Disability Insurance: Making Sure the Income Stream Doesn't Run Dry

How to Shop for an Individual Policy

There's no question that once you've found a policy that offers all the important features you need, the cost of the policy becomes a major consideration. But another consideration that is equally important is the claims-paying ability of the company. Make sure the insurance company has the financial strength to make payments as long as you're disabled.

Look for companies that are well known for their line of comprehensive individual disability policies. The companies should be rated highly by rating services such as AM Best, Standard & Poor's, Moody's, and Duff & Phelps.

It is important that you understand what the ratings mean. Each of the rating companies has its own classification system for evaluating the claims-paying ability of an insurance company.

Policy Riders

In addition to the basic policy, disability insurance can be purchased with add-on features called "policy riders."

What You Need ... What You Don't

In addition to the basic policy, disability insurance can be purchased with add-on features called policy riders. Most riders are expensive and may not be worth the extra cost. Remember, basic transportation is what's important. You're better off putting money into your retirement plans than adding frills to your disability program.

Disability policies are issued in two basic forms: Non-cancelable and Guaranteed Renewable.

  • A non-cancelable policy cannot be canceled and the premium cannot be changed prior to its next due date.
  • A guaranteed renewable policy cannot be canceled before a specified age. The premiums can be changed if all policyholders in your occupational class or state are raised.

The best type of policy is one that is both non-cancelable and guaranteed renewable. Your policy cannot be canceled and the premium remains fixed until you reach a specified age.

Here is a list of provisions and riders that may be available depending on the policy you purchase.

What You Usually Need

What You Usually Don't Need

Waiver of Premium—should be automatically included in your policy after 90 days of disability.

Guaranteed Insurability Option—allows you to buy specified amounts on certain future anniversaries without evidence of insurability. You should only be concerned with this if you have a family history of debilitating illness and you anticipate substantial increases in earnings.

Presumptive Disability—should be automatically included in your policy, will pay you full disability benefits if you lose the use of any two limbs, speech, hearing, or eyesight.

Cost-of-living Adjustments (COLA)—increases your monthly benefits by a fixed percentage or may be indexed to inflation. This kicks in generally after your first year of disability, not after the first year you own the policy. It could add 50% to the premium.

Residual Disability—usually written as a rider. If you sustain a loss of income (20% or more), you can receive a percentage (partial benefit) of the total disability benefit. Some policies only allow for this following a period of total disability. If possible, find a policy that pays residual benefits without first being totally disabled.

"Own-Occupation" Rider—that pays you a benefit even if you are gainfully employed in another occupation. It could add 10% to the premium. This rider is usually limited to higher occupational categories, including professionals and executives.

Social Security Rider—If you don't qualify for Social Security disability benefits, your monthly benefit can usually be increased.

Accident or Hospital Income Benefit—may be included in the policy but is not worth the extra cost if it is a rider.

Rehabilitation Benefits—usually included in the policy; if offered, the insurance company will pay for a rehabilitation program to get you back to work or train you for a new job.

Refund of Premium—a rider that will return all or a portion of your premiums if you don't submit any claims for a period of time, usually ten years or more. It can cost you up to 50% more.

Group Association Policies Can Save You Money

If you belong to an alumni, fraternal, or professional association, call the association's benefits administrator to see if they offer disability coverage. Since disability insurance offered through an association is written on a group basis, the rates are less than those for an individual policy. However, their underwriting requirements may be less flexible since they are dealing with large numbers of people. If you have any pre-existing conditions, you may be ineligible for coverage.

Many group policies have similar features to an individual policy. Here are some differences:

  • Group policies may have more restrictive definitions of disability or may offer shorter benefit periods. Only take a five-year benefit period if you can't get one that pays until age 65.
  • Group policy premiums go up every few years.
  • Some individual policies are issued as non-cancelable, guaranteed renewable depending on your occupational classification. The rates remain fixed and the policy can't be canceled as long as you pay the premium.
  • Group policies can be terminated. If you've developed a medical condition after enrolling in your group association plan and the insurer terminates the association plan, the association's new insurer may 1) not pick you up, or 2) may exclude any disability resulting from the medical condition.
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