Disability Insurance: Income Protection, Benefits & Riders

Disability Insurance: Income Protection & Coverage Options

What is disability insurance?

Disability insurance — Replaces all or part of your income if you cannot work because of disability.

• Underinsurance problem
  • Disability insurance is the largest category of basic insurance for which Americans are underinsured.
  • People mistakenly believe that other insurance they carry will protect them in case of long-term disability.

Elimination Period

Elimination period — A clause in your insurance policy that specifies how soon after the disability the policy will begin to pay benefits.

• A longer elimination period substantially reduces the premiums on disability insurance.

Financial Strategies

• Live below your means
• The two-career family

Reducing Risk of Disability

Reducing risk of disability — Take care of your health

• What you do now does matter
  • Develop a healthy lifestyle while you are young. Be careful with high-risk activities.

Key Definitions

Total disability — Not being able to perform any of the main functions of the job you held when you became disabled, or not being able to perform any job.

Own-occupation protection — Extra coverage you can buy if you have a highly specialized and highly paid job.

Residual and Presumptive Disability

• Residual disability
  • Provides protection when you are able to work part time but not full time.
  • Residual benefits — An income loss of at least 20 percent results in the insurer paying a percentage of your full benefits to compensate you for lost income.
  • Make sure you have residual disability coverage.
• Presumptive disability — “Presumed” disabled under certain conditions.

Benefits

Benefits — Usually 80 percent of your income is the maximum disability benefit you can receive.

• You cannot buy more disability insurance than you make in income.
• The total of all income replacement benefits paid to you by different kinds of insurance cannot exceed the maximum benefit you could receive from your disability insurer.

Benefit Period and Riders

Benefit period — Buy at least five years of coverage.

• Cost-of-living adjustment — A rider you can purchase to prevent your benefits from losing value due to inflation.

Renewability Options

Renewable options — Guaranteed renewability, Noncancelable renewability, Conditional renewability, Future purchase option.

Waiver of Premium

• Waiver of premium — Prevents you from needing to pay premiums for a specified period after you are disabled.

Policy Pitfalls to Avoid

• Avoid policies that:
  • Leave you unprotected in critical areas.
  • Cost more than they should for the protection they offer.
• Accident-only insurance
• Nonmedical disability