Agents: Share This Article with Your Clients!
Buying a disability insurance policy is a smart way to protect your paycheck. It’s also an investment. Just like you wouldn’t buy a car without thinking about all the features you absolutely need and the features you would like to have, you shouldn’t buy a disability income insurance policy without thinking about the features you want it to include.
Understanding Your Disability Income Insurance Options
Disability insurance policies are not all the same.
If you’re buying disability insurance, you may already know that you can’t really depend on Social Security Disability Insurance. Although the government program provides important benefits for some people, the monthly Social Security benefits are very modest, and the strict eligibility requirements mean that most applications are denied. If you want to rest easy knowing that you have good disability coverage in case you can’t work because of an illness or injury, you need to buy a disability insurance policy.
But what type of disability policy should you buy?
- Some workers have access to employer-provided group long-term disability insurance benefits. These group disability insurance policies usually only replace up to 60% of the policyholder’s pre-disability income, with monthly caps that mean high-income earners often receive even less – plus the benefits are usually taxed and the coverage isn’t portable. The plan might not pay benefits for anything other than total disability, and you can’t pick and choose your terms. On the bright side, the employer might cover some or all of the cost, and group plans generally come with good discounts and minimal underwriting requirements.
- Some professionals also have access to disability insurance through an association. These plans sometimes include specialty-specific protection, and the disability coverage is often portable. However, as with group plans, the benefit amounts may be limited, and you may be stuck with whatever policy the association picks out.
- The other option is individual disability insurance. These policies are highly customizable, and different insurance companies offer different terms and conditions, so you can shop around to get a policy that meets your needs. If you have a group long-term disability insurance plan through work but you’re not sure it covers your needs adequately, you can buy an individual disability insurance policy to supplement your coverage and boost your monthly benefits.
For a concise rundown of your coverage options and the key differences to consider, see the DI Coverage Comparison Chart.
Comparing Your Disability Benefits
Let’s say you’ve decided to purchase an individual disability insurance policy, either as your only coverage or to combine with a group disability policy. Great decision! But before you pat yourself on the back for making a wise investment in your future earning potential, you need to learn how disability insurance works so you can compare plans.
Disability insurance protects your income from the risk of disability. This sounds simple, but if you stop to think about it, you might have questions. What counts as a disability? How long can you receive benefits? How big will the benefits be? The answers to these questions and more depend on the specific terms in your insurance policy.
- The definition of disability determines when your policy pays, and this is typically based on your ability to work. Doctors are generally advised to purchase own-occupation and specialty-specific coverage that pays benefits if they can’t perform duties required in their specialty, but many other workers are fine with a less expensive any-occupation policy, which pays benefits if a disability prevents them from doing any type of work they’re suited for. Also consider whether the policy pays only pays if you’re totally disabled or if partial disabilities are also covered.
- The elimination period, also called the waiting period, is the length of time that has to pass between when the disability starts and when you start receiving benefits. This can be compared to the deductible that other types of insurance policies require you to pay. In both cases, you’re accepting a portion of the risk, but the elimination period is measured in time instead of money. A typical waiting period is 90 days, meaning you’ll need to be disabled and unable to work for 90 days before you can claim benefits. Longer waiting periods can lower the premium cost, but make sure you have enough emergency savings to cover your elimination period.
- The benefit period is how long you can continue to receive benefit payments. If your benefit period is two years, your benefits will stop after two years even if you’re still unable to work. Some benefit periods are much longer, and some disability policies keep paying benefits until you reach age 65 or 67.
- The benefit amount is how much you can receive. Your monthly benefit amount will never replace 100% of your pre-disability monthly income. However, by combining a group policy with an individual disability insurance policy, you can replace a greater portion of your regular income, so you should calculate how much disability insurance you think you need.
- Exclusions and limitations can create situations in which you won’t receive benefits. For example, if your policy excludes disabilities related to mental health and substance abuse disorders, you won’t be able to claim benefits if you are unable to work due to mental health or substance abuse. Other exclusions might be related to pre-existing conditions. It’s important to understand the exclusions in your policy so you don’t get caught off guard.
- Riders are extra features. Some riders are standard with the policy, but other riders are optional and will raise your monthly premium costs. For example, a COLA rider provides a cost-of-living adjustment to help your benefits keep up with inflation, a student loan rider provides an extra benefit to cover student loan repayments that need to be paid during a covered period of disability and a retirement protection rider pays a benefit into a retirement fund to make up for retirement contributions that you can’t make during a covered period of disability. Some riders provide partial disability benefits. Different insurance companies offer different riders, so you’ll want to compare your options.
- Future increase options let you increase your income protection without medical underwriting. As your career progresses, your income will probably increase. Let’s say you realize your income has increased substantially since you purchased coverage, and your financial commitments have also increased. You want to buy more coverage, but you’ve experienced health problems recently, so you’re no longer eligible for good, affordable coverage. A future purchase option lets you avoid this problem by allowing you to increase coverage to match increases in your income without a medical exam or questions.
- Renewability provisions determine whether or not your rates can go up. If your policy is non-cancellable and guaranteed renewable, you can keep your coverage and your premiums won’t go up as long as you pay your premiums. If your policy is guaranteed renewable only, your insurance premiums may increase if the insurance company raises rates for the entire class of policyholders.
For a simple guide to key terms and provisions, see the Anatomy of a Disability Insurance Policy handout. This is a great handout to reference while you’re comparing your disability insurance quotes.
Selecting the Disability Insurance Features That Make Sense for You
With disability insurance, a health crisis doesn’t have to become a financial crisis, too. Because there’s so much variation from policy to policy, you need to review your options carefully. Otherwise, you might not have the best disability insurance policy for your needs.
Ask your agent for assistance with comparing disability insurance policy quotes. Need help? Find an agent.