Buying disability insurance

Why is disability insurance important?

Few people ever anticipate experiencing an illness or accident that might cause them to miss months or years of work, but it can happen. Disability insurance can help you stay on top of your finances. When you don’t have to worry about how to replace your income, you can focus on decisions regarding your health. Because of the financial stability, disability insurance benefits can provide to your household, getting it even when you are young or in good health can be a savvy financial planning move. 

How does disability insurance work?

Disability insurance replaces a set portion of your monthly base salary up to a cap, such as $10,000. There are two main types of disability insurance: short-term and long-term coverage. Benefits end when the disability ends or after a specified period. Long-term policies may also pay for additional services, including training to return to work. 

How do I purchase coverage?

Check to see if there is disability insurance available through your workplace, in which case your employer may cover part of your premiums. Consider purchasing a policy on your own if coverage at the workplace is insufficient to meet your needs or if workplace coverage is not available to you. Ways to buy a policy on your own include going through a professional association, contacting an insurance broker, reaching out to an insurance company. Take the time to understand the policy you are buying, and don’t be afraid to ask any questions about what your disability insurance policy covers.

Key things to look for when shopping for disability insurance:

1. The policy’s definition of disability. Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits only if you are unable to perform any occupation. "Own occupation" policies are more desirable, but more expensive.
    
2. Benefit period. The benefit period is the amount of time you will receive monthly benefits during your life. Experts usually recommend that the policy you buy pay you benefits until at least age 65, at which point Social Security disability will take over. If you are young, you may consider buying a policy offering lifetime benefits because it will still be relatively inexpensive.
    
3. A policy that will replace from 60 percent to 70 percent of your total taxable earnings. A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before deciding how much disability coverage you need.
    
4. Coverage for disability resulting from either accidental injury or illness. An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased.
    
5. A cost-of-living increase in benefits. You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer "indexed" benefits, keeping up with inflation after benefit payments begin.)
    
6. A policy paying "residual" or partial benefits. This type of policy is available so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, a residual benefits policy pays partial benefits based on loss of income without an initial period of total disability.
    
7. Transition benefits. Offered by some companies, it can offset financial loss during a post-disability period of rebuilding a business or professional practice.
    
8. Ongoing coverage. This would be a non-cancelable policy which will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders.
    
9. Waiting period. Every disability insurance policy imposes a waiting period, also known as the elimination period. This reference is to the number of days you must be disabled before receiving benefits, and the first check will come within 30 days of the end of this period. In other words, if you are disabled during the elimination period, you will not receive any benefits, even though you cannot work. Many people select an elimination period of 60 to 90 days. Shorter elimination periods, such as 30 or 60 days, can mean higher premiums and vice versa. Keep in mind that waiting to receive benefits can strain your finances.
    
10. Financial stability. Check the financial ratings of an insurer. Your insurance agent or company representative should provide this information or check with the following companies, which rate insurance company’s strength:  

AM Best Company, Inc.
1 Ambest Rd.
Oldwick, NJ 08858
908-439-2200
http://www.ambest.com

Fitch Ratings
33 Whitehall Street
New York, NY 10004
1-800-75-FITCH
http://www.fitchratings.com/

Moody’s Investor Services
7 World Trade Center, 250 Greenwich St
New York, NY 10007
212-553-0300
http://www.moodys.com

Standard & Poor’s Insurance Ratings Services
55 Water Street
New York, NY 10004
212-438-2000
www.spglobal.com/ratings/en/

Weiss Research
11780 US Highway 1, Suite 201
Palm Beach Gardens, FL 33408-3080
877-934-7778
http://www.weissratings.com

Talk to the agent who sells you your life, health, auto or business insurance—he or she may either sell disability coverage or will be able to refer you to an agent who does.

Your state's insurance department will also have names of agents and companies writing policies in your state.