I have been thinking a lot about our financial future and where we are headed. When your looking that far ahead though, you’re assuming that you are going to continue to generate an income. Well, what if that income stops from a disability? Wouldn’t that ruin your financial plans in you didn’t have an income? It sure would!
Over the last few days, I have been checking around about disability insurance. What is disability insurance you ask? Disability insurance helps replace a portion of your income when you cannot work because of illness or injury. If you have an emergency fund built up, you really only need long-term disability insurance. Long-term disability insurance usually only kicks in after you have been disable for at least a few weeks.
Many people argue that having disability insurance is more important than life insurance. The main reason for this argument is that for a 30 year old male, you are 4 times more likely to become disabled than die. It was that staggering statistic that got my attention. I already have life insurance, but not disability insurance. So, I guess it’s time to buy. During my research, I came across a few things that everyone needs to know when purchasing a disability policy. Here they are:
Waiting Period
The waiting period is from the time you become disability to the time the policy starts paying. Most policies have a 30, 60, or 90 day waiting period. In other words, the insurance company wants to make sure it’s a long-term disability before they start paying. Like I mentioned before, it’s crucial to have an emergency fund to cover the waiting period.
Also, the longer your waiting period, the cheaper the policy. It’s been said before that a 1 year disability with a 7 day waiting period costs more yearly than a 30 year policy with a 90 day waiting period. Weird huh?
Benefit Period
The benefit period is the maximum time that benefits will be paid. Obviously, the insurance company will only pay while you are disabled. So, if you recover 6 months after, the benefits will stop. But what if you are permanently disabled with no chance of recovery? That’s were the benefit period is crucial. You can get almost any term policy but the most popular is probably the “to age 65″ policy. As you can guess, it will continue to pay until you are age 65 so long as you are still disabled.
Type of Disability
This is an area where you need to read the fine print. There are basically two ways a disability policy can be written. It can be written as an “own-occupation” or “any occupation” policy.
An own-occupation policy states that it will pay benefits if you can no longer perform the occupation you were doing when you were disabled. So, if you were a fireman and were disabled on the job, the policy will pay so long as you can’t perform your old duties.
An any occupation policy states that it will pay benefits only when you cannot perform any occupation. So for the same fireman example, if you can still sit in a wheelchair behind a desk, the policy will not pay.
As you can see, it’s more beneficial to get an “own-occupation” policy as it will cover you a lot better. It does come with a price though!
Riders
There are a couple riders out there that are important. The first rider is the cost-of-living (COL) rider. The COL rider will increase your benefit each year to keep up with inflation. It’s important because obviously $1 today isn’t going to buy the same stuff 30 years from now.
The other rider to think about is the Social Security rider. A social security rider will allow you to increase your benefit should you be turned down for Social Security disability (as 70% of people are). When most people think about their needs for disability insurance, they assume they will get something from Social Security. This rider protects you just in case you are denied!
OK, Now How Much Does It Cost?
Disability insurance is just like any other insurance. The company rates you on the amount of risk they take. So, if you have a higher chance of a claim, the policy will cost more. For example, if you work around heavy machinery every day, you are more likely to become injured than say someone like myself who sits at a desk. That’s just the way the cookie crumbles.
For me, a policy with a 90 day elimination period that would pay until I am 65 (I’m 26 now) costs $375 a year. I was really surprised at that number and I thought it would be WAY higher. I also only looked in once place (Zander Insurance) so I could possibly find it cheaper somewhere else.
Where Can I Buy It?
Well, the first place to look is your employer. Many places offer long-term disability through work and it’s cheaper due to group rates.
If your work doesn’t have a policy (like my work), you need to find yourself a good independent insurance agent. These are the people that don’t just work for one company. They can shop around and get you the best rate.
So, what are you waiting on? You shouldn’t be going another day without disability insurance!