Disability Insurance

Disability insurance is possibly one of the most needed types of insurance that you could own. According to some studies, one in three people who reach age 35 will become disabled for at least three months before reaching age 65, and one in ten will become permanently disabled. It is therefore vital for every working adult to have a disability policy.

If you become disabled, you not only lose your income, but at the same time you’ll have substantially higher expenses. Health care and rehabilitation costs, for example, can be prohibitive. This is why it’s crucial to have this type of coverage.

Disability insurance is offered in two basic forms: short-term disability and long-term disability. Short-term disability insurance provides benefits for a relatively short period of time, from several months up to two years. Long-term disability insurance can provide benefits for your entire lifetime. Many employer insurance packages contain some form of disability insurance.

The most important thing to evaluate when choosing a disability policy is that it contains the right definition of exactly what constitutes a disability. Some policies will only pay benefits if you become disabled and cannot engage in “any” occupation. This is, of course, too restrictive. If you are a truck driver, for example, you don’t want a disability policy that will only pay if you cannot work at all. You’d want a policy that pays if you can’t drive a truck. The best definition of disability, therefore, is the inability to engage in “your own occupation”.

There are several other provisions that you should consider when evaluating a disability policy. Select a reasonable elimination period. The elimination period is the time that you have to wait after the disability occurs before the insurance company begins paying benefits. The longer you agree to wait, the lower your premiums will be. Of course, you have to weigh the length of the elimination period against how long you think you can go without an income. (This is a prime example of the need to have an emergency cash reserve fund. Please read the article Pay Yourself First!)

Get as much coverage as possible. The amount of coverage is expressed as a percentage of your normal income. Insurance companies will not cover you for 100% of your income, because they don’t want to give you an incentive to not work. Sixty percent is generally customary for short-term; 75- to 80% is typical for long-term disabilities. The maximum benefit period is the longest amount of time that the insurance company will pay benefits. It’s wise to choose the longest benefit period that you can afford.

Finally, choose a policy that the insurance company can’t cancel or raise your premiums in order to get you to cancel. In other words, look for a “noncancelable” policy. With this type of policy, the insurance company can’t cancel the policy or raise your premiums for the length of the contract. If this isn’t available, a good alternative is a “guaranteed renewable” policy. With this type of policy, the insurance company cannot raise your premium unless they are raising it for the entire class of insured people which you belong to. You cannot be singled out for higher premiums in an effort get you to drop your coverage.