Factors Involved in Choosing a Disability Insurance Policy

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Factors Involved in Choosing a Disability Insurance Policy

If you’re seeking an individual disability insurance policy, there are a number of factors to consider, including:

Short-term versus long-term

To be fully protected in the event of a disability, purchasing both types of coverage is optimal. If that’s too expensive, you’ve got to choose. Most people opt for long-term coverage over short-term.

Coordination of benefits

Before signing up for a policy, check to see what coverage your employer offers. You’ll want coverage that complements what you already have, if you do have other coverage. Also, realize that insurance companies won’t pay for the same problems multiple times, so if your group policy at work picks up a particular claim, your individual policy won’t, and vice versa.

Elimination (or waiting) period

This deals with how long you have to wait before collecting benefits—the shorter the wait, the higher the premium.

Cancellation features

To avoid having your policy cancelled in the future due to any health problems you may experience, choose a non-cancelable policy over one that can be cancelled. These policies are more expensive, but they ensure that you have access to coverage unless you fail to pay the premium. Additionally, the premiums on these "non-can" policies cannot be raised.

Renewability options

When you opt for a guaranteed renewable policy, you ensure that you can renew your policy with the same benefits as long as you continue to pay your premium on time. Again, these policies are more expensive and don’t guarantee that there won’t be an increase in your premium, but that increase can’t be any more than other policyholders in your same classification.

Amount of insurance

You need to choose a benefit amount that can replace from 50 to 70 percent the income you would have received from working. The higher the benefit, the more expensive your premium. Insurance companies typically pay benefits on a weekly or monthly basis, so when choosing a benefit amount, think about your monthly expenses and what items in your budget are absolute necessities—food, mortgage payments, car payments, utilities—and what are optional, such as cable TV, eating out, and gourmet coffee.

Cost of living adjustment

As prices rise over time, the value of your benefit will be eroded. To avoid this problem, you can choose a policy with a COLA (cost of living adjustment).

Waiver of premium

When you’re disabled, money is tight, so a nice policy feature to have is one that waives your disability insurance payment after you’ve been disabled for a certain period of time, such as 90 days.

Additional purchase

Should you decide you need more coverage later on, a policy with an additional purchase option allows you to purchase more coverage without going through an additional physical.

There are factors that determine how expensive individual coverage is for each person. These include your overall health, what type of job you do, and your age and sex. In terms of your health situation, you typically must undergo a physical and a blood test to determine the current state of your health and whether you have chronic medical conditions. Some insurers will refuse to write policies for individuals with illnesses or chronic conditions, while others will write a policy with a higher premium or exclude that specific condition from the individual’s policy.

Job and lifestyle factors

In addition, your job and lifestyle will influence the cost of a policy. If you have a job as a construction worker, for example, coverage will be much more expensive than if you sit in an office and work on spreadsheets all day. Certain high-risk hobbies, such as skydiving and mountain climbing, may also affect your rate negatively. Your age can also influence the cost of the policy, as younger workers are generally healthier; you can avoid excessive age-related increases if you choose a policy that is renewable.

Get the ratings

When selecting a policy, consider the issuing company’s financial strength. You don’t want to buy a policy and then find out that your insurer is going out of business. There are five independent companies that assess the financial strength of insurers, and each uses a different rating system. You can find financial strength information from each rating agency here:

• A.M. Best Company: www.ambest.com
• Fitch Ratings: www.fitchratings.com
• Moody’s Investor Services: www.moodys.com
• Standard & Poor’s Insurance Rating Services: www.spglobal.com
• Weiss Research: www.weissratings.com