Buying Disability InsuranceTalk to the agent who sells you your life, health, auto or business insurance—he or she may either sell disability coverage or will be able to refer you to an agent who does. Your state’s insurance department will also have names of agents and companies writing policies in your state. Make sure that you understand what you are buying and don’t be afraid to ask your agent to explain exactly what is in the policy.
Key things to look for when you shop around
- The definition of disability. Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits only if you are unable to perform any occupation. “Own occupation” policies are more desirable, but more expensive.
- Benefit period. The benefit period is the amount of time you will receive monthly benefits during your life. Experts usually recommend that the policy you buy pay you benefits until at least age 65, at which point Social Security disability will take over. If you are young, you may consider buying a policy offering lifetime benefits because it will still be relatively inexpensive.
- A policy that will replace from 60 percent to 70 percent of your total taxable earnings. A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before deciding how much disability coverage you need.
- Coverage for disability resulting from either accidental injury or illness. An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased.
- A cost-of-living increase in benefits. You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer “indexed” benefits, keeping pace with inflation after benefit payments begin.)
- A policy paying “residual” or partial benefits. This type of policy is available so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, a residual benefits policy pays partial benefits based on loss of income without an initial period of total disability.
- Transition benefits. Offered by some companies, it can offset financial loss during a post-disability period of rebuilding a business or professional practice.
- Ongoing coverage. A non-cancelable policy which will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders.
- Waiting period. Every disability policy imposes a waiting period, also known as the elimination period. This is the number of days you must be disabled before receiving benefits. If you are disabled during the elimination period, you will not receive any benefits, even though you are not able to work. If the elimination period is short, such as 30 or 60 days, the premium will be higher. A longer elimination period may strain your finances more when you need it, but you will be charged a lower premium. Most experts recommend that you select an elimination period of 60 to 90 days. The first check is usually paid 30 days after the waiting period.
- Financial stability. Check the financial ratings of an insurer. Your insurance agent or company representative should provide this information or check with the following companies, which rate insurance company strength.
There are two types of disability policies:
- Short-Term Disability policies – have a waiting period of 0 to 14 days with a maximum benefit period of no longer than two years.
- Long-Term Disability policies – have a waiting period of several weeks to several months with a maximum benefit period ranging from a few years to the rest of your life.
Disability policies have two different protection features that are important to understand:
- Noncancelable means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in the premium or a reduction in benefits.
- Guaranteed renewable gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, your insurer has the right to increase your premiums as long as it does so for all other policyholders in the same rating class as you.