Top 3 Mistakes People Make Buying Disability Insurance
Get the Advice of Somebody Who Specializes in Disability Insurance
by Bill Olmsted
In 2014, my office submitted over 1,100 applications for individual long term disability insurance with major insurance companies. In doing so, I’ve seen many mistakes that people make once they’ve decided to buy a policy to protect their income. I’d like to share the top 3, and why they can be so costly.
Mistake #1 - "Shopping" For A Policy
We’ve all shopped for a car. You go from one dealer to the next, looking for the best deal. A car at one dealership might cost $35,000, while the exact same car at another dealership might cost $32,000. It doesn’t work this way with disability insurance, but people think it does. Every day, I hear how someone wanting to get insured is shopping for a policy, and looking for the best deal they can get.
There are two issues here. The first one is the issue of price, or what the insurance company charges as the premium for their contract. This is set by the insurance company and can not be changed by individual agents. A disability policy structured with the same monthly benefit, same elimination period, same benefit period, and same optional riders will cost exactly the same from whoever it is purchased from. The only thing you’re doing is choosing the agent, not the price. The agent’s job is to give you knowledgeable advice, help you through the underwriting process to obtain the most favorable decision, and provide service down the road. Since they have no ability to influence the cost of the policy, chose your agent based on his or her reputation, knowledge and experience. Don’t think that you can get another agent to give you the same thing for less money.
The second issue is one of cost. If “price” is what you pay for the policy, “cost” is what the policy is worth long term – it’s value. Cost is a much more important factor than price. If you purchased a policy with a low price, say $1,000 per year, but that policy didn’t pay you when you were disabled because you didn’t meet the definition of disability it had, it’s cost was very high. The most expensive policy is the one that doesn’t pay you when you need it to.
The mistake people make is that they look only at the price of the policy, and neglect the provisions of the contract, believing that all of them are the same. They are not. Every disability policy has different provisions and definitions. While one might consider you to be disabled if you can’t do your own occupation, another might consider you to be disabled if you can’t do any occupation. There will be a difference in price between these policies, but also a difference in benefits should you ever need to use them. Don’t only look at the price, but consider the provisions of when and how you get paid. You’ll need an experienced agent to do this.
Mistake #2 – Trying to Become an Expert
Advising people on plans to protect their income isn’t rocket science, but it does require some specialized knowledge and experience. Some of the information that one needs to make an educated decision can be found in the quotes that are provided by the insurance companies. Some important information, however, may not be found there. First look to the specimen policy to see subtle, but important, differences between policies. It also helps to have knowledge of the industry, the underwriting guidelines, and which insurers emphasize particular features or benefits. There are many intangibles that you can’t get in the quotes that can help to provide the best contract for an individual.
The second biggest mistake I see is someone trying to compare policies themselves. They think that they will get 3 or 4 quotes, read them in 10 minutes and know which policy is best for them. This can be a very costly mistake if they guess wrong. I say guess, because that’s really what they’re doing. They’re guessing that policy A is a better fit and will pay them in more circumstances than policy B. You wouldn’t go to your physician with a self-diagnosis and say “Doc, I’ve determined that I need open heart surgery. When can we schedule this?”, why would you try to determine which insurance contract is the best one without consulting with an financial professional in the field?
Get the advice of someone who specializes in disability insurance. Since many insurance agents write little to no disability insurance, you need to ask how familiar your agent is with disability income policies. Do your homework on the agent, the company, the company financial strength, and the contract, and then take their advice.
Mistake #3 – Not Accepting a Policy
Once you’ve consulted with a disability specialist, decided which policy is best for you, and you’ve applied for coverage, there are still mistakes to be avoided. The biggest mistake I see after someone has applied for a policy is not accepting the offer made by the insurer.
There isn’t a long term disability policy out there that will cover pre-existing conditions. Basically, it’s something that was a medical concern before you applied. Insurance companies don’t insure for disabilities, and they exclude them from coverage. If you’ve had a back problem, and have regularly seen a chiropractor to alleviate the discomfort, you should expect some form of a back exclusion. The disability insurance policy won’t pay for anything related to your back pain because it will be excluded from coverage.
The mistake people make is that they won’t accept the policy with this exclusion on it. Even though they didn’t initially want coverage because of their back, and they don’t ever think that they will be disabled because of their back condition, they don’t want a policy that isn’t 100% perfect. What they should do is accept the policy and work with their agent over time to ensure that they still have the best possible offer.
All insurance carriers work in the same fashion, so don’t turn down one offer with the idea of going to another carrier – best case, you’ll likely be disappointed with the second offer as well; worst case, you’ll have a more significant change in health and be left without any coverage.
To get the best disability coverage, you have to do three things…Shop for a policy with an eye toward it’s contractual provisions, not it’s price. Value follows dollars, and the better policies typically have higher premiums because they offer a better value. Use a financial professional in the field of disability insurance, not an agent who just also happens to sell an occasional DI policy, and definitely don’t try and go it alone! Finally, after consulting with your disability insurer, take the offer that the underwriter provides, and see what you can do to improve it over time. If you follow these three rules, you’ll almost always have the best income protection you can find.
William Olmsted holds a Financial Representative contract with The Guardian Life Insurance Company of America based out of New York, NY.
2015-7392 Exp 6/17