Note: This is Part 2 of a 3-part series of columns. Read Part 1, “Your Personal Financial Security Formula,” and Part 3, “Last step in your Personal Financial Security Formula.”

In Part 1 of this series, we explored the concept I call your Personal Financial Security Formula, with life insurance being the first element. The next part of your P.F.S.F. is protection against potential disability. Your profession determines the kind of insurance you need to buy to protect against this. Many people belong to professional societies and associations that offer group disability programs.

If you became disabled to a point that you could no longer work or practice the duties of your profession, would you be capable of performing any other job for wage, means, or profit? This question must be asked before you determine what kind of disability insurance is adequate for you. If you are a neurosurgeon and suffer a heart attack from the stress of your regular occupation, your cardiologist may tell you to rest and work only in your garden. If your insurance policy disability definition is “inability to perform any duty or occupation for which you may receive remuneration or profit,” then you are not disabled under this definition, because you are capable of being a gardener.

You should therefore analyze your policies to determine if disability is defined based on your “own occupation” or “loss of earnings” basis. The “own occupation” coverage is what the neurosurgeon wants because the policy would pay if he were unable to render services as a surgeon. The policy would not consider his being able to obtain gainful employment outside his specialty. You also need to look out for any restrictive words in the policy’s definition of disability, such as “any and all,” “completely unable,” or “each and every duty.”

List the forms of disability that could render you disabled from your profession. Determine which of those disabilities would not prevent you from assuming other employment. If you are in general labor and become disabled, you probably would be unable to perform any other job. If so, any disability policy with a fairly restrictive definition will cover you.

If your profession is a specialty that requires the use of hands, eyes, hearing, mental alertness, and so forth, then you may pay particular attention to specific things that could disable you in your profession but would leave you capable of working in another occupation. For those of you in this situation, be careful in the purchase of your disability policy. Definitions become critical!

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Your disability policy is the security blanket in your P.F.S.F. Your most important asset is your income. With the exception of gifts and inheritance, all of the assets you ever acquire will be byproducts of your earned-income stream. If you were to become permanently or partially disabled, this all-important earned-income stream would obviously cease or diminish.

Without your income you could not even be able to purchase other forms of insurance, much less provide for the other financial needs of your family. Therefore, buying the proper disability insurance is critical. Select a company that has a policy you can understand, and read that policy carefully. See if the policy can be canceled by the insurer. If a company can cancel your policy at any time, your security blanket has a gaping hole.

Once a primary disability has occurred, the probability of a secondary, related or unrelated disability increases. This is unlike death, which can occur only once. If your policy can be canceled at the option of a company, one disability is all it will take to make you uninsurable for any future disability. Make sure that the policy you have can be canceled only by you, through nonpayment of premium.

Next, make sure the premium rates cannot be raised. If the policy is non-cancelable, but the company has the right to raise the premiums, then once you become an unusual risk, the company could raise the premiums to an unattainable level. Locking in a premium from the date of purchase ensures that no matter what your future health may be, you will always be able to maintain the coverage. This removes the fear of losing the coverage because of the insurance company’s re-evaluation of your physical condition.

You need to select a monthly indemnity that fairly represents your needs and your family’s in the event of your disability. Far too many people are under-insured when it comes to disability. Determine your personal cash flow, the costs (such as house payments, groceries, taxes on property, etc.) that would continue if a disability occurred tomorrow, and make sure your disability insurance will be enough to cover your continuing expenses.

Another variable, other than the amount of benefits, to be considered is an analysis of the waiting period. The waiting period represents the number of days between the date of the disability and the date when coverage will commence. Disability coverage can be purchased in waiting-period increments of 1, 7, 30, 69, 90,180, days. The longer the waiting period, the less you pay for the same coverage. Suppose your disability occurred today and you had $50,000 in liquid reserves and expenses of $6,000 a month. This would carry you for approximately eight months. Therefore, a waiting period of not less than 180 days is recommended.

It is wise to select disability insurance that covers you to at least the age of 65 for sickness and accident. Disabilities usually will be either short-term or permanent. Should you have only a five-year coverage, you would face financial disaster after the fifth year. (If a disability runs as long as five years, the odds are that it will be permanent.) Don’t be afraid to pay a higher premium for a good disability policy, because in this particular area of the insurance industry, you get exactly what you pay for.

Purchasing a group disability policy through an association or society of which you are a member for your main coverage will be considerably cheaper. But it has one major flaw: The group is the owner of the policy. The group decides whether it wants to keep the coverage with that carrier. This may not seem to pose a problem at present.

Let us consider a 50-year-old man whose only disability insurance was through his group. He suffered a coronary at age 51. The insurance company paid him benefits without protest.

At age 52, this man was back at work and seemed very healthy. When he was 54, his group became dissatisfied with the disability carrier and decided to look around and renegotiate for a better premium rate. The new company it selected said that coverage would be provided at a much cheaper group rate. The catch was that the group would have to submit members over the age of 50 to an insurance physical examination and eliminate the coverage for those who could not pass. The group evaluated the number of members over age 50 who would not qualify and decided at most 5 percent would fall into that category.

Because the group had to negotiate for the benefit of the majority, it chose a premium reduction for 95 percent of its members, forcing the 5 percent who could not qualify to find insurance elsewhere. Our friend, at age 54, lost his insurance, and because of his past coronary is now uninsurable. He will never again be able to acquire disability insurance.

One option is to balance the amount of the inexpensive group coverage with the more expensive permanent coverage.

Disability should be the Rolls-Royce of your insurance programs. The other areas of insurance can very easily be stripped down to the Volkswagen model.

Note: This is Part 2 of a 3-part series of columns. Read Part 1, “Your Personal Financial Security Formula,” and Part 3, “Last step in your Personal Financial Security Formula.”

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