Once you have estimated your level of need, you can begin your search for a disability income insurance policy. Look first for the major policy provisions, discussed in the following paragraphs, that meet your needs. Be aware, however, that disability income insurance policies are very complicated. Do not rely on the verbal assurances of the agent selling the policy. Do your own analysis and, if necessary, seek the advice of a financial planner.
Waiting Period The waiting period (elimination period) in a disability income policy is the time period between the onset of the disability and the date that disabilitybenefits begin. Because disability income benefits are paid monthly, the first check will not arrive until 30 days after the end of the waiting period.
Benefit Period The benefit period in a disability income policy is the maximum period of time for which benefits will be paid. It begins when the elimination period ends. The benefit period is usually stated in years but may instead state aspecific age when benefits will cease. Most disability income policies will not paypast age 65.
Degree of Disability Policies can be written on an “own-occupation” or “anyoccupation” basis. An own-occupation policy will provide benefits if you can no longer perform the occupation you had at the time you became disabled. An anyoccupation policy will provide full benefits only if you cannot perform any occupation. In effect, an any-occupation policy is an income replacement policy, as it makes up a portion of the difference between what you were earning prior to becomingdisabled and what you can earn while disabled. Own-occupation policies are more generous and, therefore, cost more. Some policies provide own-occupation coverage during the first two years of a disability, then switch to an anyoccupation basis with income replacement for the remaining years of the benefits. Such split-definition policies are likely to provide benefits for rehabilitation and retraining at insurance companyexpense.
A residual clause is a feature of own-occupation policies that allows for some reduced level of disability income benefits when a partial rather than full disability occurs. Consider the case of Françoise LaDeux, a criminal lawyer in Providence, Rhode Island, who purchased a disability policy offering a benefit of $3000 per month. Françoise later developed multiple sclerosisand was forced to cut back her workload by 50 percent, therebytaking a 50 percent pay cut. Her disability policy had a residual clause, so she received $1500 (0.50 x $3000) per month during her disability.
Social Security Rider If you have figured your disability income insurance needs assuming that you would receive Social Security benefits, you will find yourself with inadequate protection if your Social Security application is denied. To provide an extra dollar amount of protection if you fail to qualify for Social Security disability benefits (70 percent of all applicants are rejected), a Social Security rider may be added to your policy. Consider the case of Karen Gifford, a florist from Urbana, Illinois. Karen determined that her disability insurance needs would be $1400 per month after assuming that she would receive $1000 from Social Security if she were to become disabled. She couldhave purchased a $2400-per-month policy and removed all uncertainty, but the premiumwould have been more than she could afford. Instead, she bought a $1400 policy with a $1000 Social Security rider for a premium savings of 30 percent.
Cost-of-Living Adjustments You might want to seek out policies with a costof- living clause, which will increase your benefit amount to keep up with inflation. You might also consider buying a policy that limits benefits to a percentage of income rather than a specific dollar amount per month. With such a policy, your potential monthly benefit would increase automatically as your income increases.
Waiting Period The waiting period (elimination period) in a disability income policy is the time period between the onset of the disability and the date that disabilitybenefits begin. Because disability income benefits are paid monthly, the first check will not arrive until 30 days after the end of the waiting period.
Benefit Period The benefit period in a disability income policy is the maximum period of time for which benefits will be paid. It begins when the elimination period ends. The benefit period is usually stated in years but may instead state aspecific age when benefits will cease. Most disability income policies will not paypast age 65.
Degree of Disability Policies can be written on an “own-occupation” or “anyoccupation” basis. An own-occupation policy will provide benefits if you can no longer perform the occupation you had at the time you became disabled. An anyoccupation policy will provide full benefits only if you cannot perform any occupation. In effect, an any-occupation policy is an income replacement policy, as it makes up a portion of the difference between what you were earning prior to becomingdisabled and what you can earn while disabled. Own-occupation policies are more generous and, therefore, cost more. Some policies provide own-occupation coverage during the first two years of a disability, then switch to an anyoccupation basis with income replacement for the remaining years of the benefits. Such split-definition policies are likely to provide benefits for rehabilitation and retraining at insurance companyexpense.
A residual clause is a feature of own-occupation policies that allows for some reduced level of disability income benefits when a partial rather than full disability occurs. Consider the case of Françoise LaDeux, a criminal lawyer in Providence, Rhode Island, who purchased a disability policy offering a benefit of $3000 per month. Françoise later developed multiple sclerosisand was forced to cut back her workload by 50 percent, therebytaking a 50 percent pay cut. Her disability policy had a residual clause, so she received $1500 (0.50 x $3000) per month during her disability.
Social Security Rider If you have figured your disability income insurance needs assuming that you would receive Social Security benefits, you will find yourself with inadequate protection if your Social Security application is denied. To provide an extra dollar amount of protection if you fail to qualify for Social Security disability benefits (70 percent of all applicants are rejected), a Social Security rider may be added to your policy. Consider the case of Karen Gifford, a florist from Urbana, Illinois. Karen determined that her disability insurance needs would be $1400 per month after assuming that she would receive $1000 from Social Security if she were to become disabled. She couldhave purchased a $2400-per-month policy and removed all uncertainty, but the premiumwould have been more than she could afford. Instead, she bought a $1400 policy with a $1000 Social Security rider for a premium savings of 30 percent.
Cost-of-Living Adjustments You might want to seek out policies with a costof- living clause, which will increase your benefit amount to keep up with inflation. You might also consider buying a policy that limits benefits to a percentage of income rather than a specific dollar amount per month. With such a policy, your potential monthly benefit would increase automatically as your income increases.
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