Disability Insurance: The purpose of disability insurance is
to replace the lost income from work should you become disabled,
and unable to work. Since the policy can potentially cover more
than one disability, and they can last for an extended time,
disability insurance claims can be very large.
Disability insurance is expensive because unfortunately people
do become disabled. For many people, the chances of a disability
present a much greater likelihood at their current age than
death. For example, a person under the age of 45 is three times
more likely to be struck with a disability than die at that age.
An individual disability insurance policy has some advantages
and disadvantages over a group policy. Here is a quick look at
some of them;
Advantages of an individual disability policy:
1) You select policy features and determine which coverages and
riders are important to you
2) It is portable. If you change jobs, you can take this
important coverage with you.
Disadvantages of an individual disability policy:
1) It is more expensive than group coverage
2) Requires proof of insurability
3) Underwriting can be difficult
Let’s look at the factors that determine how much disability
insurance costs:
Elimination Period (EP): This is the time between when a
disability occurs and when payments to the insured begin. Think
of this as being similar to the deductible in health insurance –
the longer you can wait until benefits are paid to you (i.e. the
larger the deductible) the less your premiums will be. The EP
can be as short as 30 days and as long as one year. Based on the
pricing, it seems the industry wants the EP to be around 90
days. To go to a 60 day EP, there is usually a sizeable jump in
premium, but to go to a 180 EP, there is not that much savings.
Benefit Amount: This tells how much a disability policy
will pay out in the event of a claim being paid. It is usually
expressed as a percentage of salary up to a monthly amount (60%
of salary up to $3,000/mo).
Benefit Period: Assuming the insured remains disabled,
how long will the policy pay benefits? The best policies pay
benefits to age 65 (or longer if you are disabled after age 60),
although you can get policies with two, three, or five year
benefit periods. The chance of becoming disabled decreases
somewhat with age, but the average duration of a disability
tends to increase with age. At age 40, if a disability lasts
longer than 90 days, the average length of the disability is
over five years.
Definition(s) of Disability: Do you just have to be out
of work, or have a loss of income, or both? Do you have to meet
the Social Security Administration definition of disability? The
definition of disability under Social Security is different than
other programs and is VERY strict. Social Security pays only for
total disability. Social Security considers you disabled if you
cannot do work that you did before and they decide that you
cannot adjust to other work because of your medical condition(s).
Your disability must also last or be expected to last for at
least one year or to result in death.
Insured’s Occupation (and its definition): Although a
quality disability policy will pay if you are injured or get ill
away from work, what you do for a living has a big determination
on the price (or even availability) of disability coverage. Are
you more likely to get a really bad paper cut (an insurance
agent, for instance) of fall off of a roof (a framing
contractor)?
Another factor that is considered is that some occupations are
relatively safe, but are such that a relatively minor illness or
injury could lead a severe or even career threatening
disability. For example, a minor injury to a finger could end
the career of a professional musician, or a slight unsteadiness
of the hand could prevent a surgeon from continuing to operate
on patients.
The
“occupation definition” in a disability policy describes what
occupations you may be able to perform. For example, a policy
may specify that you are considered disabled when you cannot
perform your normal occupation. Suppose I am the surgeon
mentioned above (Mom would be so proud!) and I am injured so
that I can no longer perform surgery. According to the above
definition, I am disabled, and am entitled to receive disability
payments. A policy with this occupational description offers
strong protection for me. However, it will be more expensive
than one of the other possible occupation definitions.
On the other hand, a policy may state that I am disabled when I
cannot engage in any similar occupation. In the above example, I
might not be considered disabled if I am still able to teach
medical students, or have an office practice. This offers less
protection, but such a policy would normally have lower premiums
than the first type of policy.
Insured’s Health: This is a form of health insurance, after all,
and what self-respecting health insurance policy would not look
at your health? Let’s face it,
your health directly affects your risk of being disabled. Some
of the factors they look at in determining your premium include
tobacco use, build (height & weight), and current (and family)
medical conditions.
Riders: Other policy features you may want to consider
include:
Non-cancelable: The insurance company cannot cancel your
coverage
Guaranteed Renewable: Rates are guaranteed not to
increase
Automatic Increase in Benefits: Benefits amount increases
periodically while you are still working to help offset the
effect of inflation. You still need to review your coverage from
time to time, but this will help.
CPI Cost of Living Adjustments: Once you are disabled and
collecting benefits, this feature will allow your benefits to
increase at a rate similar to the rate of inflation.
Guaranteed Insurability: Protects your ability to buy
additional disability coverage in the future, regardless of your
health.
If you want more information, just
contact us, we will be happy to help you decide what is best
for you.
