Subscribe to erollover.com Blog by Email
What to look for in a Disability Insurance Policy
Mike Rowan, eRollover.com
Buying disability insurance probably ranks low on your
financial to-do list. After all, if you’re young
and healthy and you work at a desk job, what are the odds
you’re going to need it?
Well, you might not think of a broken bone, a problem pregnancy or an anxiety condition as disabling, but all of them could keep you out of work. About 30 percent of Americans age 35 to 65 will suffer a disability lasting at least 90 days sometime during their careers, according to the Health Insurance Association of America. Should you ever need the protection a disability policy can offer, you’ll be glad you took financial precautions. Without coverage, an unexpected disability can easily drive you into serious debt.
Do you need it?
Many people say, “I don’t need disability coverage -
I’ve already got it through work.” But most
company-issued disability insurance only provides you with 60
percent of your salary and sets a monthly maximum of $5,000 to
$10,000, which can be even less than 60 percent of a highly
compensated employee’s salary.
But here’s the problem: Those benefits are also fully taxable, which means you’re actually getting a lot less than 60 percent of what you’re used to.
You could easily find yourself trying to survive on about 40 percent of your salary - or less, if you’re a high wage earner - if you don’t buy a supplemental policy. And Social Security probably won’t cover you, either - Social Security disability benefits are one of the most difficult benefits to qualify for. You have to be completely disabled for at least a year, with no hope of recovery. Even when you meet those requirements, you’re unlikely to receive more than $2,000 a month.
Shopping for policies that make the grade
Look for company strength. The first question you need to ask is
whether the insurance company you’re eyeing is financially
sound.
There are maybe six major insurance companies left that still offer disability insurance. There are lots of smaller companies that offer disability insurance, but you should check their financial statements. Make sure they look like they’ll be able to pay out claims as time goes by. To check insurance company ratings, check moodys.com, standardandpoors.com, or ambest.com.
Please visit our site for more Retirement, 401k, and
Insurance information:
www.erollover.com
Aim for a non-cancelable contract.
Next on your checklist is renewability, or whether your
policy’s terms are subject to change over time. There are
three options: a non-cancelable and guaranteed renewable policy, a
guaranteed renewable policy, and a conditionally renewable
policy.
Experts say the non-cancelable contract, especially if price is
not an issue, is by far the best of the three. That’s because
it locks in your rates and benefits. The insurance company
can’t make changes unless you request them.
Finally, avoid conditionally renewable policies. An insurer can put
any condition on them or raise rates at any time.
Look for a broad definition of “total
disability.
The most consumer-friendly definition of total disability is
“own-occupation disability.” If you are disabled and
cannot perform the principal duties of the job you currently have,
you get paid your disability benefit even if you can do some other
tasks.
Even if they become disabled, most people want to keep working.
The neat thing about own-occupation coverage is that you’re
not penalized for working at the flower shop down the street, even
if you can’t yet go back to your full-time job.
The most conservative definition of total disability is
“any-occupation disability.” Under this definition you
do not get a benefit unless you are completely unemployed and
unable to do any work.
Many companies, of course, will define “disability” in shades of gray between own-occupation and any-occupation disability. And some disability insurance products will give you own-occupation coverage for a specified period, then move you to a modified plan, increasingly contingent on whether you can produce any income.
Get the appropriate riders
If you have disability coverage, you may not use it for decades -
if ever - and $3,000 a month in ten years will buy you considerably
less than it does now. You might want to buy a rider that adjusts
your policy for inflation, particularly if you’re in your 20s
and 30s.
Another option to consider is a “future purchase option” – it allows you to buy more coverage as your salary rises or your business expands. This is especially good for people just starting their careers.
Please visit our site for more Retirement, 401k, and
Insurance information:
www.erollover.com
Putting a price tag on your policy
Disability insurance premiums will typically cost between 1 percent
and 3 percent of annual income. Prices will vary according to
several main factors, including your age, gender, health history
and occupation.
Another factor affecting your premiums is the policy’s elimination period. That’s a specified length of time - people usually choose 90 days - from the onset date of disability. When that time is up, the company starts paying your benefits. You can choose an elimination period as short as 30 days or as long as 720 days. Generally, the longer your elimination period is, the cheaper your premium.
You’ll also have to choose a benefit period, or the length
of time the insurer will pay you benefits. Most companies let you
choose between benefits lasting two years, five years, all the way
to age 65, to age 67, or for the rest of your life. Most people
choose the age-65 option, as Social Security kicks in thereafter.
The longer your benefit period, the more expensive your policy will
be.
When they price your policy, each insurer categorizes you according
to its own set of occupation classes, ranking systems that sort
different jobs according to their likelihood of filing a claim. The
more likely your occupation is to result in disability, the more
expensive your coverage will be.
Please visit our site for more Retirement, 401k, and
Insurance information:
www.erollover.com
