We protect our cars and our homes, but a large number of families’s do not protect the absence of a paycheck.  For 70% of Americans, not earning a paycheck would create financial difficulties within one month. Disability insurance (DI), sometimes referred to as income protection, is exactly that -protecting your ability to earn a living. If you become sick or hurt and unable to work, you’ll receive payments to help you continue paying living expenses such as rent, mortgage, car payment, food, insurance, utilities, medical expenses and more.

The Real Risk of Becoming Disabled

Unless you have experienced being disabled or know someone that has become disabled, most people think the odds are very small that something could happen to them. However, nearly one out of three women and one out of four men can expect to suffer a disability that keeps them out of work for 90 days or longer at some point during their working years. Long term disabilities are also a reality. One worker in seven are expected to be disabled for five or more years before retirement. When you imagine a 30 year-old earning $50,000 per year being disabled for life, that could be more than $1.7 million in lost future earnings.

Sources to Replace Your Paycheck

Workers Compensation: If you are a PA employee and sustain a job injury or a work-related illness, the Pennsylvania Workers’ Compensation Act (Act) provides for your medical expenses and, in the event you are unable to work, wage-loss compensation benefits until you’re able to go back to work. Wage-loss benefits are equal to approximately two-thirds of your average weekly wage, up to a weekly maximum. Remember that this coverage only applies to employees and disabilities at work. According to The National Safety Council nearly 90% of disabilities occur outside of work and Workers Compensation would not be available for the vast majority of disability cases.

Social Security Disability: Most salaried workers in the United States participate in the federal government’s Social Security program that also can provide disability benefits. However, eligibility is based on being unable to perform any gainful employment (not just the job you were performing at the time the disability began), rougly 60% of applicants are initially denied and the average benefit is just above the poverty line of $1,004 per month.

Employer-Sponsored Disability: Many employers, especially larger ones, provide employees with group disability insurance. These types of policies provide income protection both inside and outside of work and typically replace 60% of your base salary. If you have disability through work, find out what benefits your employer offers. Sometimes employer plans may only last 6 months or have a 180-day waiting period before any payments are made. A group plan is not customized for specific individuals and the benefits may not meet your financial needs.

Individual Disability Insurance: An individual disability policy is the most flexible and reliable way to protect your paycheck. Policies are specifically tailored to your financial situation and the policy is owned by you, meaning you don’t have to worry about losing coverage if you change jobs. Generally, policies are paid with after-tax dollars, meaning the benefits you receive will be income-tax free.

Overall, Disability Insurance is one of the most important but one of the least talked about insurance coverages. Most people either believe the odds of becoming disabled are negligible or a program like Social Security Disability will replace their entire income if they are unable to work. However, just like so many things in life, education is key. As we enter into Disability Awareness Month please consider sharing this article or the official Disability Insurance Awarness website with a friend or family member that needs to protect their paycheck.

I will begin with the actual piece of paper you receive in the mail, the first page of which is called the Declarations Page. Declarations Page is the sophisticated word we use when we are referring to the front page of the policy you are holding in your hands whenever you call us on the phone to ask a question. You may simply call it your Policy, which makes sense, of course. But we’ve been trained over the years to use the technical term, Declarations Page. If you think about it, it’s a pretty accurate description, since it essentially declares basic pieces of information about your policy. For instance, the Declarations Page indicates your name or business name, your mailing address, the date the policy is effective, the date the policy expires, the limits of coverage, the address of the property(s) being insured, the premium you are paying, and any applicable forms attached to the policy. In other words, it’s where you can find the basic policy information if you’re curious.

Let’s take a look at another word we might throw your way, “First Named Insured.” The First Named Insured is the first person or entity listed on the policy. For instance, a husband and wife might have both names on the policy, Ex: John Doe and Jane Doe. The first person named is the First Named Insured. John is named first and, therefore, is the First Named Insured. Got that? This is extremely important because it is the First Named Insured who is responsible for paying the premium and is the one who has the right to make changes to the policy.

In addition to these fancy words, it would be good to know that each policy contains Common Conditions that are pretty much common to almost every insurance policy. I’ll briefly describe some of the most, uh… common.

Agreement – Your insurance company agrees to provide you with the coverage indicated on the Declarations Page as long as you pay the policy premium in a timely manner.

