Being wealthy doesn't mean having all the money in the world, just not having to worry about it.

Lesson 26 – Disability Income Protection

Now that tax season is over, I have a little more time to blog. A new lesson is overdue: my last one on life insurance was a cakewalk compared to disability income protection.

It’s not because it is difficult to determine whether or not you need disability income protection: if you aren’t yet financially independent, you almost certainly do. Nor is it hard to determine the amount of coverage you should obtain: as much as you can, which is typically limited to 60% of your provable earned income (fortunately, the benefits are tax-free as long as you paid the premiums yourself rather than letting your employer do so). The length of time the policy should pay is equally clear: for the same length of time you expect you’ll need to work before becoming financially independent. So what’s the difficulty?

The problem, almost insoluble, is that good disability insurance, like good government, sounds nice in theory but is often unattainable in practice. This isn’t entirely the fault of the insurance companies: while few people fake their own death in order to collect on life insurance outside of TV shows, plenty of people claim to be unable to work when they probably can. As a result, insurance companies make it hard to prove that a disability is sufficient to prevent the insured from being employable and lawsuits claiming bad faith denial of benefits are filed against every insurer on a regular basis and sometimes are successful. The balance between good coverage and reasonable cost is impossible to identify, in part because it is different for each person. I’m afraid this blog post isn’t going to solve that problem, but I’m not just going to punt since some coverage is likely better than none. Please be kind unless you think you can do better. If you CAN do better, I’ll be glad to follow this lesson with credited recommendations (or uncredited if you prefer) in subsequent posts.

Now, you already have one form of disability income protection through the Social Security System. You’re paying for it, of course, through your Federal payroll taxes. And it is quite hard to qualify for benefits: you must be unable to perform any kind of job, not just the jobs for which you are suited by education, experience, and benefits. Moreover, the benefits are comparable to old age Social Security benefits in amount, which is probably not what you had in mind as a comfortable retirement. The benefits are taxed in the same manner as other Social Security benefits, meaning not at all for people without other coverage up to 85% for people with significant other income.

You may also have group coverage through your employer. The benefits are going to be significantly better than Social Security. Also, coverage is likely to apply as long as you are unable to perform work in your chosen occupation.. “Own occupation” coverage is far better than “any occupation” coverage. The bad news is that this coverage is usually fully taxable because you didn’t pay for it: the employer did. If you have this type of coverage, ask your employer if you can pay the premiums with after-tax dollars. Although you’re not getting a tax benefit now, you don’t need it as much as you will need the benefits themselves to be tax-free in the event of long-term disability.

The worst news is that your coverage is not portable if you leave your job. And if your next job doesn’t offer long-term disability, and your health has worsened in the meantime, you might not be able to qualify for coverage at a decent price. Like Social Security disability, group coverage through your employer is better than nothing, but not optimal.

Optimal, of course, is buying your own portable policy. But it is hard to find objective advice on whose coverage is better: believe me, I’ve been trying for years. Here’s the best I can offer at this time:

  1. Make sure your coverage is “own occupation” so that you qualify if you can’t perform surgery anymore but could still work at McDonald’s. By the way, some policies have an own occupation standard for the first two years and then switch to any occupation after that. Personally, I would find that unacceptable in a policy even if it cut my premium.
  2. Make sure your coverage is “guaranteed renewable” so that your policy will always remain in force as long as you pay the premiums. The insurer is forbidden from making changes in the benefits and features shown in your original policy. That’s essential. Unlike others, I’m not as wedded to the idea that your policy must be “non-cancellable,” which means they cannot increase the scheduled premiums in the policy you originally obtained. Obviously, it is nice if they can’t do so, but provisions aren’t free. As long as a policy is guaranteed renewable, they can only raise your premiums if they are raising it for the entire class of policyholders you are in and must demonstrate they are suffering unacceptable actuarial losses at the current rate. Such rate increases are rare and, frankly, if the current premiums are not actuarially sustainable for the company, I’d prefer they be raised to the insurer failing. Disability income protection is expensive enough and, if I’m going to pay more, I’d rather it be for more protection from disaster and not for the comparatively small protection from rate increases that will apply to everyone in my class. With guaranteed renewable, they still can’t raise your premiums based on your personal health history.
  3. I’m on the fence about coverage for mental/nervous disorders. Most insurers are unwilling to provide more than 2 years of benefits if they are based solely on these, and these are also subject to an enormous amount of dispute. I’d prefer coverage without the exclusion, of course, but I understand the reticence of insurers to accept these claims for the full term until retirement, and it adds greatly to the cost of coverage. Still, if you find the idea of having only 2 years of such protection to be mentally unnerving, you probably should go to a company that will pay these in the same manner as other claims, at least up to the normal retirement age. As of this writing, I believe that only includes Guardian (Berkshire) and The Standard among the largest providers.
  4. Which brings us to the choice of insurer. As for which insurer to choose, I share the general attitude that, in the absence of any better way to judge, you should stick to providers who have been offering coverage for a long time and have sold a lot of policies. In addition to Guardian and The Standard, I believe that list includes Ameritas (Union Central), MassMutual, MetLife, Northwestern Mutual, and Principal Financial Group. You would probably benefit from dealing with an insurance broker who is able to sell policies from all of them. If you don’t know one, check Disability Insurance Services so you can get quotes and to figure out the bells and whistles that you feel are or are not worth paying for. No reason to do this alone: there’s no such thing as “no load” disability insurance protection and the policies will cost the same whether you directly contact the company or work through a broker. They’ll also talk about lots of features I’ve ignored that are relatively standard in the policies of all the major providers.

Obviously, you have the ability to play with the bells and whistles to see how the premium is affected. In the same way that I don’t think you should pay a higher premium just to avoid the risk of a class-wide rate increase, I think you should try to lower premiums with the biggest deductible you can handle. In the case of disability protection, that is the length of time you must be unable to work before the benefits kick in. If you have savings or family that will help you in the event of short-term disability but don’t have the resources to protect you from long-term inability to work, you can cut your premium significantly by extending the wait before collection.

For those of you who dread the prospect of searching for a quality insurer and policy, let me offer one thought. Most of the disability insurance people I’ve met who have earned my respect describe the Guardian ProVider Plus policy as the gold standard for high quality coverage without exclusions. Since disability is the single event most likely to DESTROY YOUR FINANCES FOR THE REST OF YOUR LIFE, and since doing nothing until it’s too late is the most common way people handle the danger of disability, I can think of far worse decisions than to just head to Guardian’s own aptly named website,, and finding out the cost of this policy. If you get sticker shock from the premium quote, look at Guardian’s ProVider Plus Limited, which has the same two year limit on mental/nervous benefits as most of the other insurers and a few other restrictions that, in my opinion, are reasonable given the cost savings. Then, for heaven’s sake, make your choice (even if you have to flip a coin) and start the application process. Guardian isn’t the only quality company by any means, but coverage from any of the seven insurers I mentioned is better than leaving open the risk of the single event most likely to DESTROY YOUR FINANCES FOR … oh, wait, I already used up my quota of all caps.

Please offer me your feedback at if you feel there are matters I could expand upon or, especially, if you adamantly disagree with one of my opinions and would like to offer another perspective. I’ve hesitated for months over this blog post because it is impossible for me to write one that feels completely satisfactory. But with blogging as much as with disability coverage, I finally remembered that anything is likely better than nothing.