Considering buying a disability insurance policy to protect your future income?
Good move.
Everyone can benefit from having disability insurance because a disability, illness, or injury can happen to anyone at any time of life. When one does occur, disability insurance is the best way to keep yourself afloat financially.
But don’t sign up just yet. First, read these seven tips to help you decide which disability insurance to choose.
- Choose an Individual Long-Term Disability Policy
Disability insurance policies fall into two different types of categories:
- Individual or group
- Short-term or long-term
The best type of disability insurance is an individual long-term policy. If you have disability insurance coverage through your employer, then you have a group policy, and group policies are not customizable.
With an individual policy you can add policy riders to get extra benefits, select your benefit period and elimination period, and choose the definition of disability that you want.
Short-term policies usually only pay benefits for up to six months. Long-term policies can pay benefits for five years, ten years, twenty years, or even more, depending on the benefit period you select.
This article from Physicians Thrive goes into more depth on the difference between group policies, individual policies, short-term, and long-term options.
- Choose the Own-Occupation Definition of Disability
Every policy has what’s called a “definition of disability,” and you have to meet that definition in order to qualify to receive benefits.
The most common definition is any occupation. Under this definition, you must be injured or ill in a severe way that prevents you from working ANY job at all.
The preferred definition of disability is own occupation. With an own occupation definition, you can collect benefits as long as you have any injury or illness that prevents you from doing your current job.
There are only six insurance companies (known as the “Big Six”) that offer the own-occupation definition of disability:
- Ameritas
- Mass Mutual
- Ohio National
- Guardian
- Principa
- The Standard
The own occupation definition makes it much easier to qualify to receive benefits. With the any occupation definition there’s a greater chance that you’ll never be able to collect a dime.
- It’s Worth Adding Riders
When you purchase an individual disability insurance policy you’ll have the option to add policy riders. Riders are additional features that offer added benefits.
Some of most important riders to add are:
- Non-Cancellable, Guaranteed Renewal Rider: This ensures that the insurance company can never cancel your policy and that you always have the option to renew it.
- Cost of Living Adjustment Rider: The COLA rider protects against rising inflation. As the cost of living increases (based on the Consumer Price Index), your coverage increases as well.
- Future Increase Option: Sometimes called the Future Purchase Option, the FIO allows you to increase coverage amounts without having to undergo any additional health evaluations.
- Student Loan Repayment Rider: If you still have student loan debt, this rider will pay additional benefits specifically to cover student loan payments.
Every rider you select will add to the price of your monthly premiums, but they are well worth the added cost.
- Compare the Costs of Different Elimination Periods
The elimination period, or waiting period, is the amount of time between the date of your disability or diagnosis and the date that you can start to collect benefits. Elimination periods range from anywhere from 30 days to 730 days.
The shorter the elimination period, the higher the cost will be, but the price difference is sometimes very little. It’s worth asking the insurance agent to price your policy with different elimination periods to see how the premium prices compare.
- Pay For as Much Coverage as You Can Afford
Most long-term individual policies allow you to select a coverage amount up to about 60% of your current salary. If your disability benefits will only be your source of income should you become physically unable to work, it’s worth paying for the most amount of coverage possible.
Individuals that have another source of income, such as spousal income, may choose to save money on monthly premiums by opting for a lower coverage amount.
- Compare Prices and Policy Terms
Insurance companies charge different rates for different types of policies, so it’s always best to get price quotes from two or three insurers to make sure you’re getting the best possible rate.
When comparing policies, don’t just look at the cost — look closely at the policy terms as well to make sure you’re comparing apples to apples.
In Conclusion
Long-term, individual disability insurance protects your future unearned income when an illness or injury prevents you from working. Without it, your personal finances and family’s security are at risk.
If you don’t already have a policy, get one now. The younger and healthier you are, the less you’ll pay for coverage, so start comparing prices and policies from the Big Six insurance companies.
