Disability insurance can be really confusing. There are a lot of caveats and options to add to policies. Finding solid information that is easily understood can be challenging.
But that’s no reason to forgo owning disability insurance if you need it. The stakes are just too high. Let’s look at some of the key areas so you are better prepared to go out and get a policy sooner rather than later.
Understanding Disability & Disability Insurance
Disability insurance exchanges annual premiums for insurance coverage that will replace your income if you become disabled for a period of time. You are more likely to become disabled in a given year than you are to die. But even though folks load up on life insurance they ignore disability coverage. Here are some of the critical aspects of this coverage that you need to know about.
Two Main Types of Disability Insurance
There two major categories of disability insurance based on how long you will need income replacement. The first is short-term disability. With short-term disability you can get coverage for up to a year of being disabled. This insurance is designed to cover you for missing work (and thus your income) for an injury or sickness. Often your short-term coverage can kick in the day or week after you become disabled.
The second and more critical disability coverage is long-term disability. As you might imagine, it is designed to provide you coverage for a long period of time. Some policies provide payments for 5 or 10 years while others cover you up until age 65 or life. You can still normally get a policy that kicks in immediately after becoming disabled, but those can be pricey compared to having a built in waiting period.
A Key Factor of Long Term Disability: Occupation Coverage
Your insurance policy spells out what “disabled” means in one of two ways:
The first is “any occupation” coverage. This means that you if are disabled to the point that you couldn’t work anywhere you can claim benefits. That means you’ll only receive payments if you can’t take customer support calls from home, be a greeter at Wal-Mart, etc. You get paid only when you are completely disabled and unable to work at anything.
The second coverage, and the one you really want, is “own occupation” long-term disability coverage. This means you are disabled to the point that you can’t do your specific job. If a roofing contractor is no longer able to climb on roofs his policy kicks in to pay him rather than denying his claim because he could go work in some other low-paying industry.
4 Factors to Watch When Getting a Long Term Disability Insurance Quote
Here are four ways you can change the cost of your policy and avoid issues that would put your income replacement at risk.
Just like you can get life insurance with varying time periods the same is true for disability insurance. Shorter policies such as 5 or 10 year terms will be significantly less expensive than a policy that covers you until age 65 or life.
However, if you are disabled enough to need coverage for 5 or 10 years you will likely be disabled for life. In short, there are other ways to reduce the cost of your policy. Don’t scrimp on the term length.
How Long Before Insurance Kicks In
This is called the waiting period. The longer you can wait before the insurance company must begin giving you payouts the cheaper the premium will be. Long-term disability policies can start the day you are disabled (expensive) or up to 180 days after you become disabled (less expensive).
Surviving for the period of time in between your disability and when you begin getting paid for that disability requires a healthy emergency fund. If you have six to twelve months of expenses saved up then you should be able to pay your bills until the disability insurance kicks in.
What Level of Income Replacement
The industry standard for payouts is 60% of your normal income. These payouts are not taxed on policies that you pay 100% of the premium of, so what you get paid is what you get to keep. (If your employer provided you disability insurance and paid for half of it, then half of the payments would be taxable.)
You won’t find a policy that replace more than 60% of your income because it would encourage buyers to commit insurance fraud. For example if you could get a policy for 80% of your income (what you would net if you were in the 20% tax bracket) then you could buy long-term disability and look for ways to become disabled since your lifestyle wouldn’t have to change.
However, if you are finding it difficult to land a policy you can afford with a 60% income replacement you can go the other direction to cut down on how much income is replaced by the insurance company. If you know that having 60% would be really nice but you could survive on 40% instead, dropping to that amount will lower your annual premiums.
Guaranteed Renewable Policy
Lastly you want to make sure your coverage is guaranteed renewable until retirement. This means the insurer cannot drop you and leave you without the disability payments you need. Going with a policy that does not include this coverage is incredibly risky because you aren’t guaranteed of that income for the rest of your life (or until government benefits kick in).
The disability insurance company is allowed to make changes to your annual premium. However, they can only make changes to premium if they make the same change across the board for all policy holders in your risk group. They can’t single out your policy to jack up the price.
Do you own disability insurance? Why or why not?