How to Buy Disability Insurance on a Budget
by Bill Olmsted
You’ve finally gotten around to taking that step to protect your income and you’re ready to buy a disability insurance policy. You have requested quotes from a few brokers on-line, and the emails are starting to show up with several options. The problem is the cost of the coverage with everyone seems to be out of your comfort zone. How can you protect your income and not break the bank?
There are things you can do to lower the cost of coverage and still provide a solid level of protection.
First, let’s put the price of a good disability insurance policy in perspective. Many people get discouraged from buying a policy when they find out it’s not going to cost $10 per month. They don’t know anyone who was ever disabled, and have never really thought about it before.
When they find out that the premiums are about 2%-5% of their income, they are shocked. They haven’t really considered that disability insurance is not expensive, when compared to what they are trying to protect, and relative to other types of insurance they already own. When they realize that the chances of being disabled for 90 days or more during their career is so high, and that their income is the most valuable thing they have, it should be a reality check that protecting that asset is not an option, but a necessity.
The reality of cash flow limitations can limit what you can purchase; however, and we all have to make compromises sometimes. Although compromising on disability insurance could mean the difference between getting paid or not, there are things you can do to reduce the cost and still get a good policy.
- Consider a shorter benefit period. Although most companies offer benefit periods to age 65, and some even lifetime, the shorter the period of time that the insurance company might have to pay you, the less in premium you will pay. Consider a 5 or 10 year benefit period option, especially if you’re in your upper 40’s or 50’s.
- Consider a lower benefit amount, and use Future Increase Options to allow for increases down the road. There is a maximum level of disability coverage that you can buy based on your income. Just because you can buy this much doesn’t mean you have to.
Buying a lower amount of coverage will cost less, and having something is certainly better than having nothing. You may also be able to use a future increase option rider (FIO), to lock in your good health today and allow you to buy more disability insurance in the future without more medical questions.
- Look for a modified own occupation policy. Although a true own occupation policy is the best type of protection, if the choice is between nothing or a modified own occupation policy, get the modified own occupation policy! The difference between true “own occ” and modified “own occ” is that under a true own occ policy, if you chose to do another job, you could still receive full benefits from your policy.
Under a modified own occ policy, if you chose to do something else, you might not be eligible to receive any further benefits. If you don’t have a very specialized occupation, and you’re looking to buy basic coverage, a modified own occupation policy might be just fine.
- Consider a delayed cost of living adjustment rider. When someone is disabled and has purchased a cost of living adjustment (COLA) rider on their policy, benefits will begin to increase to keep pace with inflation. Typically, these increases in benefits start after someone has been disabled for 12 months. A COLA rider that starts increasing benefits after 4 years is less expensive, but still offers long term inflation protection.
- Don’t compromise on the financial strength of the insurance company backing your coverage. You can make compromises on the definition of disability, the COLA rider and the benefit period, but make sure you buy your policy from the strongest mutual life insurance company you can. The promise to pay in the event the unthinkable happens is only as strong as the company behind your policy.
If you’ve thought about protecting your income, don’t let sticker shock keep you from following through. There are ways to design a policy that provides a good level of protection, and doesn’t break the bank. Work with your agent, and let him or her know what is important to you and what is not. They’re the experts, and should be able to get you the coverage you want at a price you can live with.