Unquestionably, disability insurance is more complicated than other forms of insurance. There are a lot of moving parts to understand in order to create the right kind of coverage, which may be one reason why many people are reluctant to look into it. No one likes to pay for something they don’t understand; however, once you understand the risk and your need for protection, purchasing a disability insurance policy becomes much more straightforward. Then you just need to know what to look for in a disability insurance policy to best suit your needs.
You might think you are unable to work due to an injury or illness, and therefore, eligible for disability benefits, but the insurer may not agree. It depends on how it defines a “total disability” which is the key trigger for paying out the monthly benefit - the broader the definition, the better, while, the more narrow the definition, the less chance you may receive benefits.
An example of a broad definition is the “own occupation” definition that applies to certain occupation categories, such as physicians, dentists, attorneys and certain other professionals, which is:
“The inability, due to an accident or illness, to perform any of the material and substantial duties of your own occupation, regardless of whether you are able to work in another type of occupation.”
In this case, a doctor may not be able to perform surgery or emergency room duties, but he may be able to do consultations. So, he can qualify for disability benefits.
A more limited definition might say:
“The inability to work in any occupation for which you are qualified.”
That means that, if you are a teacher, and you are unable to stand all day in a classroom, but you can sit at desk and do research, you would not be considered “totally disabled” and, therefore, ineligible to receive benefits.
Another type of disability definition is based on a “loss of earnings” which will pay a benefit, if you are unable to work and your earnings drop below 80 percent of your pre-disability level. If eligible, you would then receive a benefit proportionate to your earnings loss. But, with some policies, you would have to be unable to work in any capacity in order to receive benefits.
The bottom line is that you should look for the broadest definition of “total disability” and have your disability insurance broker fully explain the circumstances under which the policy would pay benefits.
The elimination period of a disability insurance policy is like the deductible on your auto insurance – it’s the financial risk you assume before the insurance company begins to pay the benefit. As with auto insurance, the more risk you are willing to assume, the lower your premium cost. Choosing the longest elimination period – up to 6 months – could save you hundreds or thousands of dollars in premium costs over time. The best course of action is to accumulate a cash reserve equal to six months worth of living expenses that can be used to replace your income and then choose the longest elimination period for your policy.
A Guaranteed Insurability Option allows you to increase your disability benefit without evidence of insurability. With this option, you are offered the opportunity to increase your benefit at specified intervals, and you can choose to use the option or pass (some policies limit the number of passes you can take before you have to exercise the option). If you anticipate your income to increase substantially over the years, the Guaranteed Insurability Option will protect your ability to add coverage even if you become uninsurable.
Should you become disabled and begin receiving benefits at a younger age, you could find the value of your monthly benefit gradually eroded by inflation. The COLA rider will ensure that your disability income increases with the pace of inflation at a minimum.
With fewer insurance companies offering disability insurance, it has become a specialty insurance product over the years. It is strongly recommended that you work with an insurance broker who specializes in disability insurance and who has access to disability insurance products from the top disability insurers.
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