Insuring your wallet

One factor in the size of income insurance premiums is how long you are willing to wait before benefits start, should an accident or illness sideline you for many months.

A third of all Americans between 35 and 65 will become disabled for more than 90 days at some point in their lives, and one in seven will become disabled for more than five years, according to the American Council of Life Insurers. Most of those disabilities are caused not by accident but by illness.

“You’re three times more likely to have a serious illness or accident before you retire than you are to die before you retire,” says Jeremy Feldman, state training coordinator for Aflac in Maryland.

In the language of the insurance industry, three months out of work counts as “short term,” but to the owner-operator it’s quite a long income interruption. An owner-operator’s truck payments do not stop when he or she is sidelined, says Marc Van Dam, a vice president at trucking insurer Campbell Group. The same is true for all personal expenses. Almost half of home foreclosures are caused by a disability, according to the U.S. Department of Housing and Urban Development.

For these reasons, doing without some sort of income-replacement insurance “is kind of a gamble,” says Katherine Mazeika, editor of Insure.com in Darien, Ill. “It’s worth investing the extra dollars.”

The term “income-replacement” insurance is misleading. Insurers are leery of “making it more attractive to be out of work than at work,” so policies don’t replace all your income, says insurance consultant Scott Simmonds of www.scottsimmonds.com in Saco, Maine. Instead, they replace a percentage – typically 50 percent to 60 percent, though some cover 70 percent to 80 percent – and usually for only a fixed period.

The most common forms of income-replacement insurance include disability (both short and long term), accident (both occupational and general), workers’ compensation and Social Security.

DISABILITY
Short-term disability policies typically pay up to 56 percent of one’s income for up to 26 weeks, with a maximum benefit per month, Mazeika says.

The short-term policy offered by the Owner-Operator Independent Drivers Association pays up to a year, but at a flat rate of $400 a week rather than as a percentage. That 12-month total of $20,800 is about 38 percent of the $54,000 net income of the average client of owner-operator business services firm ATBS.

Long-term policies keep paying for years, often until you’re 65, when Social Security and retirement savings presumably kick in. Some more expensive policies will keep paying the rest of your life.

“Long-term and short-term policies are meant to supplement or complement one another,” Mazeika says. “Pretty much the same percentage of income is covered, and one simply picks up where the other leaves off.”

The most important difference among disability policies is how they define a disability. “The lower-cost policy is going to have a very broad definition, and the broader the definition, the less useful the policy will be to you,” Simmonds says. “What you want is a policy that pays if you are unable to perform the primary tasks of your occupation” – for example, driving long haul and dropping and hooking trailers.

“There’s a big difference between your occupation and any occupation,” Simmonds says. An “any occupation” policy won’t pay even if you’re unable to climb into the cab, as long as you’re still able to drive a forklift or run the register at a truck-stop fuel counter – no matter the hit to your income. The broadest definitions of disability pretty much require you to be bedridden before you can collect a cent.

Some policies pay benefits only if you are unable to perform “any occupation for which your training, education and experience have qualified you” – but that can be a problem, too, if you got plenty of experience driving a forklift in high school, Simmonds says. Some policies provide initial “own occupation” coverage for a year or two, then switch to “any occupation” afterward – which can be an effective cutoff of payments for all but the totally disabled, depending on how the policy’s worded.

If you can’t afford an “own-occupation” policy, consider “residual disability” coverage, which makes up the difference between pre-disability and post-disability income. This would help, for example, if you had to ease back into driving only part time or locally, making less than you had before.

“The prices are going to be all over the place,” depending on the coverage, but an owner-operator shouldn’t be surprised to pay more than $1,000 a year, Simmonds says.

Simply extending the waiting period of your policy, so that payments don’t begin until 60 days, 90 days or even 180 days after you file the claim, can save money on premiums. OOIDA’s short-term disability plan, for example, has a monthly premium of $64.15 with a 60-day wait or $77.75 with a 30-day wait.

