The probability that you will experience a disability that will last more than 90 days is statistically more likely than the probability of your premature death even at age 60. For this reason, disability insurance coverage is of primary importance in your financial planning. Your personal resources and your disability insurance policy should be able to replace at least 60 to 70 percent of your pre-disability income. Disability insurance provides you monthly payments when you are unable to work because of illness or injury.
Short term disabilities can usually be covered by your emergency fund and savings, vacation or sick leave benefits, or in some cases, short-term disability coverage available from your employer.
When considering the purchase of long term disability insurance, consider the following:
- Annual renewable disability insurance is typically the least expensive way to purchase disability insurance.
- A step rate or level premium disability insurance plan, purchased from a participating (dividend paying) insurance company, will also reduce the long-term costs of a disability policy.
- Purchase a policy that is guaranteed renewable and non-cancellable. With the guaranteed renewable option you have the right to renew the policy annually, regardless of your current health, up to a maximum age, generally age 65. With a non-cancellable option, if you pay the premiums, the insurance company cannot cancel or modify the provisions of the policy although they can increase the premiums for an entire group of policy holders. Many companies are charging extra for the non-cancellable option.
- Purchase a policy that provides guaranteed future insurability. This feature allows you to increase your benefit without proving evidence of insurability.
- Disability insurance should cover both sickness and accident. Choose a policy that covers sicknesses when first manifested and not first contracted. An illness may not manifest itself until after you purchased the policy although it may have been contracted before you purchased the policy. Also select a policy that pays benefits if you lose your vision or the use of your arms or legs. Avoid contracts that require the severance of your limbs.
- A good disability policy will cover you in the event you cannot perform the usual and customary duties of your own occupation. A more restrictive policy, and less expensive, will only pay benefits if you cannot perform the duties of any occupation to which you are reasonably suited by education, training or experience.
- The disability policy should also have a provision to pay a residual disability benefit. This coverage is payable if you can only return to work part-time.
- If possible, obtain a policy that will pay benefits for your lifetime or at least until age 65.
- Reduce the cost of disability insurance by selecting a long waiting period between the time the disability occurs and the time payment of the benefit begins. Be sure you have enough money to survive the waiting period. Usually a 90 day waiting period or longer will create a dramatic reduction in disability premiums. Waiting periods are typically 30, 60, 90, 180, or 365 days. The policy should have a provision for recurrent disabilities. This provision provides that if you return to work after being disabled for some time period and then become disabled again by the same condition, a new waiting period is not triggered.
- Premium costs for disability insurance may be discounted for non-smokers and good health.
- The insurer should be willing to waive your premiums during any period of time that you are disabled and receiving a disability benefit.
- The policy should provide an option to increase your benefits to reflect an increase in the cost of living (inflation indexing). Some policies place a ceiling on the amount the coverage can increase. This ceiling is usually two or three times the basic coverage. Find out what the ceiling is before you pay for this additional benefit.
- The policy should pay for physical and occupational rehabilitation costs.
- A waiver of premium provision that allows the annual premium to be waived until 60 day after complete recovery.
Consider purchasing a policy that pays a benefit for partial disability.
- If you have more than one source of coverage, ascertain whether there is a coordination of benefits provision. With a coordination of benefits provision, the benefits paid under one policy will be reduced by the benefits paid under another.
- Your disability insurance benefit should not be reduced by any Social Security disability benefits you may be entitled to if you are permanently disabled.
- If you are on a tight budget consider a step-rate plan where premiums start off low for several years then increase to the normal level.
- When considering the purchase of disability insurance, ask the agent to provide you with the company's history regarding the payment of disability claims. Ask to see the payment of claims ratio. A low ratio of 80 percent or less may indicate that the insurance company is too restrictive in the payment of claims. The claims information is presented in the Argus Chart. A good agent will be pleased to provide you the information.
- Determine the financial stability of the insurance company before you purchase a policy. Depending on your age, the policy may be in force for 20 to 40 years. Select a company that has top ratings from three of the five rating companies, and that will not likely be a candidate for acquisition or merger with another company. Mutual companies have a better chance of avoiding a merger. (See: How To Evaluate The Strength Of An Insurance Company). In addition, select a company that writes little or no group health or disability insurance where AIDS claims and other underwriting weaknesses could result in higher future rates or company financial weakness.
- If you are a partner or an owner of a closely held corporation, consider funding a buy-sell agreement with disability insurance in the event of your disability. Under this arrangement, the company generally would pay the premiums for the coverage. Upon your disability you would receive payments in exchange for your ownership in the enterprise.
- If you are an owner of a business and you have an employee that is indispensable to your business, consider purchasing a Key Employee Disability policy. If your key employee becomes disabled you will receive a monthly payment to cover expenses for additional help or to replace lost profits. Benefits are generally paid for a period no longer than 24 months.
- If you are a business owner, consider the purchase of business overhead expense insurance. This insurance covers business expenses such as rent, salaries, utilities, lease payments, insurance premiums, and other obligations should your income cease as a result of your disability.
- Your disability benefits will be received tax-free to the extent you paid the premiums.
- Long-term disability insurance can be purchased less expensively if it is group coverage. Request that your employer offer group disability insurance, provided there are other employees who will participate.