Shopping for disability insurance can be a daunting task, especially if the only experience you have had of this type of insurance in the past is via an employer. However, although finding a suitable disability insurance plan is more complicated than purchasing say, home or vehicle insurance, it can be done.
Start by calculating how much income you need to replace. In general, you should be looking for a policy that will cover around sixty percent of your current salary. Sixty percent coverage will roughly match your take home pay as the premiums on your long-term disability policy are not taxed. You can reduce the level of cover that you require if you have sufficient savings to help with your monthly outgoings, but take into consideration that the average length of a long-term disability claim is around two and a half years so your savings would have to be pretty substantial!
Secondly, take a close look at some of the policies on offer, and not only compare prices, but compare the benefits included. A good policy should be non-cancellable. This means that the insurance provider cannot cancel the policy, or change the terms and conditions, including the premium, as long as you are up to date with your payments. By buying a non-cancellable policy you will ensure that your premiums keep to a minimum throughout the entire term of the policy. In addition, it definitely pays to take out disability insurance when you are young as your premiums will be cheaper as you are viewed as being less likely to make a claim.
Another important feature of disability insurance is that it should be an ‘own occupation’ policy. This means that the insurer will pay out if you are unable to work in your usual occupation. The opposite to an ‘own occupation’ policy is an ‘any occupation’ policy. This type of policy is cheaper but will only pay out if you are unable to work in any occupation that is suited to your experience and training so has fewer benefits. It could mean that you would be required to retrain in a role that was less financially lucrative than the one you presently enjoy.
A good disability insurance plan should have at least a ninety-day elimination period. The majority of long-term disability plans do not start to pay out until at least one month has passed since you became unfit for work. Short-term disability plans are available to cover this gap in income, and are relatively inexpensive. You can purchase long-term plans that have short elimination periods, but they are more costly. However, conversely, it is unwise to purchase a disability plan with a long elimination period in an effort to cut costs unless you have a substantial amount of savings to cover this elimination period.
Some long-term disability plans have a ‘residual benefits’ option. This means that if your disability results in you being unable to work full-time, but you can work part-time you will receive partial benefits. You will usually become eligible for benefits if you sustain a loss in income of at least fifteen to twenty percent. However, be sure to read the small print with regard to the ‘residual benefits’ option as some insurers state that you must first become totally disabled before you become partially disabled; this, of course, makes a successful claim less likely.
When shopping around for suitable disability insurance look for a policy that covers you for at least five years. Some less expensive policies will only cover you for two years, whilst others will pay out benefits until you are sixty seven years old regardless of the age you are when you first make a claim. There are obviously more costly. A good compromise if you want to keep your premiums at a reasonable level is a policy that provides five years of coverage.
Some policies have a ‘future increase’ option, which allows you to increase the amount of coverage you have on a regular basis without having to undergo further medical examinations. This is a useful option to take out if you purchase long-term disability insurance when you are young as your salary is likely to increase over time so you will require greater coverage.
An added bonus if you can find it is a policy that contains a cost of living adjustment. This means that the amount you receive in benefits will increase annually to allow for inflation. This is particularly beneficial if you are disabled over a significant period of time.
Finally, some policies offer an ‘unemployment waiver of premium’. Whilst this is not vital it is useful as it means that your insurance provider will waive your premiums if you become unemployed until you find another job.
According to figures released by the Social Security Administration disability insurance is one of the most overlooked types of insurance; seven out of ten employed people do not have long-term disability cover. They also revealed that they estimate that over one quarter of today’s twenty-year-olds will become disabled before reaching the age of sixty seven. It is important, therefore, that you consider the implications on your household income if you were to become disabled over the longer term, and to take out an appropriate policy if you feel that you would need it.