Seven days once was the standard waiting period in the disability insurance industry, but today it’s up to 90 days, according to Smart Money magazine. And because benefits typically are paid monthly, a 90-day waiting period often means the first check won’t arrive for at least 120 days. Whatever your policy’s waiting period, make sure you have emergency savings sufficient to carry you that long. As your savings increase over time, you might be able to extend your wait period for a break on the premium, Simmonds says.

Long-term disability premiums tend to be constant for the life of the policy, not even increasing if, for example, the individual policyholder develops a bad back or is diagnosed with sleep apnea. Insurers have been known, though, to increase rates for an entire “class” of policyholders, Simmonds says; sometimes this is a good opportunity to shop for a better deal.

Some disability polices add coverage yearly, tied to a fixed rate such as 2 percent or to the inflation rate, and increase premiums to match, Simmonds says. Be wary of long-term policies with premiums that increase as you age but without increasing benefits. Such a policy may have low initial premiums, but it’ll be a good buy only if you’re sure you won’t need it indefinitely.

ACCIDENT
Another way to insure some cash flow if the worst happens is with a policy that pays you in case of accident or hospitalization. This is not to be confused with health insurance, which pays the benefit to doctors and hospitals. Accident policies pay the policyholder, who can spend the checks wherever they’re most needed. “It’s not a full-blown health insurance program, but it does help fill in the gaps,” Van Dam says.

TV commercials for Aflac – the short name of American Family Life Assurance Co., based in Columbus, Ga. – have publicized such coverage. In one ad, the Aflac duck looks on in amazement as Baseball Hall of Famer Yogi Berra opines from a barber’s chair: “If you get hurt and miss work, it won’t hurt to miss work. And they give you cash, which is just as good as money.”

Benefits in Aflac’s accident plan and hospitalization plan are based not on income, but on a menu that specifies the payment for everything “from cutting your hand slicing open a bagel, to being in ICU for 10 days,” Feldman says. “The longer you’re in there, the more it pays.”

An emergency-room visit, for example, pays $120; a broken leg, $1,000. Aflac’s two-tier accident policy pays $1,200 for the first night of hospitalization and either $200 or $250 for each additional night, up to a year. This 12-month maximum of $92,200 in cash “is not a long-term care policy by any means, but it is a significant amount of money, and it helps out greatly,” Feldman says.

Rates vary by state, but in Maryland, Aflac’s accident premium starts at $7.87 a week for an individual ($409 a year) and $12 a week for a family ($642 a year), Feldman says. Aflac also pays its policyholders a wellness benefit of $60 for each preventive doctor’s visit, such as a teeth cleaning or routine blood work, in effect refunding five to eight weeks of premiums. Aflac denies initial coverage to people with recent drunken-driving convictions or recent diagnoses of disease, injury or disorders of the back, neck or joints.

A more specific form of accident insurance is occupational accident, which covers only work-related injuries or illnesses. Because it’s more limited than disability insurance, the premiums tend to be cheaper. However, what constitutes “work-related” often has to be decided in court.

WORKERS’ COMPENSATION
Two-thirds of disabilities are not work-related and therefore aren’t covered by occupational accident insurance or workers’ compensation, according to Prudential.

Workers’ comp is more common among company drivers than owner-operators, as the self-employed are not allowed to purchase such insurance in some states.

A typical workers’ compensation policy, for premiums of $700 to $800 a year, covers not only lost wages but also medical bills for work-related injuries and illnesses, and includes a small life-insurance benefit, typically $5,000, Simmonds says. Duration of benefits varies by state, and many states cap the lost-wage benefit.

“It’s not the ideal situation, but it’s better than nothing,” Simmonds says. “It won’t help you if you fall off a roof during a weekend at home.”

SOCIAL SECURITY
For those younger than 65 who are unable to work at all for at least 12 months, collecting Social Security Disability Insurance may be an option. About half the claims submitted are denied, however, and even if you’re approved, the checks don’t start arriving for five months. Moreover, the payments, which are based on your Social Security earnings through the years, won’t be large.

Social Security defines disability broadly, specifying that you must be unable to perform any job, Simmonds says. “Someone with a bad back might not quality for Social Security disability, even though a bad back is enough to put an owner-operator off the road.”

