Price is only an issue in the absence of value. The problem with disability insurance is determining value. To understand this we first need to look at how disability insurance policies are priced. We want to make sure we are getting the most bang for the buck and see if we can find some sweet spots from a pricing standpoint.
Occupation
The basis of all disability policies is to protect your income if/when you are unable to work. Your occupation is the core measurement of risk from an insurance company’s point of view. Occupation classes usually use a scale from from 5 to 1, 5 being the less riskier jobs to 1 being more risky. Then they will sometimes add on an A and B for even riskier hands on occupation classes. Obviously, the lower risk occupations become more cost efficient to protect. For instance an office job is a lot safer from an insurance companies prospective than a job which requires substantial field work. An office job might be a 4 or a 5 occ class while field work might be a 1 or a 2 occ class. This makes the duties of your occupation even more important than the title itself.
An example of this is an engineer. There are various different types of engineers that range from doing design from the comfort of their office to traveling and on-site field work. I’ve seen engineer occupation classes range from a 2 all the way up to a 5 occ class. This can really change things from a pricing standpoint as well as what companies will be most competitive for this particular person’s situation.
Income Protection
The first real decision that someone looking for disability has to make is how much of their income are they going to protect. Under most circumstances the maximum coverage you can obtain for income protection is protecting 60-70% of your income. This is an area where most people’s group disability fails (if you even have group coverage). When your group disability falls short, the best thing you can do is put and individual supplemental disability insurance policy in place to help protect your short fall. (Make sure not to mistake this for Aflac which is supplemental insurance and something totally different)
Why wouldn’t you want to cover as much of your income as possible? A disability insurance assessment is a great way to determine whether you are or not.
Elimination Period
The next decision you’ll need to make when looking for disability insurance is when it will kick in. For those more familiar with health insurance, which refers to it as a deductible, this is different because it doesn’t measure the money you will have to front but instead measures the time for which you have been disabled.
The most common elimination periods are measured in days: 0, 30, 60, 90, 180 and 360. The sweet spot for most disability insurance polices is 90 days. The reason for this is that there is usually a decent increase in premium to shorten your elimination period less than 90 days and little savings by increasing your elimination period beyond 90 days. The best place to start here is 90 days.
Coverage Period
Coverage period is the length of time for which a disability insurance policy will pay benefits. The most common coverage periods use to be: 2 years, 5 years, 10 years and to age 65. Today there are more policies that have added: to age 67, to age 70 and even lifetime graded benefits. The reality is that people are working longer today.
The sweet spot for coverage period is usually to age 65 or to age 67 if you are offered it. I say if because some higher risk occupation classes have limited coverage periods. If you are comparing policies age 65 is your best place to start.
Riders
Riders are add-ons to your disability policy that provide extra benefits for you as a policy holder. However, they are not free. Stay tuned for next week when I’ll cover the 7 disability insurance riders you need to know about.
Related posts:
{ 4 comments… read them below or add one }
As a stay at home parent I have never considered disability insurance, but I probably should!
Kelly:
The problem is that for most stay at home parents they don’t have any earned income, so there is nothing to insure. However, I’ve had numerous people where the driving force to make sure they had adequate protection was their stay at home spouse. In a one income family there is a whole lot more pressure on the ability to earn an income of the working partner.
I always get confused with the limits 60% vs 66%
Evan:
That’s because it’s about context. Percentages are only really a concern when you are looking at group LTD. When it comes to an individual LTD policy percentages are just a guideline. Insurance companies do financial underwriting to see how much coverage you are eligible for.
{ 8 trackbacks }