This is not going to be your typical “you need to buy disability insurance” article. Since you’re reading this, I’m going to assume that you’ve already thought of that, and you’re now researching what you don’t know about the product. Having sold disability insurance policies from every carrier for the past 17 years, I’ve got some opinions on what you should know, and what agents (or the internet) might not be telling you.
Here are my top 10 things you should know:
1. Yes, it’s a good idea to work with an agent.
More specifically, you should work with an agent who specializes in disability insurance. I know many insurance agents who are great at what they do, but they’re not great at everything. Just like you wouldn’t go to your primary care doctor for your back surgery, you shouldn't go to your homeowners agent to protect your income. Disability insurance is a very technical contract that has many moving parts, and these parts change depending on the carrier you’re considering – no two policies are exactly the same. Therefore, it’s critical that you utilize the services of someone who lives and breathes this stuff. They're going to know the differences between policies that could actually mean whether you get paid on a claim or not.
2. Yes, own occupation coverage is important, but it’s not important for everyone.
If you’re looking for disability coverage, I’m sure you’ve heard that you MUST get an own occupation policy. While “own occ” is important, it’s more important for some people than others. While it varies on a case-by-case basis, if you have a highly specialized, technical occupation, then you should consider obtaining an own occupation policy. It will mean that if you can’t do the duties of your specific occupation, you’d be paid the monthly benefit even if you could do something else. This is important because many highly trained, specialized occupations are also highly compensated occupations. If you couldn't do the technical duties of your job, you probably wouldn’t make as much doing another job. In these cases, you'd want to be able to earn your income from your new job AND receive your full disability benefits.
Own occupation isn’t as critical to have if you have an occupation that doesn’t require you to have a few very specific skills, or where you could retrain and earn a similar income in a new job. Now, the thing some agents may not tell you is that the difference in cost for a true own occupation policy, and one that isn't might not be too much. Talk to your agent and get quotes both ways and assess the value to you.
3. You should have coverage for partial disabilities.
I’ve seen many policies from clients where another agent didn’t include coverage for a partial disability. In the past 17 years, I’ve sold exactly 3 policies that didn't have coverage for partial disabilities, and that was only because the client was adamant that they weren’t going to ever be partially disabled. I made it clear to these clients that without this important feature, if they decide to work at all, they would not be considered disabled and would receive no benefits.
The problem is that if you’re considering a disability insurance policy, by definition, you are a person who values their income. You value working and most likely like what you do. You’ve worked hard to get to where you are and if you could work one day a week, you’d prefer to do that. If that’s you, then consider an accident or an illness that you fight through to be well enough to get into the office a day or two a week. If you don't have partial, or residual, benefits on your policy, you won’t receive any benefits. Basically, you'll be forced to either sit home and collect a benefit check or go to work and receive nothing from the policy. Make sure you have coverage in the event you want to work part time after a disability.
4. Understand how COLA works.
COLA stands for cost of living adjustment, and it is designed to increase your monthly disability benefits once you are disabled so that your purchasing power keeps up with inflation. Inflation, however, hasn’t been over 5% since 1990, and was a paltry 1.3% in 2016. This isn’t to suggest that inflation will never increase again, or that people who are in their 20’s or30’s shouldn’t consider having inflation protection on their policies, but if you’re looking to trim the costs of coverage, I’d suggest eliminating a benefit that mathematically may not provide a significant return.
5. A 10 year benefit period might be a good fit.
The benefit period is how long you get paid in the event you are disabled. Traditionally, a benefit period to age 65 was a standard for long term disability insurance. Recently, however, insurance companies have been offering other benefit period options. Among them are: 5 year, 10 year, to age 67, to age 70, and lifetime.
Since the insurance company takes a higher risk that they’ll have to pay you more for a benefit period to age 65 than they would if you had a 10 year benefit period, the longer you have your benefit period, the higher your premiums will be.
DisabilityCanHappen.org indicates that the average individual disability claim lasts 34.6 months, or just under 3 years. You could make the argument that the 5 year benefit period would more than cover the average, but do you want to be average? What is your risk tolerance for being out of work and knowing that you need to get better and earn a paycheck again inside of 5 years? The same could be said of the 10 year benefit period, but it’s a substantially longer timeframe to be out of work.
I also like to consider the 10 year benefit period for people in their late 40’s. If you’re debating between a benefit period to age 65 and the 10 year benefit period, consider this: by the time you’re 55 years old, you have a 10 year benefit period with either one. That means that a 48 year old needs to make it another 7 years without being disabled, and then they have the same coverage that their buddy has who bought a policy with a benefit period to age 65. The difference is that while his buddy is still paying “to age 65” premiums, he is paying premiums based on the 10 year benefit period. This can be a nice way to reduce premiums, but you have to be ok with the fact that should you get disabled prior to age 55, and should that disability last until you’re age 65, you will have given up some benefits that may have been needed.
