Individual disability plans - worth the peace of mind?

Suppose you were injured in a car accident and couldn't work for six months. If you had to rely on group disability coverage to substitute for your salary, could you live the way you do now? If the answer is no, you should be shopping for individual disability insurance.

No one wants to think about disability, but its implications are undeniable. Most people think they can count on their employer's disability coverage, and for the average person, that might be enough. But for financial executives, who are likely to have much more at stake, employer coverage is probably too skimpy. Without adequate insurance, they may be risking their homes, lifestyle and their children's future education.

Individual disability insurance coverage offers more protection than a typical group plan, and it allows you to customize your policy. Although it costs more than other types of disability insurance, it's often worth the peace of mind. However, individual disability insurance isn't right for everyone. To find out if you need the coverage and what kind of plan would work best for you, start with a hard look at your existing disability insurance coverage.

First, read the policy's definition of disability. You're probably covered for total disability. But your policy may have an "any occupation" stipulation, which means the insurance company can reduce or eliminate benefits if you can earn income from another occupation, even if the disability prevents you from earning a far greater income in your chosen profession. So, for example, the chief financial officer of an international company who must leave his position because of a heart condition might not be eligible for full benefits if he is able to teach finance at a local college.

Also, consider how much your employer-provided policy will pay. Most group disability policies replace about 60 percent of your salary, excluding bonuses and employer-paid retirement contributions. But some insurance policies cap the benefits, which may lower the income replacement level for executives. For example, a policy may return 60 percent of income, but cap the benefits at $10,000 per month. Understand how the caps in your policy function and weigh those limits against your income needs.

AX THE TAXES

Employer-provided group benefits are fully taxable. In contrast, benefits from individual disability income policies are tax-free. For someone in the 31 percent tax bracket, this difference amounts to about 40 cents on each dollar of lost income, compared with at least 60 cents on each dollar for the individual disability plan. This means an executive with an $80,000 annual salary would have to live on $32,000 annually under group coverage, compared with $48,000 annually under individual coverage.

Think about when your benefits begin and how long they will continue. Most people deplete their savings within six months of becoming disabled. Your employer may offer a short-term disability policy to cover the time span between when you become disabled and when you begin to receive long-term benefits. If not, you need some way to bridge that gap. You may have an even more serious coverage gap if the benefits do not continue to age 65. Even the most generous benefits over a five-year span will not suffice when a disability shortens a person's working life by 15 or 20 years.

If you're beginning to see some holes in your insurance portfolio, individual disability insurance may be a good solution. Of course, you may very well be able to get along without it. If you have income from sources outside your job, you might conclude that the extra funds are enough to offset small coverage gaps. Or your asset base may be substantial enough to overcome even large gaps in your insurance protection.

However, if you do decide to consider a disability income policy, make sure it has these valuable features:

* It pays benefits to age 65.

* The insurer cannot cancel, change or restrict the policy.

* Rates can't increase until age 65.

* The policy pays benefits after 90 days.

Also, look for policies that specify "own occupation" coverage, which lets you collect benefits if you can't work in your chosen position, even if you can work in another field.

CONSIDER YOUR OPTIONS

In general, individual disability policyholders can expect more benefits than they would receive under a typical employer plan. Individual plans pay benefits in more circumstances and often return a higher percentage of income. And the policies generally insure a wider range of income sources, such as regularly paid bonuses. When tax considerations are factored in, the gains over employer-provided coverage alone can be vast.

A good individual disability plan lets you customize coverage. For example, the best plans offer riders to support your children's college education if you are disabled. To protect the full value of your benefits, an inflation protection rider is recommended. Some plans also allow for a smooth transition from disability insurance coverage during your working life to long-term care coverage after you retire. As you approach retirement, the need for asset protection in your post-retirement years supplants the need for the income protection features of an individual disability policy. If you can get a "future purchase option" rider for long-term care, you can lock in your insurability, and if you buy it at a fairly young age, you also can get a lower rate on a long-term care insurance contract down the road.

With an individual disability plan, the executive is covered regardless of where he or she works, and this portability cannot be overemphasized. An executive moving into a new position or starting a new firm can find valuable peace of mind with an individual disability policy.

Mr. Menario is second vice president, individual disability market/product development, at UNUM Life Insurance Co. in Portland, Maine.