m not sure what that means, but a match sounds good.

I’ve never invested in the stock market before and don’t have a clue what investments to select or if I should participate in the 401(k) or do something else. I’ve looked at my budget, and I think I can afford to pay for my health insurance, the long-term disability, put up to a $1,000 in the 401(k) and save another $250 a month.

Any advice you can offer would be great.

A. Congratulations on beginning your career. Disability insurance is important to protect yourself if an accident, health or other issue leaves you in the position where you are unable to work. If you are unable to work, without disability insurance there won’t be any income to help with your daily living expenses, and you certainly won’t be able to save any money for future expenses or retirement.

Your “free” short-term disability policy will probably provide an income for 90 days if you are disabled. The long-term disability insurance would provide income after you are disabled for 90 days but end after it has paid benefits for 60 months. Like all insurance, disability policies have different features to choose from, and costs vary. Some insurers are more competitive in certain areas than others. I’d contact an independent insurance broker representing several highly rated insurance companies or several captive agents (only represent one insurance company) and ask for quotes for a five-year benefit period and longer benefit periods.

If you can afford a policy that will pay until age 65, buy it. Don’t overlook policies with benefit periods of two, three, and five years if you can’t afford a longer benefit period. These are relatively inexpensive and will provide income for a time while you make adjustment to your lifestyle.

Definition of disability is important. The more expensive policies offer lifetime “own occupation” definitions. Unless you are in a highly specialized profession with a clearly defined job, this may not be the wisest use of your insurance dollar. A policy that pays benefits if you can’t work in your own occupation for the first two years and then pays only if you can’t work at any job you are reasonably trained for is much less expensive.

Integration with Social Security can save you premium dollars. This allows the insurer to reduce your benefit payments by the amount of Social Security disability benefits you receive.

As with all insurance, extra features are available, such as cost of living adjustments, but all features will increase the cost of the policy.

I’ll discuss 401(k) plans next week.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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