Some states, including California, Hawaii, New Jersey, New York and Rhode Island, supplement Social Security with their own disability programs for longtime earners.

OTHER RESOURCES
Don’t spend so much money on income-replacement insurance that you starve your emergency or retirement fund. If you live, you’re guaranteed to need that retirement money, whereas you may never need the income-replacement benefits. And if you have plenty of savings and are at a late stage in your career, maybe already beginning to cut back on your work load, you may not need income-replacement insurance at all.

Since six months of living expenses is relatively easy for a disciplined saver to sock away into some account or another – savings, checking, money market – Simmonds steers people away from short-term disability policies in favor of long-term policies instead. “Build up some sort of cash account for those unexpected emergencies over the short term, and let the insurance company take care of something you can’t take care of yourself, which is a year or two years out of work.”


Tips for evaluating a disability policy

  • Make sure the policy can’t be canceled or its premiums increased as long as you pay on time.
  • Make sure the policy covers both injuries and illnesses.
  • The policy may exclude specific causes of disability, such as war or criminal acts. Make sure you can live with any exclusions.
  • Look for a policy that waives your premium once you begin collecting benefits and continues not to charge you for the duration of the disability.
  • Adding variations to a basic policy also adds to the cost of the premium, so consider them carefully. Adding an automatic cost-of-living adjustment, for example, may not be worth the expense.
  • Another add-on is a cash-back plan that eventually refunds a portion of your premiums if you never need to file a claim. Many experts argue you’d be better off putting the extra expense into savings.

Rules of the game

  • Income-replacement insurance is unaffected by your assets, meaning you needn’t drain your savings in order to start
    collecting.
  • Most policies stay in effect even if chronic health problems crop up later, as long as you keep up the premiums.
  • Many insurers allow one missed or late payment and drop you thereafter. If you might have trouble requalifying, consider paying through automatic bank drafts.
  • If you’ve been paying the premiums yourself, any benefits you eventually receive are tax-free. The premiums, however, are not tax-deductible.

Shopping for a policy
Like most areas of insurance, income replacement is complicated. Buy policies only in close consultation with your business services provider and an insurance agent familiar with insurance needs of the self-employed.

A number of major insurers, however, such as Berkshire Life, MassMutual, Northwestern Mutual and Unum Provident, do offer individual disability insurance, and the Owner-Operator Independent Drivers Association offers a group short-term disability plan as a member benefit. More limited accident and hospitalization plans are available from owner-operator insurers (such as the Campbell Group) and general insurers (such as Aflac). Here are some sources to get you started.

Aflac
www.aflac.com
(800) 992-3522

Association of Health Insurance Advisors
www.ahia.net
(703) 770-8200

The Campbell Group
www.campbellgrp.com
(800) 748-0351

Health Insurance Finders
www.healthinsurancefinders.com
(909) 335-9703

Insurance Information Institute
www.iii.org
(212) 346-5500

Insure.com
www.insure.com
(800) 324-6370

OOIDA
www.ooida.com
(800) 715-9369

Scott Simmonds
www.scottsimmonds.com
(207) 284-0085


Jumping the hurdles
To qualify for a disability policy, expect a visit with a nurse who will take your blood pressure, measure your weight and height, and ask questions about your individual and family health history. Age is a factor, but health is a greater factor in premium cost, says consultant Scott Simmonds of Saco, Maine.

A customer who has controlled his diabetes with insulin for years poses less risk than one whose diabetes was diagnosed only recently, Simmonds says. The same is true for any other chronic condition.

Group policies can be less stringent. The short-term disability policy offered to Owner-Operator Independent Drivers Association members requires no health checkup and no health questions to enroll. The tradeoff is that it doesn’t cover any pre-existing conditions for the first 12 months of coverage.

Disability insurance can be tough for owner-operators to get. Insurers are leery of selling disability coverage to the self-employed because “it’s extremely difficult to verify their level of income and to verify the extent of their disability,” says Jeremy Feldman of Aflac. “Also, people who seek out insurance on an individual basis, rather than going through a group, have a higher claim rate.”

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