Length of Coverage

When you apply for disability insurance, you will be given the opportunity to choose a specific benefit term. Typically, benefit period options will be one year, two years, five years, age 65 or, if different, retirement age. Since disability benefits are designed to replace a portion of the income you would earn by working, most people do not need benefits that extend beyond their working years. If you anticipate working beyond age 65, which is increasingly common, you will need to discuss that possibility with the insurance company. Traditionally, companies have been reluctant to insure beyond age 65, but they are adapting to the longer working lives of the population.

Electing shorter benefit periods can save premium dollars because the insurance company will be liable for fewer benefit payments. But you should realize that, if you need the insurance, you probably need it to cover a disability that would permanently remove you from the workforce. In other words, you probably need a policy with a long benefit period. A lengthy disability threatens your financial security far more than a short term disability.

Keeping Pace with Inflation

Group disability income insurance typically adjusts the benefit as your income increases. In other words, it insures a certain percentage of your income, whatever that happens to be. This automatic adjustment acts as a kind of inflation protection, assuming that your income steadily increases over the years. Individual disability income insurance does not adjust. The benefit is based on your income at time of application and remains the same. However, for an additional premium, you may be able to add a cost-of-living adjustment (COLA) benefit to your policy’s basic disability income benefit.

This benefit is often added as a rider, although it could be built into a policy. This provision increases payouts by a specified percentage, generally between 4 and 10%, after each year of disability, but it does not take effect until you are disabled. In other words, it does not increase your benefit each year you own the policy, only when you become disabled and begin collecting benefits. This benefit can be very important, especially during a lengthy period of disability.

Some individual policies permit you to buy additional coverage to keep pace with your rising income without requiring a new medical examination or further evidence of insurability, with, of course, an appropriate additional premium. This benefit gives you the equivalent of a group long term disability income policy, but with the ability to keep it if you change jobs.

If your policy does not have this option, you can always buy another disability income policy if your income increases significantly. This may save you premium dollars in the long run because you won’t pay the additional premium until you have the increase in income, but you will have to undergo medical underwriting, which could be a problem if your health has deteriorated.

Waiver of Premium

Most policies include a waiver of premium provision. This provision states that no premium payments are required after you have been disabled for a stated period of time, often 90 days. The waiver continues until you are no longer disabled. Once you are no longer disabled, you must begin paying premium on the next premium due date.

This is such a common provision that you should be wary of any company that does not automatically build it into the policy.