Pointers

If you wait until you are diagnosed, you may find it difficult to obtain all the disability insurance you need to replace income sources you will lose if you quit working. Nevertheless, if you have a chronic illness, the very nature of your disability may make it possible for you to generate financial resources from Credit Life & Disability Insurance if you carefully follow the terms of the policies and use advance planning to take advantage of these policies. What these plans may do for you is to allow you to use the cash resources available to you from their affiliated credit instruments before you quit working to pay obligations you would otherwise have to fund after you stop working. In other words, you can use them to purchase items in advance that you will need after you stop working. After your income is reduced, you can then avoid the payments according to the terms of the policies. Thus, it is possible that these plans can reduce your overall cash needs for a period of time, and therefore might be ideal to carry you through a cash crunch. For example, you may discover that your savings are not adequate to sustain you through am elimination period on a disability policy or during the entire Social Security Disability waiting period before benefit payments begin.

Nor do you need to be concerned that there is anything “unfair” about this strategy. Credit Life & Disability insurance is usually offered by creditors such as banks and credit card companies purely out of self-interest: it is a way of guaranteeing continuity of payments of their credit obligations even if the customers’ income is interrupted for involuntary reasons. Most of these plans allow the consumer debtor to suspend payments during periods, for example, of disability or involuntary unemployment, and some policies even provide that both principal and interests payments will be made for the debtor under certain circumstances. In order for consumers to take advantage of these plans, it is important to read them carefully and to clearly and thoroughly understand what benefits you will receive and the conditions under which you may receive them before you consider using these policies.

At the outset, if you decide you want to implement a plan with this type of insurance, you should try to line up sources of credit that you can tap years later without incurring any substantial expenses just for having them in the meantime. Thus, credit cards with no annual fees are a good starting point, whereas credit cards or lines of credit with annual fees will cost you money even when you do not use them. You may wish to consider collecting a number of credit cards with no annual fees and just “file” them away for future use.[1] If you plan to do this, you should also request copies of the Credit Life & Disability plans for each card to make sure you know what you will get when or if you eventually sign up for such insurance. If the policy will not meet your needs, cancel the credit account to free up your credit rating (unless you need the card for other reasons).

When you evaluate Credit Life & Disability, you should pay close attention to several issues:

§ Note the precise maximum benefit. If the benefit is mere suspension of payments (as compared to payments made for you in other plans, including both principal and interest), the actual benefit is really limited to the elimination of interest on any debt you may have, and not the actual debt itself. In other words, from a long-term view, you are being forgiven the interest on the debt for a specified period of time you otherwise would have paid if the payments had continued uninterrupted. The principal balance remains to be paid off in the future despite the temporary suspension of payments.

If you have credit balances when you become disabled, these types of policies may be useful in reducing your monthly expenses if you transfer balances to them within the requirements of the policies so that they are covered by the policy benefits. But, beware – this strategy only works for as long as the benefit period lasts. For example, Discover Card® AccountGuard^SM suspends payments only, and has a maximum benefit period of one year. Thus, the best benefit you could obtain with that credit card is a suspension of payments for one year (without incurring additional finance charges). This type of benefit will not help to generate additional resources, and in any event, is not a long-term solution to a cash shortfall. To generate resources using Credit Life & Disability, you need to acquire policies that will actually make principal and interest payments for you during benefit periods.[2]

§ Take account of the precise circumstances under which the benefit is available, including the definitions of such circumstances, and any exclusionary or limiting clauses. For example, Discover Card® AccountGuard^SMcovers a number of circumstances, including involuntary unemployment, disability due to accident or illness, and unpaid-employer-approved leave of absences. Under this plan, “disability” is defined under that same plan as “an accident or illness that prevents you from performing the material and substantial duties of your job or, if you are retired or are otherwise unemployed, that would prevent you from performing the material and substantial duties of any and all jobs.” Among the further exclusions is a limited pre-existing clause: you do not qualify for benefits due to “disability during the first six months of Discover AccountGuard coverage arising from an accident or illness that caused you to consult with a physician or seek medical treatment within 6 months prior to enrolling for Discover AccountGuard.” These definitions are significant. First, disability is not defined as the presence or absence of any known medical condition. It is instead specifically tied to employment and performance of a job or jobs. Thus, as long as a person with a known medical condition is employed, she is not considered “disabled” within the meaning of this policy, and her potential to collect benefits is equal to that of healthy members of the general public after six months! If she is working, and takes out the insurance at least 6 months before leaving employment due to disability, then she would be eligible for benefits even if she were receiving significant medical treatment when she signed up for benefits and could anticipate some future disability at that time. In essence, this policy could be used by a person with a disability who was planning eventual cessation of employment due to disability and subsequent application for Social Security. If that person has future anticipated expenses that could be charged to this card at least 6 months before ceasing work, that person could suspend payments for up to one year, and thus reduce income requirements (and preserve credit history) while waiting for Social Security or other disability benefits to begin. In sum, the policy definitions of these types of plans may lend themselves to some forms of risk planning for disability, even if you have a known condition, as long as you are actively working.

To the extent you are able to predict when your disability will begin, you become an increasingly good candidate for taking advantage of these types of plans. If possible, you should not sign up for them (and incur the expense for them) until you think you have a plan for using them. As a general rule, these types of benefits are much more expensive than traditional disability insurance, and it is usually more prudent to acquire savings and investments for times of trouble with the premiums you might otherwise pay for these plans. However, if you can predict disability in the future, you may be able to take good advantage of these plans as sources for additional resources during that disability, so long as you have taken into account the need to sign up in advance of any required waiting period and complied with the other conditions of the policies. In this way, you can minimize the number of months you pay premiums before you begin collecting benefits.

[1] If you can acquire debt before a benefit period that will be paid off for you during a benefit period, the amount of that debt effectively becomes an additional “resource.” It may not be straight cash for you to spend, but the resource is just as valuable as cash because it replaces the need for cash that would otherwise have been used to acquire the resources the debt was used to finance.

[2] Be aware that the existence of such credit may – but will not necessarily – diminish your ability to secure further credit, even if the cards are never used. How such unused credit will affect you depends upon the scoring of your credit report by each individual creditor.

07/18/08