6. If you’re saving for retirement, you should insure that too.
When most clients (and agents) talk about disability insurance, they’re talking about protecting earned income. That makes sense, and is the first place to start, but one thing is almost always overlooked – retirement savings. What happens when you’ve been collecting an insurance company check for the past 10-15 years due to a disability, and then the check stops coming when you hit age 65?
Consider for a moment you’re a successful professional with a good income. You’re doing all the right things – you bought a good disability insurance policy and you’re saving for retirement into your 401k. Then, the unthinkable happens and you have an illness that prevents you from doing your job. You submit your claim to your disability insurance carrier, and are relieved to get your first disability benefit check a few weeks later.
Upon receiving your check, it occurs to you that you can pay your mortgage, your car payment, and other obligations, but there’s not enough left over to continue saving for retirement. The money you were putting into your 401k has stopped and you realize that your life after age 65 when you stop receiving money from the insurance company will be very different than if you had been able to continue maxing out your 401k plan.
The solution? Purchase a retirement protection policy that allows your retirement savings to continue in the event you are disabled. Now, when you get to age 65 and the disability income stops, you have the retirement nest egg you and your financial professional had anticipated.
7. Your CPA is not a disability insurance specialist.
This point sort of goes along with #1, but I hear it so much that I think it deserves its own topic. I cannot tell you how many people engage me to help them find the disability insurance policy that is right for them and then tell me that they need to discuss it with their CPA.
I am all for discussing all sorts of important decisions with trusted advisors in your life, but your CPA may not be the best source to provide guidance on disability insurance, given the highly technical aspects that can be involved in this type of insurance policy (the same goes for attorneys, by the way). While they could be a part of the decision process, I believe it’s a good idea to engage them in combination with your licensed agent.
8. You probably haven’t heard of a “term disability insurance” policy, but you should.
Up until very recently, disability insurance policies didn’t have a term like life insurance. A disability insurance policy has a benefit period, as we’ve discussed, but that’s not the term of the coverage. A 10-year term life insurance policy lasts for 10 years and then it goes away. If you die with that 10-year period of time, a death benefit is paid to your beneficiary.
A disability insurance policy is different. It doesn’t have a term at which it expires. You simply pay your premium every year and the policy renews for another year. When you retire and no longer need your coverage, you stop paying the premium and the policy lapses.
Guardian has recently come out with a new type of disability insurance policy called PayGuard that works more like a term life insurance policy. When you buy it, you establish the term for which you want to maintain coverage and once that term has expired, the coverage terminates. A 10-year term PayGuard policy purchased when you’re 45 would last until you’re 55. If you got disabled at 50, it would pay you for the remaining 5 years.
This type of policy could be beneficial for people looking for a temporary solution to a problem – like covering a loan for a defined period of time. It’s less expensive than the traditional disability insurance policy and is something to keep in mind when assessing your options.
9. Don’t forget your business.
Many business owners buy disability insurance because they are not covered under their employer group LTD plan. They talk to an agent or get quotes online to protect their personal income, but they often never consider protecting their business interests.
When you’re disabled, a few things happen.
- Your income stops – This is where a personal disability insurance policy comes in to support you.
- Your business expenses do not stop – Things like rent, staff salaries and other loan payments are still due even if you’re not working. It is important to help make sure that these are covered by using a Business Overhead Expense policy.
- You may want to sell the business – If you have a partner, the conversation quickly turns to how to fund your buy-out. Many times, this is specified in the operating agreement. The problem is that it’s almost never funded with insurance. A Buy-Out disability insurance policy can provide the funds the healthy partner needs to buy-out the shares of the disabled partner.
Be sure you consider all the ramifications of not being able to work and not just the immediate personal impact.
10. Understand the policy approval process.
Getting approved for a disability insurance policy is not always the easiest thing to do. There are medical and financial questions to be answered and insurance companies may make offers that exclude pre-existing conditions from coverage.
Whenever anyone gets approved for a policy and I tell them that it doesn’t cover a particular part of their body due to a pre-existing medical condition, they immediately focus on that body part as the only thing that will disable them. This is natural, but not a good way to go about protecting yourself. If you don’t obtain the policy with the exclusion, you have no protection for that specific excluded condition, and no protection for anything else. On the other hand, if you do obtain the policy, then you may not have coverage for the excluded condition, but you do have coverage for everything else.
In my opinion, you’re always better off putting the policy in place and then working with your agent over time to see if you can have the insurance company remove the exclusion. They frequently do this once enough time has passed that the concern that necessitated the exclusion is no longer an issue.
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. This material contains the current opinions of William Olmsted but not necessarily those of Park Avenue Securities, The Guardian Life Insurance Company (Guardian), New York, NY or its subsidiaries and such opinions are subject to change without notice. Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA or provided by Guardian. BLICOA is a wholly owned stock subsidiary of and administrator for the Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. 2021-119909 (Exp. 4/23)