Over the next few weeks, we’ll revisit our multi-part series on risk management and the basics of different insurance plans! This week, we’ll wrap up our discussion on disability insurance.
Should everyone have disability insurance? That depends. For one, it depends on your preference as it relates to risk management – do you want to insure against this risk, protecting your household from a potential loss of income, or retain those risks and avoid paying premiums? It also depends on your current financial situation. Do you have enough in non-retirement savings to cover the loss in income? Do you have assets that you’d be willing to sell to make ends meet? Is there another employed spouse in the household that earns enough to comfortably live with just their income?
If you do decide to get disability insurance, here are a few things to consider.
For long-term disability insurance, the longer the elimination period, the lower the premium. With that said, be sure you have adequate non-retirement savings to cover your household expenses during that elimination period.
If you are going through a divorce and the ex-spouse is expected to pay child support and/or alimony, consider requesting in the divorce decree that they buy disability insurance to protect those support payments.
There are a number of features you can add to your policy, but remember, virtually all of them will make that policy more expensive. Selecting a non-cancellable policy means the insurer cannot cancel the policy, raise the premium, or decrease the benefits. Generally, long-term disability insurance covers 50-70% of net income. Some insurance companies will provide options to increase the benefit amount if you don’t think that’ll be enough to support your household. If the policy has residual benefits, that means they’ll provide you partial benefits if you’re still at your job but unable to work at full capacity. For instance, if a disability results in you working 20 hours instead of 40, a disability insurance policy with residual benefits may provide you 50% of the policy benefit amount. A cost-of-living-adjustment rider, or COLA, allows for your benefits to increase with inflation. A waiver of premium rider means the insurance company will not charge you for premiums if you become disabled, though how that’s implemented and for how long differs from policy to policy. Lastly, a recurrent disability clause means the policy will waive your elimination period if you become disabled soon after a previous disability period, if it’s from the same injury or cause. Generally, policies will have a limit on time between these two disability claims, often six months, for the policyholder to be eligible for the recurrent disability.
That concludes our discussion on disability insurance, we’ll return next month to discuss umbrella insurance.