This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Wednesday, May 6, 2009

What I Learned About Disability Insurance

Posted by Paul

One of the things that I looked into when I become a Dad was disability insurance. Of course coming into it I had no idea what the different "flavors" of DI were and how it was priced, or how much it all cost.

I feel like I learned a little as I went through the process so I thought I would take what I learned and share it.

First of all, DI is generally defined by four characteristics:

1) Elimination Period
This just means how long you have to be unable to work before they start paying. Common amounts are 30 days, 60 days, 90 days, 6 months and 1 year.

2) Payout Amount
This is how MUCH they pay you per month while you are disabled.

3) Maximum Benefit Period
This is how LONG they will pay you if you remain disabled for a long time. Common amounts are 1 yr, 2 yrs and so on (you can also get a benefit period that says they keep paying until you turn 65).

4) Whether or not your premium is locked.
Some policies lock in your premium and they can't change it as long as the policy is active, others are allowed to change it based on your career (like if you become a skydiving instructor they can change your premiums), stuff like that.

5) Your current state of health.
If you have serious health problems then the premium they offer you will almost certainly go up or the company may choose to not offer you coverage.

What I learned is that these factors can dramatically change the premium you pay.

Here are some examples:
Shorter elimination period = higher premium.
One policy I looked at had a 90 day elimination period with a premium of $58 a month but if you switch to a 60 day elimination period the premium jumps to $115.29.

Longer benefit period = higher premium.
It seemed like generally to go from a 2 year to a 5 year benefit period it means your premium would increase an additional 50%. (the same policy I looked at for $58 a month was for a 2 year benefit period, changing it to 5 years made the premium go to about $90 a month).

Higher payout amount = higher premium.
No surprise there.

The more locked in your premium = higher premium.
There was an added cost to having a premium that was locked in for as long as the policy is active, though in my experience the extra cost wasn't THAT much.

More health problems = higher premium or denial of coverage.
I don't know the specific formula for coverage based on health but I do know that if you apply for personal DI assume that they will require a check up where they check your blood pressure, weight, and take a blood and urine sample, and also inquire into your medical history.

So given this information, how much should you get?

Well the choice is really up to you. If you want you can certainly have no disability insurance, and assume that if something horrible happens to you then you will live off of social security (or just assume that you'll never be disabled). Insurance is based on the fear of what MIGHT happen so it becomes a tricky question of how much you want to pay for varying amounts of coverage.

One suggestion I do have is to look into the policies that you work offers. Sometimes they can be good and super affordable. Also if your state of health is bad to the point where you can't get personal DI then getting it through your work may be your ONLY option.

But before you automatically sign up for your work plan I would also suggest that you shop around and see your other options. For example at my work they offer DI for a price, but there was only one choice of coverage. The policy they offered had the longest benefit period (it gave you coverage up to age 65 if you become disabled) and even though the cost wasn't bad for the coverage you got it was still a pretty hefty monthly premium.
I decided to call an insurance company and see what kind of options I had (in fact I called the same company that handles the group plan for my work). I talked to an agent and got quotes on an individual policy with varying types of coverage and then I made the personal decision that I preferred a little less coverage for a lot less money.

My advice to people who are interested in DI is to first determine the cost of getting DI through work, and specifically noting the characteristics of the policy (or policies) that your work offers and the cost. Then call up an agent and find out the costs of policies for a greater spectrum of coverage and then make your decision.

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