Other pitfalls loom. If the insurer denies a claim, don’t count on taking your case before a jury. Policies funded by private employers are subject to the Employee Retirement Income Security Act (ERISA), which provides for disputes to be handled first by an administrative appeal to the employer’s insurance company or self-funded plan. Lose there and you can pursue your claim in federal court, but Darras says you’ll have to prove your case to criminal-court standards before a judge. That means you’ll have to convince the judge that the insurance company was wrong beyond a reasonable doubt. Even if you prevail, you won’t be able to collect any punitive damages or extra contractual damages. “If you have to sell your car collection at a fire sale while you’re fighting this thing, or take your kids out of private school, or if the second home goes into foreclosure, you have no remedy,” he says. “Because employer-sponsored plans are covered under ERISA, the only thing you will get are back-due benefits, in rarer instances some interest, and in a very few instances attorney fees.”
While buying a personal-disability policy may appeal to anyone who’d prefer not to hold down a job that requires wearing a paper hat, or suffer a huge cut in income, or face legal headaches in the event of a dispute, it’s particularly well-suited to those who earn high salaries but who haven’t accumulated enough wealth to draw on if she became unemployable. “Someone in that situation can buy a lot of disability insurance — and needs it,” says insurance broker Paul Simon, president of Simon & Associates, in Villa Park, California.
But shop carefully. Buy from an agent or broker not affiliated with your employer, says Darras. That not only makes any benefits tax free, but, in the event a claim is denied, it gives you access to consumer remedies — most important, a jury trial. Also, insist on a noncancelable, guaranteed-renewable policy with occupation-specific coverage for life, or at least until age 65. Occupation-specific language ensures the policy will pay off if you are rendered incapable of performing your specific job, not just any work. Finally, advises Darras, work with your HR department to put your personal plan in place in lieu of the company-sponsored coverage. Insurers won’t allow double coverage.
What will it cost? In California, Simon solicited two quotes on an occupation-specific long-term disability policy for a 55-year-old man. He specified that the policy pay a benefit of $10,000 per month after the first 90 days of disability, plus cost-of-living increases, and that it cover “residual,” or partial, disability. One carrier quoted a premium of $7,601 per year, the other $10,074 per year. Prices in some other states, Simon notes, could be as much as 10 percent lower. Elsewhere, Tracy Miller, insurance agent at Houston-based Insurance Alliance, received a quote of $4,303 per year for a 51-year-old corporate executive on a job-specific policy that would pay $6,000 per month to age 67.
If you’re at or near retirement age, have accumulated significant assets, or have coverage under a better-than-normal corporate policy, don’t bother with personal disability insurance. But for many people it’s worth a look. “I always end discussions about long-term disability insurance by reminding folks how hard it was to get to the top,” says Darras. The right insurance can prevent a precipitous financial fall.
Randy Myers is a contributing editor of CFO.