What to Look for in A Disability Policy (Ken Dolan)

The Importance of a Disability Insurance Policy
by Ken Dolan October 6, 2009 10:34 AM
Posted in: Insurance


You bought life insurance to take care of your family should something happen to you. That's great. But is your family protected if you become disabled and can't work? Could you and your family still pay the bills if you didn't get a paycheck for a few weeks, months or even years? It's a question we all have to face, because between the ages of 35 and 65 we have a far greater chance of becoming disabled than dying.
Ask your employer's benefits officer if you have a disability plan at work. If you do have disability insurance through work, ask your employer how long your company will continue paying your regular paycheck if you become disabled, what percentage of your salary your disability plan pays while you're laid up, and how long you have to wait for the benefits to start. Using this information, you can decide if your employer's policy is adequate, or if you need to buy additional coverage.

First, add your sick pay and any other income (spouse's salary, investment income, etc.) to your emergency savings, then divide that total by the amount of your monthly expenses. This will tell you how long you can wait for your employer's disability benefits to kick in.

Our hope is that you have enough "rainy day" money tucked away that you can get through this waiting period on your own. If you don't have emergency savings and think it will take you some time to build up enough funds to get through a waiting period, consider buying a disability policy to bridge the gap.

If you already have disability insurance through work, the only other reason you may need additional coverage is to make up for an income shortfall. For example, if your employer's plan pays 60% of your current salary and you can't get by on that, you could make up some of that missing income with your own policy. Keep in mind, however, that the most income you'll be able to replace through all sources of disability income combined is 80% of your salary. So, if you have disability insurance through your employer that pays you 60% of your current salary, you could only cover another 20% of your salary through an individual policy.

If you don't have disability insurance through your employer, you should consider buying a policy of your own. You can buy an individual policy from any top insurance company. You should also check with any professional organizations you belong to - they may offer quite a savings on policies.

Top Features of a Good Disability Policy

Here are the key features of a top-notch disability policy that will protect you and your family without draining your wallet:

1. A waiting period that works for you. The waiting period is the amount of time you must be disabled before you can begin to collect benefits. Waiting periods range from 30 days to one year. The longer you can wait, the lower your premiums. For example, you can cut your premiums by about 20% if you can wait two months for your policy to kick in...90 days is even better!

2. A benefit period to age 65. The benefit period is the length of time that you'll receive benefits. You can save up to 75% with a policy with benefits to age 65 instead of lifetime coverage.

3. Re-insurability. The insurance company should not be able to cancel your policy for any reason except failure to pay the premium.

4. Waiver of premium. After a certain period of disability, say 90 days, you should be excused from paying the premium. This waiver is standard in most policies.

5. Coverage for a disability caused by accident OR illness.

6. Residual disability protection. This rider lets you receive partial benefits if you are partially disabled. Be sure your policy would pay you a percentage of your benefits based on the amount of income you have lost.

7. Coverage if you can't return to your chosen job. A good insurance policy will include this coverage at no extra cost. An "any occupation" policy means your insurance company can refuse to pay you any benefits if you're still capable of performing any job. For example, if you're a nurse, and then have an accident, your insurance company may refuse to pay you benefits because you could still get a job flipping burgers.

8. Recurrence: If the same disability recurs within a certain period of time, such as 6 months, you shouldn't have to go through a waiting period again before benefits start. As you grow older and your assets grow, your needs will change, so reassess your disability needs every few years.