The Basics to Buying Disability Insurance

Disability insurance is a type of coverage that will cover a portion of your income in case you are not able to work because of an illness or an accident. While that may sound simple enough, there are some tough questions you may need answered before your purchase this type of policy.

The Need for Coverage

If you are wondering whether or not you need disability insurance, the question is an easy one to answer. Anyone who would be considered the breadwinner in their family should invest in this type of coverage. Even the non-breadwinner may want to consider purchasing a policy if his or her loss of income would be challenging for the family to coup with. This is often the case in two income families.

According to the Insurance Information Institute, nearly half of all people over the age of 40 will have need to be off from work for an extended period of time because of an illness or injury before they reach retirement age. That means this type of coverage is really a necessity for most families.

Types of Coverage Available

Disability insurance comes in two forms. The first is group coverage. Many employers provide this as a benefit to their workers. The premiums are often paid in full by the employer, and the benefits equal up to 60% of what the worker would normally be making. For example, if she was earning $400 per week, her disability benefits would be $240 per week. While that’s still a major loss, it’s easier to deal with a loss of $160 than a full $400 which would be the case without such coverage.

Individual plans are also available, but these do cost more in premiums. However, they also pay more usually. Some of these plans will pay up to 80% of your income. With the above example that would be $320 per week in benefits.

Short Versus Long Term

There are two types of disability coverage. Short term disability coverage provides benefits when you are going to be out of work for only a short time, perhaps because of an accident or a surgery. Long term disability benefits provide you with coverage when you are going to be unable to work for an extended period of time, even years. This might be causes by a serious illness, such as cancer.

If you choose a short term disability policy, you will normally receive benefits for less than two years. However, you won’t have to wait as long to begin receiving those benefits. Waiting periods are no more than two weeks. With a long term disability insurance policy, you could be covered for several years or up until you reach retirement age. Benefits do not start immediately; you may have to wait as long as three months before coverage begins.

Defining Disability

As you are searching for the right disability insurance policy for your needs, make sure to check the policy’s definition of a disability that will qualify for benefits. There are differences among the policies. For example, some policies will only pay benefits if you are unable to do any kind of work. Others will pay if you are unable to do the work at your current job. These definitions can have major ramifications for whether or not you will receive coverage so make sure to check them carefully before buying a policy.

Partial Benefits

You should also consider looking for a policy that will continue paying a portion of the benefits to you if you return to work part-time. This is sometimes a good option for people who have been unable to work for a long period of time and need to ease back into full-time work. However, without the partial benefits from their disability insurance such a choice may not be financially feasible for the family.

The Cost

As with any type of insurance, disability insurance premiums are determined by using risk analysis. That means a number of factors are going to be considered, including your age, sex, income, and occupation. As you get older the risk of long-term disability is going to increase so the premiums will be higher. Additionally, premiums for people who work in higher risk occupations will also be higher. If you are a welder, for example, your premiums are going to be higher than if you are a freelance writer.

You can reduce your premiums by choosing to have coverage over a shorter period of time. However, this can be a risky strategy since you may end up needing that coverage for the full length of time possible. Another way is to increase your waiting period. This can be a good strategy, especially if you are able to save up some money to float you until the benefits would kick in.

Premium Waiver

When you are shopping around for a disability insurance policy, look for one that includes a provision that will waive the premium during the time you are unable to work. Most of these provisions say the waiver begins if you are classified by the policy as disable for at least 90 days. This can be another way to help extend your reduced income even further.

Cost of Living Adjustment

One extra feature you might want to add if you can afford it is the cost of living adjustment (COLA). This provision will actually increase your coverage to adjust for increases in the cost of living. This is a good idea if you’re purchasing disability insurance at a young age because your policy could easily become insufficient to cover your income down the road. However, your premiums will be higher as a result.

March 13, 2009, Posted by Rainy Day Mitch