When evaluating disability income insurance policies, here are the most important terms with which you should be familiar:
Amount of Benefits
Policies usually pay 40 to 60 percent of pre-disability earnings. Monthly benefits are calculated in terms of stable, earned income at the time of purchase. Most insurers, not wanting to provide benefits so sizable that they would encourage workers to remain at home, limit benefits from all sources to no more than 70 to 80 percent of monthly income. Because of caps that limit how much can be paid out in any one month, lower-paid workers may receive a larger portion of their pre-disability incomes than higher-paid workers.
Definition of Disability
Some policies pay benefits if you are unable to perform the duties of any occupation for which you are reasonably qualified by training, experience and education. Other policies pay benefits if you are unable to perform the major duties of your own occupation. Some policies will combine these features. Be sure to ask your insurance agent how disability is defined in policies you are considering.
Extent of Disability
Some policies require that you be totally disabled before payments begin. Partial disability sometimes is covered for a limited time but most often only if the partial disability follows a period of total disability for the same cause. Some policies may not require total disability before partial disability payment.
If you are able to work but your income is reduced because you cannot fulfill all of your job responsibilities, residual benefits can help to make up the difference in your income. A standard feature in some policies (added with a rider to others), a residual benefit allows partial payment based on your loss of income, generally without prior total disability.
Even if you can still perform some or all of your regular job responsibilities, you are presumed fully disabled and are entitled to full benefits under specified conditions, such as loss of sight, speech, hearing, or use of limbs.
Guaranteed Renewable policies are one of the two major types of disability income policies. These types of policies can never be cancelled as long as premiums are paid. Additionally, premiums cannot be raised based on an individual's circumstances, but they can be raised for an entire class of policyholders.
Non-Cancellable policies are the other major type of disability income policies. These types of policies can never be cancelled as long as premiums are paid, and premiums are guaranteed not to increase.
Portability refers to whether or not you can take coverage with you. One of the biggest advantages of owning an individual disability policy is that it's completely portable. You own it and it follows you from job to job. By contrast, employer-provided coverage is almost never portable.
Elimination or Waiting Period
Today's policies allow you to decide when benefit payments begin. You're asked to choose a waiting period at the time of application; these range anywhere from the 31st day to six months or more after the onset of the disability. Depending on how much money you have saved, and your other resources, you can reduce your premiums by electing to wait 60 days, 90 days, or even six months before you start to receive benefit payments. Remember, though, that the first check is usually not paid until 30 days after the waiting period.
Length of coverage
A disability income insurance policy can pay benefits for a finite number of years, say, one year, two years or five years, or it can pay to age 65 or even for a lifetime. Since disability benefits are designed to replace the income you would otherwise earn by working, most people do not need benefits extending beyond the working years. Electing shorter benefit periods can save premium dollars, but bear in mind that if you need this insurance at all, you probably need it most to cover a disability that permanently removes you from the workforce. A lengthy disability threatens your financial security much more than a short-term disability.
For an additional premium, you can add a cost-of-living adjustment (COLA) to basic disability income coverage. This provision increases benefit payouts by a specified percentage, generally 4 to 10 percent, after each year of disability and can be important during a lengthy period of total disability. While this is a relatively expensive option, it could be vital to maintaining your standard of living if you're out of work for a very long period of time.