Disability Insurance - Individuals

Most people insure their homes and cars and occasionally their lives. Most forget to insure against lost wages.
Individual disability income insurance pays you benefits if you can't work because you're sick or injured. Some individual policies pay partial benefits if you can only work part-time due to sickness or injury. Individual policies specify how much you will be paid, how soon after you are disabled benefits will begin, and when benefits will end. Policies generally provide replacement of 50 to 70 percent of income. Monthly benefits are payable for a fixed period set forth in the policy, e.g. 5 years or to age 65/67. Benefits begin following a waiting period, which is the period between the time you become disabled and the time your benefit payments begin. Waiting periods can range from one week to a year or even two years. In general, the longer the waiting period the lower the cost of the policy.
If you purchase an individual disability income insurance policy for yourself, and pay premiums with after-tax dollars, the benefits you receive are generally tax free.
Two features that may be part of disability income policies are important for you to understand: non-cancelable protection and guaranteed renewable protection. An insurer cannot cancel or refuse to renew either type of policy, as long as premiums (i.e., price of insurance protection for a specified period) are paid on time. These features differ, though, in important ways.
Non-cancelable. The policy's premium can never be raised above the amount shown in the policy, and benefits may not be reduced - as long as premiums are paid on time.
Guaranteed renewable. You have the right to renew the policy with the same benefits, but the insurer can increase your premiums - as long as they are increased for all other policyholders in the same class (i.e., having the same characteristics).
Initial premiums for guaranteed renewable policies may be lower than for non-cancelable policies, but the guaranteed renewable premiums can go up over time. Less expensive policies that may not offer a non-cancelable or guaranteed renewable option are sometimes available.
Riders on Individual Disability Insurance Policies
Most insurers offer several optional benefits (called riders) to enhance disability income coverage. Common riders include:
Cost of Living Adjustments. COLA provides for an annual increase in benefits (generally after you have been disabled for a year), usually based on a Consumer Price Index or a predetermined percentage. This helps your benefits keep pace with inflation, and is particularly important if you are disabled for a long time.
Future Purchase Option (Guaranteed Insurability Option). This rider allows you to purchase additional disability income insurance as your income increases, without providing proof of medical insurability. Even if you develop a condition that would normally prevent you from obtaining additional coverage after you purchase your original policy, you could still increase your benefits.
Residual Benefit. This pays you a portion of your monthly disability benefit if you have a drop in income due to a disability (e.g., if you are working part time). In most cases you need to satisfy a minimum percentage loss in earnings (e.g., a 20 percent loss) to qualify.
Social Security Rider. If you are disabled, these riders pay you additional benefits if you are not able to receive Social Security disability benefits because of the Social Security Administration's definition of disability. Usually, an individual disability policy with this rider will pay after the waiting period for the policy and during the five-month period (sometimes up to a year) while you are waiting for Social Security to kick in. If Social Security denies your claim, this rider will continue to pay benefits for the duration of the benefit period. Before purchasing a rider to your policy, ask yourself if you would be able to pay for the benefits provided by this rider out of your own pocket.
Disability is an important part of protecting your family. While not cheap it can be the difference between bankruptcy and protecting your assets.

The 1099 Dilemna

Many contractors hire "employees" in a 1099 (see IRS guidelines for terminology) capacity in an attempt to bypass the cost of Workers Compensation as well as payroll liabilities. Sometimes the "1099" gambit is also used to hire employees who might not be legally in the United States. While these all might appear as valid reasons there are a number of reasons for not taking this course of action:

1. It's illegal. That should be enough of a reason.
2. Typically 1099 "employees" do not carry insurance and General Liability carriers have wised up to this scam and ask for certificates of insurance for all sub-contractors or they will charge for the exposure at higher rates.
3. Workers Compensation carriers will require certificates of insurance (or waivers of WC for sole proprietorship) or charge for the exposure.
4. In case the 1099 employee has an "on-the job" workers compensation claim they burden of proof can lie on the contractor to actually prove that the 1099 contractor was in fact eligible to be paid as a 1099. We typically provide our contractors with a check sheet that helps them determine if the employee can be paid as a 1099. Visit www.martinburlingame.com or email martin@martinburlingame.com for more information.
5. You have "independent contractor" liability exposure and can be sued for negligent hiring or supervision (read your GL policy)
6. Policy exclusions can limit the protection of the insurance policy towards "completed operations" by subcontractors.
7. GL policies may (almost all do) require that subcontractors carry insurance in equal limits the contractor thereby pushing additional costs down on 1099 contractors.
8. It's illegal and can result in fines from both the State and Federal government.

Quite often we get contacted by contractors who are facing large workers compensation audits or audits by their GL carriers. Many of these audits are a direct result of the miss use of independent contractors. Consult your agent and your policy and if in doubt err to the side of caution.