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Is disability insurance worth the price?

Also: How a credit card balance affects credit scores.

May 15, 2011|Liz Weston | Money Talk

Dear Liz: My husband and I have individual life and disability policies. We have two teenage children and have had some health issues in the past. I think the life insurance is important, but I'm not sure about the disability insurance.

My husband and I have coverage at work, although it would not make us whole if we got disabled. Together we make more than $350,000 a year. We have two homes and pay private tuition, so there are a lot of bills to pay. But is the insurance worth the money we spend every month?

Answer: You may have read some scary statistics about the likelihood you'll face a disabling injury or illness. One often-quoted statistic has you facing an 80% chance of serious disability, one that would prevent you from working for 90 days or more, before age 65.

But it's not clear how accurate those statistics are. Last year, columnist Ron Lieber of the New York Times tried to find the facts behind insurance industry proclamations about disability and found little agreement. One source pinned the risk of serious disability at closer to 30%. If you have a white-collar job, you may well face less risk than someone who does physically dangerous work.

The reason you buy insurance isn't to cover likely events, in any case. It's to cover events that could have a catastrophic financial impact if you didn't have the policy. That certainly describes most people's risk when it comes to disability. The Social Security system provides limited payments to only the most disabled workers, and workplace policies are often limited and may not cover disabilities that aren't work-related. An individual disability policy can be a good idea because it provides more coverage.

You can't expect any disability policy to make you "whole," however. Many insurers won't replace more than about 60% of current income because they don't want to give you an incentive to fake a disability.

Consider asking an independent source, such as a fee-only financial planner, to review your workplace disability coverage to see whether you need to hang on to your individual policies. If the cost of the coverage is an issue, this planner can help you research your options, such as choosing a longer waiting period before coverage kicks in or limiting your benefit period to three or five years instead of through age 65.

How does credit card affect scores?

Dear Liz: I am confused about how my credit limits and balances are affecting my credit scores. I haven't paid any interest on my credit cards in more than two years because I always pay off my balance before the due date. Then I figured out that the issuer was reporting my balance on the last day of the previous month instead of on the due date, so it looked like I was carrying high balances. So I started paying the balance in full before the first.

The first time I did this, my Experian FICO score shot up 30 points. But the next month I did the same thing, and it dropped back down. I was told my score was lowered because it "shows no recent balances." Is this valid? Does it mean I should be paying the balance minus $20 before the first, then pay the rest after the first? This seems like making a system overly complicated.

Answer: First of all, the credit score you're monitoring is not a FICO score. Although Experian sells FICO scores to lenders, it sells other scores to consumers. What you're probably looking at is a PLUS score, which isn't currently used by lenders. So any gyrations you're seeing don't necessarily reflect what's happening with your FICO scores — and your FICO scores are the ones most lenders use. Although you can't buy a FICO score for Experian, you can get FICO scores for the other two bureaus at for $19.95 each. Along with the three-digit numbers, you'll get reasons behind your score and suggestions for improvement.

And paying down a balance before it's reported to the credit bureaus is one way to improve your FICO scores, since it's the reported balance that's used to calculate your credit utilization — an important part of the FICO scoring formula. But you also can improve your credit utilization simply by limiting how much you charge to any card in a given month. A limit of 30% is good, and 10% is even better.

Liz Weston is the author of "The 10 Commandments of Money: Survive and Thrive in the New Economy." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via Distributed by No More Red Inc.

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