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Article 2 of 2 in Buying Disability Income Insurance Checklist and Tips |
Tips on purchasing disability insurance |
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- You need to determine an adequate level of disability income benefit to meet present and future needs. Do you want your spouse to work? Will you be responsible for college tuition? Are you saving for retirement? Answers to such questions will impact your decision on whether you need disability income insurance, as well as on the amount if you do decide purchase.
- You need to think about how long an elimination period you would need until your benefits begin. You need to calculate how long you can afford to go without supplemental income if you become disabled as well as how much premium you can afford. Remember, the shorter the elimination period, the higher the premium.
- You also need to decide how long you will need to receive benefits if you do become disabled. Many policies are designed to provide benefits to age 65, or until retirement, but you can also buy a policy with a 2 year benefit period, or just about anything else between that and retirement, depending on the company. Your needs should determine the length of the benefit period you choose.
- You need to remember, that insurance companies all have a maximum benefit level for each individual. That maximum usually can be found in the home office underwriting manual; an insurance agent also should have that information. As a general rule, insurance companies are reluctant to provide a benefit that is greater than 70% of your current income, and that percentage declines as your income goes up. Insurance companies do not want their policies to tempt people to feign disability. This could happen if they would be better off financially if they were disabled and unable to work. Since individual disability income benefits are usually tax free, a 70% benefit is, on average, reasonably close to a 100% of income that is subject to federal income tax.
- You also need to remember that insurance policies are legal contracts. You should read and compare the actual polices you are considering before you buy one of them. Marketing or sales literature is no substitute for reading the actual policy. While insurance companies are supposed to be honest and accurate in their advertising and literature, the policy, itself, is your legal contract with the insurance company and is the document by which the company is legally bound. If you do not understand any provisions, you should get clarification from the home office, not from an agent who wants to sell a policy to get the commission. If you have a question about how the policy works, call the underwriting department. If you have a question about how benefits are paid, call the claims department. If you are still uncertain about the meaning of a provision, call the legal department. To assist your analysis, you should also receive from each insurance company an Outline of Coverage. This provides basic information about your policy, but, again, remember that an Outline of Coverage is not a legal contract. Your policy is.
- You should ask for to see an insurance company’s financial ratings. This will give you an idea of the company’s financial stability, which is important for you to know because you want to be as certain as you can be that the company will be solvent if you do become disabled. The A.M. Best Company, Standard and Poor’s Corporation, and Moody’s all analyze financial data and rate insurance companies. Your state insurance department can provide information on the claims payment record for each insurance company operating in your state.
- You should know that, even after you purchase a policy, you usually have a “free look” period. During that period, you can return the policy if it does not meet your requirements for any reason and get your money back. Depending on the state, the free look period is between 10 days and 30 days, with 30 days the most common.
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