Disability Insurance

Disability insurance replaces a portion of your income if you become temporarily or permanently disabled by illness or injury. Don’t make the mistake of thinking that disability insurance is only for people in high-risk jobs, such as window washers or race car drivers—everyone who depends on income from work to pay for expenses should have disability insurance.

Disability Insurance Options

Consider the following six criteria to help you decide which disability insurance policy suits you best:

Amount of coverage
Period of coverage
Residual coverage
Renewability of coverage
Future purchase option
Cost of living adjustment

Amount of Coverage

The coverage you receive usually depends on the extent of your disability. For instance, some policies require the policyholder to prove total disability in order to receive any amount of coverage. Other policies pay out a partial amount based on the extent of the policyholder’s disability. The specific amount of coverage is tied to the income you would ordinarily earn each year.

Period of Coverage

The period of disability insurance coverage has two components: the elimination period and the benefit period.

Elimination period: The amount of time you must wait between the time the disability occurs and the time your coverage begins. The longer you agree to wait, the lower your premiums will be. Elimination periods are typically specified in months.
Benefit period: The length of time that the disability coverage applies after it begins. The most common benefit periods are two years, five years, or until age 65. The two-year period tends to be too short, since people with severe disabilities tend to be disabled for more than two years. Five years is better, and until age 65 is the best option. People older than 65 don’t qualify for disability insurance.

Residual Coverage

The residual coverage option means that even if you’re disabled and losing at least 20% of your income but are still able to work part time, you’ll still receive a portion of your benefit. Be sure to buy a policy that includes residual coverage, since you need some protection from partial disability as well as total disability.

Renewability

Buy a policy that can be renewed until you turn 65. The best type of policies, called noncancelable renewable policies, guarantee that your premiums won’t increase until you turn 65. Guaranteed renewable policies have premiums that the insurer can raise at any time.

Future Purchase Option

The future purchase option generally allows the policyholder to increase the coverage amount every three years, up to a certain predetermined limit, without the possibility of being turned down. This option makes sense for those who anticipate an increase in their monthly expenses, as well as for those who develop costly chronic conditions that result in disability, such as diabetes.

Cost of Living Adjustment

The cost of living adjustment allows you to increase the amount of your benefits while you’re disabled to keep pace with the rising cost of living. Cost of living adjustments are usually limited to a predetermined annual percentage, such as 5% of the policy’s total benefits per year.

How Much Coverage Do You Need?

Deciding how much disability coverage to purchase is a personal decision based on a variety of factors, including your family situation, your savings, and the history of debilitating illnesses in your family. At the very least, choose a coverage amount that will be sufficient to pay for the expenses you expect to incur annually. To determine this figure, determine the total amount of money you spend every month and multiply by 12.

Disability Insurance Costs

Many employers provide employees with disability insurance in addition to health insurance. But these policies often lack important options, such as renewability and the cost of living adjustment, so be sure to evaluate your employer’s policy to confirm whether you need to buy additional, private disability insurance. Also, keep in mind that COBRA does not allow you to continue your disability coverage if you leave your job or undergo another COBRA-qualifying event.

Private disability insurance varies in cost based on age, occupation, health, coverage amount and policy options. The average cost ranges from $1,200–2,000 annually.

How to Buy Disability Insurance

Private disability insurance is not as easy to find and buy as other types of insurance. As a result, you’ll most likely want to work with a captive or independent agent with expertise in disability insurance. Your health or life insurance provider can refer you to an agent who specializes in disability insurance. Two of the most popular providers are: