The key to getting the right type and amount of insurance coverage is education. Whether you get your coverage from the Internet, a local agent, or even your employer, the only way to be sure that you have adequate protection is to learn everything you can and then make your own informed decisions. Even if you seek help from a professional, you should at least understand the terminology as well as the basics so that you know that you are getting the right product at the right price.
Here are some basics you need to understand when looking at a policy, and some things to look out for:
Benefit amount: Disability insurance is designed to pay you about 60 percent of your gross income - enough to cover the basics, but not enough to encourage people to try to beat the system. Many policies may offer you the ability to add additional insurance up to 80 percent of your income for an additional premium. Two important notes: 1) If the premiums are paid by your employer, the benefits will be taxable to you, reducing the amount you really have to live on, and 2) the benefits will be a percentage of your income at the time of disability, and they don't account for inflation in the later years. Obviously, the more benefits you have, the better prepared you will be in case of a long-term injury.
Term of benefits: Your policy may specify that for each disabling incident, it will pay benefits for a certain period. It could be two years, five years, until retirement age, or for life. Few policies will pay for life because it's designed to be a substitute for income during your working years and they assume that you'll retire someday and start getting retirement benefits and social security. You can lower your premium by taking a lower term of benefits, but if you opt for a short term, such as five years, know how you would cover your expenses after that time period. If possible, look for a plan with a benefit period that continues until retirement age, although you should expect this to add about 25% to the premium.
The premium: Like most types of health and life insurance, the younger you get a policy, the better deal you'll get on the premium. But there are no simple charts in this category of insurance. The premium will depend on a wide array of factors and can vary dramatically from person to person. It will consider such things as your age, your sex, your job, your income, your medical history, and your lifestyle, including the use of tobacco and alcohol. If your employer offers this benefit as a group policy, the cost will be about one third of obtaining your own disability policy although the premiums will increase every year.
Non-cancelable: This term means that once you've been approved, the insurance company can't cancel your policy unless it decides to stop writing coverage for everyone with your job classification. It also means they can't ever raise your rates even if they stop selling policies in your state. The best policies will have this.
Guaranteed-renewable: This term means that you can continue to renew your policy regardless of your health until at least age 65, and your rates can be increased, but only if they raise the rates for everyone in your job category. However, if they can prove that their claims are much higher than expected, the state insurance department will probably give them approval to raise rates.
Own occupation vs. any occupation: This is an important distinction that determines at what point you're considered disabled and can't work. If it's 'own occupation' coverage, you're assumed to be disabled when you can't perform the functions of your job. With 'any occupation' coverage, your coverage won't be triggered until a doctor declares you're unable to work at any job for which you have been reasonably trained. This type of coverage might also be referred to as 'inability to work', which means you won't receive benefits as long as you can do any kind of work. If possible, you want a policy that specifies 'own occupation' coverage although they are much more expensive. If possible, opt for a plan that provides 'own occupation' coverage for at least the first two years.
Elimination period: This is similar to other types of insurance where you can save money by assuming more of the risk yourself and taking a higher deductible. In disability insurance, the equivalent is the elimination period. This determines when you start receiving benefits. No policy will pay benefits in less than 30 days after you've been declared disabled. From there, it jumps to 60, 90, 120 or 180 days, and a few have a one year waiting period. The longer the elimination period, the lower the premium, although there is little price difference between a 6-month and 12-month waiting period, so never opt for the latter. The decision for you is how long you can go without money coming in. The first check probably won't arrive until 30 days after the elimination period starts. For instance, if you have a 30-day elimination period, your benefits don't start to add up until you've been disabled for a month. You'll get your first payment a month later, so that's two months without a paycheck and that's the minimum waiting-period.
Social Security rider: Some policies only pay benefits if you don't qualify for Social Security disability income. First, with Social Security, most claimants are denied. Social Security typically has at least a five-month waiting period and only pays benefits if the disability will result in your death or if you can't work for at least one year. Second, this should reduce your premium significantly. Third, it shouldn't really matter to you where your benefits come from. The final decision will depend on how much you need and how much you can afford. If the premium is affordable, you could reduce your premium with this rider but use the savings to raise the amount of coverage, decrease the waiting period, or both.
Residual benefits: Some policies may offer you 'residual benefits.' That's basically a partial payment if you're less than 100 percent disabled, but still can't perform all the duties of your job. This is an important feature, since other policies won't pay anything unless you are totally disabled.
Cost-of-living rider: Some policies guarantee that your benefits will get adjusted annually to keep up with inflation. This option costs more, up to 40% more in premiums, but is well worth it if you can afford it. If you can afford only one option, it would be wiser to increase the amount of coverage, if possible, rather to add the cost-of-living rider.
Waiver-of-premium rider : Even while you are disabled, you will need to continue paying the disability coverage premiums. This option would allow you to stop making these payments while you are disabled. Look carefully at what it costs. It may be that with your benefits it would be fairly painless to keep paying the premium.
Rehabilitation rider: Insurance carriers are doing more these days in the area of benefits for rehabilitation and job retraining. The faster they get you back to work at some job, the sooner they can stop paying benefits.
Accident only policies: Some disability policies appear to be very cheap, but only pay benefits if you are injured in an accident. Disability due to sickness, such as cancer, would not be covered by this type of policy.
Return-of-premium rider: This is a marketing ploy to get you to take the policy and, more importantly, keep it a long time. Typically, a portion of your paid premiums is returned after a certain period of time, but only if you have not made any claims. This is an expensive rider, adding as much as 50% to the premium. Basically, you would be overpaying on the premium hoping to get some of it returned.
Step 3 - Determine Your Insurance Need