How to Choose the Right Disability Insurance Policy

As part of Disability Insurance Awareness Month, we have put together a short guide on how to choose the right policy to fit your circumstances.

Disability Insurance Basics: There are two general types of disability insurance policies; short term and long term. Short term disability (STD) policies provide coverage almost immediately after a covered incident (usually within 14 days) and in most cases have a maximum duration of two years. Long term disability (LTD) has a waiting period that ranges from several weeks to several months and pays benefits for a minimum of a few years and a maximum (with most insurers) of up to age 67.

For most consumers, the main focus should be having a long-term disability policy. LTD policies are often set to kick in after 90 days. To cover you during that 90 day period, you may choose to purchase a short-term disability policy. Or if you are able to put together an emergency fund of three or more months of income, you may not need an STD policy at all.

Disability Insurance Essentials: There are several considerations to take in choosing your long-term disability policy when determining what is best for you. And by the way, if you happen to have an LTD policy through your employer, it is a good idea to check the fine print to make sure they are providing the essential coverages you need.

Here are five important things to consider when you choose a long-term disability policy:

1. Income Replacement: You need to decide how much income you would need to replace in order to get by in the event of a debilitating illness or injury. The maximum you are likely to find is 65% to 70% of your current gross income. However, since benefits are nontaxable, a 60% payout is usually comparable to your current take home pay.

1. Renewability: There are three general renewable options for disability policies; non-cancelable, guaranteed renewable and conditionally renewable. The worst of the three from the standpoint of the consumer is conditionally renewable; this type of policy gives the consumer no guarantees about future renewability, rates, etc. As a general rule, it is best to stay away from conditionally renewable policies.

Guaranteed renewable is the second best option and means the terms and conditions of the policy are guaranteed through the termination date as long as premium payments are made. The only change the insurer can make is to the premium, and they can only do so if they make the same change to all other policies in the same risk class and with similar benefits.

Non-cancelable is the best type of policy for consumers because it ensures the policy cannot be canceled except for non-payment of premium. This means you are guaranteed to have the same benefits and low premiums for the life of the policy (as long as you keep up the payments).

1. “Own Occupation” vs. “Any Occupation”: An “Own Occupation” policy means benefits are paid if you are no longer able to gainfully work in your present occupation. “Any Occupation” policies only pay when you are not able to work at any job that would be suitable given your experience and education. Though the premiums will be higher, “Own Occupation” policies are clearly much better than “Any Occupation” policies and if it fits into your budget, this is definitely the preferable option.

1. Benefit Period: Some policies pay benefits for several decades (usually ending at age 67) and others that pay for only a few years. The average long-term disability lasts around five years, so you should look for a policy that pays for at least that amount of time.

1. Other Coverage Options: There are additional options that make sense for many workers and you may want to discuss with your agent. These include coordination of benefits (useful if you have other policies such as short-term disability), cost of living adjustments, residual/partial disability payments, waiver of premium, and return of premium if no claims are made for a specified length of time.

Your income is most likely your most precious asset, even more valuable than your home. Because when you think about it, a house can be replaced and you can always find another place to live. However, if you should lose your ability to earn an income, there is little you can do to replace it if you do not already have disability insurance ahead of time. Speak with a business insurance broker that works with several insurers in your state to explore the coverage options that would be best for you.