How to Buy a Disability Insurance Policy
Disability insurance is a very technical type of insurance policy that protects your most valuable asset – your income. For many people, some level of disability insurance is provided through their job. For those that are self-employed, or want to supplement what their employer provides, they’ll need to buy an individual disability insurance policy.
Here’s what you need to know to make sure you’re buying the right type of policy:
Look for the right type of disability coverage – There are two basic types of coverage that people consider. These are broken down into short and long term policies. Short term disability insurance policies usually start paying you after you've been out of work for a couple of weeks, and continue paying for 3 to 6 months. Long term disability insurance policies start after you've been out of work for 3 to 6 months and typically pay until retirement age (usually age 65).
Recommendation: Generally, we recommend self-insuring the short term risk by accumulating 3 months of cash reserves, and then shifting the long term risk to the insurance company by buying a long term disability insurance policy.
Start getting some quotes – Most people will start getting some quotes from their insurance agent. While this can be a good place to start, it might not provide the best options. Disability insurance is unlike other types of insurance. There are no two policies that are exactly the same, and there are differences between policies in terms of what it means to be disabled. With other types of insurance policies, there is a standard by which they pay a claim, so shopping based on price seems reasonable. When it comes to disability insurance; however, shopping based on price alone can lead to getting a policy that doesn't do what you need it to.
Recommendation: Work with an agent who specializes in disability insurance and can provide you with multiple options. They should be able to explain to you the various riders and options that exist and how they may be beneficial for your occupation and situation. Some sites even provide you with an instant disability insurance quote that will give you a good idea of how much coverage you should have and what a policy will cost. You can then talk with the disability specialist about the details of the policy and make changes if needed.
Design the policy correctly – When you get a quote, it will contain the amount of coverage you should have as well as the price of the policy. It will also contain details of the policy such as the waiting period, benefit period, and optional riders or benefits available in the policy. Work with your agent to help you identify those that are important to you, as not all plans contain the same options.
Recommendation: We recommend getting a policy that has a 90 day waiting, period; a benefit period to age 65; contains an "own occupation" definition of disability; and covers total AND partial disabilities. Designing a policy like this usually provides the best value. It ensures that if you can't do the material and substantial duties of your own occupation due to an accident or illness, you'd be paid; and, it provides coverage in the event that you are partially disabled and work part time in your occupation.
Apply for a policy – Applying for a disability insurance policy is a thorough process. To be approved, you typically must:
Complete an application
Answer medical questions about your health history
Have a blood test done
Submit financial documents to verify your income
While there is no cost to applying for a policy, there is an investment in your time and effort to finish all those steps. The insurance company needs to be sure that you're reasonably healthy and qualify financially for the amount of coverage you're applying for. You can't buy $10,000 per month of disability coverage if you make $5,000 per month. Generally, you can buy about 60% of your income to be replaced.
Recommendation: We recommend applying online whenever possible. Many carriers these days have online application processes that allow you to start the application in the comfort of your home or office at a time of your choosing. Applying online via an electronic application ensures that all the correct “paperwork” is completed the first time, and the application is submitted in good order and processed as quickly as possible. Again, this is where an experienced disability insurance agent can help.
Put the policy in force and become covered – Once you've been approved, your agent will deliver the policy to you for review and finalization. Again, this can often times be done electronically, which greatly simplifies the process and makes it much more efficient. There will be some forms you need to sign to finalize the coverage and you'll be asked to pay your first month's premium. Your agent will explain to you the offer the insurance underwriter has made, and whether or not there are any pre-existing condition exclusions. A pre-existing exclusion rider is often placed on a policy when there is a medical condition that was pre-existing to the application. No disability insurance company covers pre-existing conditions, so if you're looking for disability insurance for something in your medical history, this is something to discuss with your agent prior to applying.
Recommendation: Make sure you read the entire policy, especially any exclusion riders or amendments that may have been added to the policy. Discuss them with your agent and be sure that your medical history has been accurately conveyed to the underwriter. If you dispute the offer the underwriter made, discuss it with your agent and see if there is a period where they may reconsider any adverse actions taken. Often times, pre-existing condition exclusions can be reviewed once the policy has been in force for a period of time. Regardless of the outcome of underwriting, however, it's very important to accept the policy at this time. Not doing so gains you nothing, while putting the coverage in place protects your income as much as possible. You can then work with your agent to perhaps improve on the coverage in the future.
Buying a disability insurance doesn’t have to be difficult or overwhelming. It’s important to work with an agent that deals with this type of coverage daily and knows the different options in the market. Let them guide you through the process of gathering quotes, designing the policy, and working through the application. Once that’s done, be sure to review the coverage every few years, or as your income changes.
Having a good disability insurance policy is a critical part of financial planning. What good is saving for retirement if you get sick or hurt and can’t save anymore because your income has stopped? Buying the right type of disability coverage should be the first step towards a secure financial future.