Disability income insurance, in my opinion, is the most underrated of all the insurances. Everyone thinks to buy life insurance, but almost no one buys disability insurance even though, according to the Social Security Administration, for 20-year-olds more than 1-in-4 will become disabled before reaching retirement age.
By far, the biggest asset most people will ever have is their ability to earn a paycheck. A 25-year-old making $50,000 per year will earn roughly $2.5 million over their working years and yet rarely thinks to insure that asset. How I explain it to people is this: "If you had a piece of equipment that produced $100,000 a year in profit, would you insure it?" They look at me like I'm crazy, because of course they would. Well, you are that equipment, and depending on your occupation, you should consider insuring yourself.
First, see if your company offers long-term disability insurance. If they do, that's a great start. Understand though that having it at work might not be enough. Often group plans are limited to 60% of your income up to a maximum of $6,000 of benefit per month. Also, the coverage is only helpful as long as you stay at that job. Supplementing with a smaller individual policy may help fill in the gaps that group coverage leaves.
If you own a business, you should always buy individual coverage first! Then look to add a group plan for yourself and your employees. Individual policies factor in whether or not you have group coverage already in the total amount they will give you. Group does not look at individual, so always buy individual first.
Rates for men tend to be cheaper than for women, unlike life insurance. That's because women tend to file more claims -- including for pregnancy -- and men die earlier. Also, not all carriers will give you the same rating classification.
Here are some things you should consider when choosing a policy:
1. Non-Cancellable vs. Guaranteed Renewable
With a non-cancellable and guaranteed renewable policy, there will be no changes to the premium or to the policy benefits through age 65, regardless of the insured's working status, health or income level. Whereas with just a guaranteed renewable policy, the insurer cannot change the premium or the benefit for an individual, but it can make a change, with approval, to the premium for an entire group of policyholders, categorized by state, underwriting class or policy year.
2. Definition of Disability
There are several ways that insurance companies categorize their coverage: Own Occupation vs. Own Occupation but not working vs. Any Occupation.
- Own Occupation policies provide coverage if the insured becomes unable to perform the substantial and material duties of their specific occupation, even if they are still able to work in another occupation.
- Own Occupation but not working means you can't work in your specific occupation and choose not to work in another. If you do go to work, they would stop or reduce payments.
- Any Occupation policies only provide total disability benefits if the insured is unable to work in any occupation.
3. Length of Benefit
You can choose five years, or to age 65 or possibly longer.
4. Waiting Period
Disability income insurance policies have a waiting or elimination period before you are able to receive benefit payments. Typically, 90 days is the standard waiting period, and any longer than that might not be worth the small premium savings.
5. Cost of Living Adjustment (COLA)
This additional feature for policies is a must for younger workers. Your disability benefit increases over time to keep pace with inflation. This rider turns on once you file a claim.
6. Future Purchase Option/Future Increase Option
This allows you to buy more insurance later when your income is most likely higher without having to go through medical underwriting again.
7. Increase Rider (AIR)
This rider increases the monthly benefit for the first few years of a policy to keep pace with inflation. This optional rider is effective upon issuing the policy.
8. Residual Benefits
This rider pays a percentage of monthly earnings if the insured suffers a loss of income of 20% or more. This means I may be able to go back to work, but not as much as before.
9. Catastrophic Rider (CAT)
Pays an additional benefit if the insured is receiving total disability benefits and is unable to perform at least two activities of daily living (ADLs), has a severe cognitive impairment, or is presumptively totally disabled.
10. Social Insurance Supplement Rider (SIS)
Pays a benefit as long as the insured is not receiving benefits from Social Security Disability (SSDI). If the insured receives benefits from SSDI then the SIS rider benefit is reduced dollar-for-dollar for benefits received under SSDI. This is sometimes used to decrease the overall cost of a disability insurance policy.
As you can see, there is a lot to consider when choosing a disability income insurance policy. You should also remember that disability coverage usually only replaces 60% of your income, (though it may be tax free), so you shouldn't rely on it completely.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
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