What Should You Look For In A Disability Policy?

What Should You Look For In A Disability Policy?

If you find that you need an individual disability policy over and above any other income protection you may have, here's what you need to know:

Definition of disability
Policies vary. Some pay benefits if you are unable to perform the duties of your customary occupation, others only if you can engage in no gainful employment at all. Be sure to ask your insurance agent how various policies define disability.

Extent of disability
Some older policies require that you be totally disabled before payments begin. Partial disability sometimes is covered for a limited time but most often only if the partial disability follows a period of total disability for the same cause. Some policies may not require total disability before partial disability payment.

"Residual" benefits
If you are able to work but your income is reduced because you cannot fulfill all of your job responsibilities, residual benefits can help to make up the difference in your income. A standard feature in some policies (added with a rider to others), a residual benefit allows partial payment based on your loss of income without prior total disability.

Presumptive disability
Even if you can still perform some or all of your regular job, you are presumed fully disabled and are entitled to full benefits under specified conditions. Those conditions typically include loss of sight, speech, hearing, or use of limbs.

Size of benefits
Monthly benefits are calculated in terms of stable, earned income at the time of purchase. Most insurers, not wanting to provide benefits so sizable that they would encourage workers to remain at home, limit benefits from all sources to no more than 70 to 80 percent of monthly income. Lower-paid workers can expect to receive more of their predisability incomes while higher-paid workers generally receive less.

When the payments begin
Today's policies allow you to decide when benefit payments begin. You can choose a waiting period at the time of application; these range anywhere from the 31st day to six months or more after the onset of the disability. Depending on how much money you have saved, and your other resources, you can reduce your premiums by electing to wait 60 days, 90 days, or even six months before you start to receive benefit payments. Remember, though, that the first check is usually not paid until 30 days after the waiting period.

Length of coverage
By choosing a benefit term, you will elect benefits that are payable for one year, two years, five years, to age 65, or for a lifetime. Since disability benefits are designed to replace earned income, most people do not need benefits extending beyond the working years. Electing shorter benefit periods can save premium dollars, but bear in mind that if you need this insurance at all, you probably need it most to cover a disability that permanently removes you from the work force. A lengthy disability threatens your financial security much more than a short term disability.

Keeping pace with inflation
For an additional premium, you can add a cost-of-living adjustment (COLA) to basic disability income coverage. This provision increases benefit payouts by a specified percentage, generally 4 to 10 percent, after each year of disability and can be important particularly during a lengthy period of total disability. While this is a relatively expensive option, it could be vital to maintaining your standard of living.

Most policies include a waiver of premium provision, so that you don't have to pay any more premiums after you're disabled for 90 days. Some policies offer the opportunity to buy additional disability coverage to keep pace with a rising income, without having to pass a medical examination or to submit further medical evidence of insurability.