Automatic Renewal – If your policy has an automatic renewal, it means your policy will automatically renew every year, unless you request it to be terminated. (As long as you pay the premium, of course.)

Cancel or Refuse to Renew – The insurance company can cancel or refuse to renew a policy if notice is given to you in writing at least 30 days in advance.

Concealment, Fraud or Misrepresentation – The insurance company can void the entire policy if it is determined that you intentionally concealed or misrepresented any material fact or circumstance concerning the insurance. This basically means you should not provide false information at the time of application. Moreover, an insurance company can deny a claim if the claim itself is fraudulent.

Cooperation – By signing the insurance application you, the insured, agree to cooperate with the insurance company. You cooperate by; 1) cooperating with the claims process, 2) by completing questionnaires truthfully and promptly, 3) by permitting and helping with inspections and audits, and 4) by complying with any specific recommendations to improve your property or risk.

In addition, most policies will detail how to cooperate during the claims process.

Right to Recover – The insurance company, after making a claim payment under the policy, has the right to recover that payment from anyone else held responsible. For instance, if someone else causes your automobile accident, your insurance company can choose to pay the claim and then collect their money from the other person, usually from their insurance.

Inspection and Audit – This is a common condition of many business insurance policies. The insurance company has the right to inspect your property or risk at any time. They can also recommend changes and provide you with reports on the conditions they might find after an inspection. The insurance company also has the right to audit your risk by examining or auditing your books and records. Usually, they must do this within a certain amount of time after the policy is first written.

Your policy will also spell out what is not covered and what is excluded. Exclusions can vary from policy to policy.

In summary, it is a good idea to be familiar with your policy; its terms, definitions, conditions, coverages and exclusions. And, if you call us for additional clarification, we’ll try to keep the fancy words to a minimum.

1. Know who you are buying insurance from. Over your lifetime you will spend ten-of-thousands of dollars on insurance. A source like http://www.jdpower.com/insurance is great way to find out what insurance companies have the best products, have the best service, and the ability to meet your needs before a claim ever occurs. 

2. Make sure you know what is included in your policy. All homeowner insurance policies are not the same and shopping purely on price can be dangerous. It is important to understand how much coverage is included, how a claim will be paid, what the deductible is and if their are any “special” coverages included.

3. Don’t wait until the week before settlement to start the insurance process. Many insurance companies require their own inspection of the property and certain conditions may require additional inspections by certified contractors. Jeff suggests getting the process started right after your offer is accepted.

Check out all of Jeff’s video tips and insights on his new YouTube channel YourLancasterHome TV. We hope to be bringing you our own video blog soon!

Much later that statement really had a greater meaning than just conversation.  Yes, payday is a very important day to all of us that are dependent on a regular income.  After all, it is important to have food, a roof over head, medical coverage, our utilities paid, and do not forget the need to pay our taxes.  If that is not enough to worry about, there are the ever demanding needs of our children.

Have you ever thought about what might happen if you did not get your paycheck because of an illness or injury? It would be catastrophic for many to have that happen.  A great way to insulate yourself from missing that ever important day is through disability insurance (DI).  Another term used to describe this is “income protection.”  If you depend on your ability to earn an income you should have disability income protection. It continues the payday if you become ill or disabled.

If you have the need for the DI protection, determining the right amount of coverage is the first step.  As a guide, some recommend looking to see if there is coverage through your current employer.  Most often, employer paid DI provides coverage up to about six months in duration.  This is frequently referred to as short-term DI.  Once you have that amount, you can begin to figure the dollar amount of coverage which now needs to be purchased.  The monthly benefit amount can be estimated by adding up your fixed costs, to include your mortgage, utilities, food, clothing, misc. expenses and taxes.

Next, ask how long should the benefit period last?  The benefit period is the length of time the benefits are payable for total disability.  The answer to that is how long will you be ill?  Obviously, you will not know the answer to that question.  Thus, you should choose, as a minimum, two years for the benefit period. There are other options as well, but the maximum length of the benefit period is to age 65.  All of this is described in the benefit section of your policy.

