A DISABILITY INSURANCE CHECKUP Disability insurance, which safeguards against the loss of a family's income stream, is an essential part of a complete financial plan. Here is a checklist of questions for people who want to make sure their coverage in this area is adequate. IS MY EMPLOYER-PROVIDED COVERAGE ADEQUATE? If you have adequate group disability coverage, you may not need to purchase individual coverage. However, if group coverage is inadequate, or if you think you will no longer be eligible for group coverage in the future, it may be wise to purchase individual coverage. Group disability coverage will generally pay 60% or more of your salary if you become disabled. An employer might provide short-term and/or long term disability coverage, The maximum monthly benefit could be generally $5,000. Note: If the employer pays the premiums for disability coverage the benefits are taxable to the employee. If the insured pays the premiums, the benefits are not taxable when received. The extra cost of income tax on the benefits should be kept in mind when determining whether coverage is adequate. Many disability income companies will allow an employee to add on to group long term disability to protect up to 70% of income as a maximum total combined monthly benefit. Examine the terms of your group policy to check on the following points: Do payments begin after you become unable to engage in your own occupation, in any reasonable occupation, or any occupation? Of these three terms, the first is the most favorable to the insured. Do you receive benefits even though you are able to work part-time? How long must you wait after an illness or accident before benefits begin? (The term is the "elimination period.") Also, what if there is a delay between an accident and a disability? What if a disability ceases and then comes back? For how long will benefits be paid? The usual term is until retirement age. Are benefits limited depending on the cause of the disability? (For instance, are there "caps" on benefits for specified conditions or diseases?) Its important to purchase coverage for the "gaps" left by group disability - such as the waiting period. You may be able to purchase additional coverage under your group plan. WHAT ABOUT SHORT TERM DISABILITY? Short term disability coverage generally covers 60% of your salary, and might last up to six months. It can start after sick days are used up, or on some other specified date. Once you're disabled more than 180 days, long term disability will start. WHAT ABOUT MEDICAL BILLS? If you are on long term or short term disability, you are generally still covered by the group health plan. If you have an injury in the workplace, then worker's compensation will pay for the medical costs. However, if there is any dispute about the worker's compensation claim, it might take up to two years, depending on the state system, to receive payments from worker's compensation. OTHER DISABILITY INSURANCE If you are not covered by an employer plan, or are inadequately covered, it is advisable to invest in a disability insurance plan. In addition to the things we mentioned for group plan, here are some things to look for in purchasing an individual policy. Do premiums need to be paid while you are disabled? Or are they "waived"? Are there cost of living adjustments in the benefit amounts? "COLA" Is the contract renewable as long as premiums are paid up? Does the company have the right to cancel the contact, modify terms, or increase premiums unilaterally? WHAT ABOUT SOCIAL SECURITY? Social Security, worker's compensation, state disability plans, and disability coverage in life insurance policies, might provide coverage. The coverage provided under these plans should be factored in when deciding how much coverage to purchase. * * * * * * A final note: Businesses should also maintain disability insurance, to cover the possibility that an owner or partner cannot continue working. Policies can be purchased to cover overhead expenses, loss of income due to the loss of the key person's services, and/or a buyout of the key person's interest. CPA Client Bulletin, September 1995. American Institute of Certified Public Accounts, Inc.