Tailoring a DI contract to your particular needs is done with the help of an experienced agent and disability income provider.  For example, you might move to a new location or earn a salary increase as a result of a new position.  Your agent has the ability to coach you through these changes.  In addition, there are different riders you may add to your DI policy to make it fit your current situation.  You will need guidance to determining the elimination period contained in all DI policies.

Disability income benefits are often tax free if you pay the premiums. You sometimes can receive base benefits in addition to Social Security Disability or even workers compensation benefits.

Yes, payday is a very important day.  Think again how long you would survive if that day did not come for three or four times or even for several years.  It might make a lot of sense to consider DI or income replacement coverage in your mix of protection.

Question 1: You are given $1000 cash and have to choose one of the two options below, which would you choose?

Option 1 (Take a Risk) – Flip a coin. If its heads you get $1000 more and if its tails you get $0 more

Option 2 (Play it Safe) – You automatically get an extra $500

Question 2 – You are given $2000 cash and have to choose one of the two options below, which would you choose?

Option 1 (Take a Risk) – Flip a coin. If its heads you lose $1000 and if its tails you lose $0

Option 2 (Play it Safe) – You automatically lose $500

What option did you choose in each question? For Question 1 the majority of people chose Option 2 to play it safe and take the garanteed gain of $500. However, for Question 2 the majority of people chose Option 1 to take a risk of losing more in order to have of a chance of not losing anything.

The funny thing about the the study is that each question actually has the same possible outcome . Both questions give a 50/50 chance in Option 1 to end up with either $1000 or $2000 and Option 2 always guarantees $1500. So why did the majority of people switch their answer to take more risk in Questions 2 when the outcome is the same as Question 1?

It all has to do with how the question or situation is framed. When a situation is dealing with a potential gain (Question 1) people tend to ”Play it Safe”, however when a situation is dealing with potential loss (Question 2) people tend to “Take a Risk”.

This made me think how insurance is more like Question 2 because nothing can be gained by buying insurance. You either pay a premium and never use it (loss) or you use the insurance and it puts you back to the same position before the loss (no gain). The more important insurance implication is that people may be taking more risk without knowing it by either not buying insurance or not buying enough insurance. They look at insurance like Question 2 and tend to react using the Option 2 mindset of taking more risk in order to avoid an immediate financial loss (paying a premium).

Overall, I am not suggesting that you should handle risk by purchasing insurance for everything. However, when dealing with an insurance decision or any other loss situation,  beaware that loss aversion part of your brain could be influencing your decision.

So why did I reference monkey’s in the blog title? The study found that monkeys behave the same why as humans when they were presented with the same two questions but I’m not attempting to explain that one! View the entire presentation here “A Monkey Economy As Irrational As Ours” by Laure Santos.

When Does a Home Improvement affect my Homeowner Insurance?

The amount of insurance on your homeowner policy is based on the Replacement Cost or the cost to rebuild the home. So when you make an improvement or renovation to your home that increases its Replacement Cost value, your homeowner insurance needs to be updated. However, not all improvements affect your home’s Replacement Cost value. Most minor improvements such as painting, new windows and doors do not affect the Replacement Cost value of the home because you would be replacing existing home features with those of similar kind and quality. However, any home improvement that adds a new feature or is an upgrade does affect your Replacement Cost value and your homeowner insurance policy. Here are just a few examples of improvements that do affect a home’s Replacement Cost:

- Adding a porch or deck

- Adding a new bathroom

- Adding central air conditioning

- Finishing a basement

- Building a garage

- Remodeling a standard kitchen to a customized kitchen

Why is it important to update your homeowner insurance?

1. The Home Impovement May Not be Covered – Most homeowner insurance policies require the value of the home on the policy to be maintained at 100% of its Replacement Cost value and any improvement affecting the Replacement Cost value must be reported to your insurance agent or company. Any improvement not reported most likely will not be covered in the event of a loss.

2. Some Losses May Not be Paid in Full - If the value of the home stated on the homeowner insurance policy falls below 80% of the Replacement cost value, all partial losses may not be fully covered. For example, if you have a covered $10,000 fire loss to any part of the home, you could end up receiving less than $10,000 if the home is insured to less than 80% of its Replacement Cost value.

Overall, it is important to understand that any home improvement may require insurance improvements too. Otherwise, those improvements may not be covered in a home insurance claim and any other home insurance losses may not be paid in full. Make sure to talk with your agent or insurance company to find out if your home improvments affect your specific homeowner insurance policy.

Have you made any home improvements that affect your insurance lately?

1. The Savings Data Is National- One of the most important pricing factors for car insurance is location. For example, car insurance prices in Lancaster, PA are significantly cheaper than New York, NY. In addition, some car insurance companies tend to have more competitive prices in specific states and even counties. However, most insurance companies use National data to promote their average savings on television and it may not be an accurate picture of how competitive they are on a local level. Car insurance prices are very similar to real estate, it is all about location, location, location.

2. The Savings Data May Not Be Current – I understand that it takes time to compile National savings data for these commercials, however, one car insurance commercial I saw had fine print on the bottom of the screen saying the data was from 2007. Nearly every car insurance company has increased prices since 2007 and some insurance companies have taken double digit prices increases in 2010. Depending on when the last time a car insurance company increased rates, a car insurance commercial even with data from a year ago may be completely out dated.

3. The Savings Data Is Not The Whole Story – My biggest pet peeve with any marketing claim about saving money is that the savings amount is not only part of the story. The other half, and more important part, of the story is how often the savings occurs. A company with just 1 customer who saved $400 per year can make the same claim as another company who saved 10,000 customers an average of $400 per year. However, the only thing talked about in car insurance commercials is the savings amount. If you are shopping car insurance, wouldn’t you want to talk with the company who saves customers money and does it often?

Someone once told me that you can crunch data to make it say anything you want. Keep this mind the next time you see a car insurance commercial and how much you could save if you switch.

Misconception 1: I Don’t Need Insurance because My Business is Too Small

Most people do not consider their hobby or part-time work from home as a business since it is not their main source of income. Thus, they do not even realize that they need insurance for a home based business. If you answer yes to the following 3 questions, you probably have a home based business along with all the risks and rewards associated with owning a business

- Is it a trade, profession, occupation or hobby

- Is it full-time, part-time or occasional

- Is the activity engaged in for money or any other type of compensation

Misconception 2: Doesn’t My Homeowners Insurance Cover My Home Based Business

Homeowners insurance policies were never intended to cover business exposures. The purpose of the homeowners policy is to protect insureds during personal activities. Neither the coverage nor the premium charged is intended to cover a business activity exposure. Thus, most homeowners insurance policies have very limited coverage for most home-based businesses. Below are the common business coverages and exclusions offered on most PA homeowners insurance policies

- No business liability coverage of any kind –no on-premises liability, no-off premises liability, no products liability, no professional liability, Workers Compensation liability, etc.

- No coverage on any detached structure, for example a shed or garage, if used even partly for to conduct business

- Minimal coverage on business property such as computers, fax machines, filing cabinets, tools and inventory – typically $2,500 in your home and only 10% or $250 away from home

What are My Insurance Options for a Home Based Business?

The insurance solution for a home based business is unique for each situation but most can be protected by using one of the following.

- Incidental Business Endorsement – Depending on the type of business and insurance company, you may be able to add an endorsement to your homeowners insurance to extend liability insurance for your home based business. This coverage usually costs around $30-$50 per year but it only covers on-premises business liability only.

- Businessowners Policy (BOP) – A BOP is a package policy that is designed to provide property and liability coverage for some small businesses. Generally, small businesses whose activities or operations involve processing and/or service are eligible for a BOP. Manufacturers, especially with complex liability issues, are not suited for a BOP. A BOP policy can cost as little as a few hundred dollars and it has several optional coverages that can be tailored to fit an individual business.

- In-Home Business Owner Policy – Some insurance companies offer a policy that combines a homeowner and BOP into a single policy and are designed specifically for home based businesses. The policies eliminate gaps and duplications in coverage and the rates reflect the in-home status of a business.

Don’t Risk A lot For A Little

Millions of Americans are operating a home based business without knowledge that they have little or no insurance protection. In the event of a loss, they could be underinsured or uninsured leaving them personally liable. The solution to reduce or eliminate this potentially devastating risk is simple and can cost as little as $30 per year. Don’t risk a lot for a little!

Are you sure if you are covered by home based business insurance?

Chad’s question on what is covered and more importantly not covered is one of the most important questions to ask when purchasing home insurance. Some people believe everything is covered for all reasons but home insurance policies have exclusions and coverage limitations. One example of those limitations are the 11 Special Limits for insuring your belongings (Coverage C). Note that the list below is based on a standard HO-3 home insurance policy and the Special Limits may be different for your specific insurance company. Make sure to check your policy or talk to your agent for the details of your policy.

1. $200 on money, bank notes, coins, precious metals, stored value cards and smart cards

2. $1500 on securities, accounts, deeds, evidences of debt, letters of credit, notes, manuscripts, personal records, passports, tickets and stamps (limit includes cost to research , replace or restore the information from the lost or damaged material)

3. $1500 on watercraft of all types, including trailers, furnishings, equipment and outboard engines or motors

4. $1500 on trailers or semitrailers not used with watercraft of all types

5. $1500 for loss by theft of jewelry, watches, furs, precious and semiprecious stones

6. $2500 for loss by theft of silverware, silver-plated ware, goldware, gold-plated ware, platinum ware, platinum-plated water and pewterware

7. $2500 for loss by theft of firearms and related equipment

8. $2500 on property, on “residence premises”, used primarily for “business” purposes

9. $500 on property, away from the “residence premises”, used primarily for “business” purposes.

10. $1500 on electronic apparatus and accessories, while in or upon a “motor vehicle”. Accessories include antennas, tapes, wires, records, discs or other media

11. $1500 on electronic apparatus and accessories used primarily for “business” while away from the “residence premises” and not in or upon a “motor vehicle”. Accessories include antennas, tapes, wires, records, discs or other media that can be used with any appartus described above.

Now you can see that these “Special Limits” might not be so special if you have an expensive engagement ring or a large amount of business property at home. Fortunately most of the these limitations can be resolved by either using non-insurance risk reduction methods outlined in our prior blog post or by purchasing the right insurance for an extra premium. The key is to be aware that these Special Limits exist so as your belongings change or increase, your insurance provides the coverage you expect. Also look for our future blog post dealing with the business property limitation listed above and other exposures that home-based businesses face.

Leave a comment below and let me know if you were surprised by any of the 11 “Special Limits”.

Who Must Purchase Workers Compensation Insurance?

The Workers Compensation section of the PA Department Labor & Industries’s (DL&I) website says, “If you employ workers in Pennsylvania, you must have worker’s compensation insurance - Its the law.”

That seems clear enough but how do you know if the person you are employing is actually an employee or a subcontractor?

Before I answer that question, I must point out that the PA DL&I website goes on to further describe who does and does not need coverage, as well as provides examples of the penalities incurred for employers who fail to provide coverage even though they should have. Also the PA Insurance Department website has a nice piece of information titled “Your Guide to Workers Compensation Insurance.” If you’re in business in Pennsylvania, I suggest you check it out.

The IRS Test

The best way to answer the question as to whether you have an employee or a subcontractor is by using the “IRS Test“. Basically, a subcontractor is defined by the IRS as a person whom you have the “right to control or direct only the result of the work and not the means and methods of accomplishing the results.” Whereas a worker is an employee if you “can control what will be done and how it will be done.”

The IRS test consists of three main catagories to review regarding how to classify your worker: behavior control, financial control and relationship of the parties.

Behavioral Control – This section deals with whether you demonstrate a “right to direct or control how the worker does the work.” Examples are type of or level of instruction and/or training afforded to your worker

Financial Control – This section deals with “whether there is a right to direct or control the business part of the work.” Examples are whether there is significant investment in the work or who is responsible for a majority of the expenses incurred.

Relationship of the Parties – This section deals with “how the business and the worker perceive their relationship.” Examples are employee beneftis and written contracts.

In many cases, the control you demonstrate over a worker, along with your relationship with that worker, can determine how to classify them. Take a look at Publication 1779, “Independent Contractor or Employee”. The document details the three catagories, as well as lays out several questions you can answer to help you better understand how to classify your workers. How you answer the questions in this publication can go a long way in determining whether you need to purchase a workers compensation policy.

In conclusion, determining whether a worker is a subcontractor or an employee can be difficult task. Each situation is unique and a local insurance agent is always a good source to answer questions or help with navigating any of the aforementioned websites. Are you sure if your business has contractors or employees?