One approach to the problem of providing income during an extended period of disability is to purchase individual disability income insurance.
What to Look for in a Disability Insurance Policy
- Definition of disability: Are education, experience, and past earnings taken into account in determining whether the insured is qualified to resume work? Many policies provide for an initial “own occupation” definition of disability, for a specified period of time, after which a different definition of disability applies.
- Partial or residual benefits: Partial or residual disability benefits may be paid in some polices when the impairment allows the insured to perform only a portion of his or her duties. This provision may also pay benefits in the event the disability reduces the insured’s income by a certain amount (e.g. 20% or more) from pre-disability levels.
- Cost of Living Adjustment: Is there a cost of living adjustment9COLA) which would increase benefit payments after a disability occurs?
- Cancel ability and renewability of policy: Except for nonpayment of premiums, is the policy non-cancelable or guaranteed renewable? Non-cancelable generally means that the insurance company cannot cancel the policy, change the policy provisions or increase policy premiums after issue, as long as premiums are paid on a timely basis. Guaranteed renewable is similar, but allows the insurance company to increase the premium.
- Waiting and eliminating period: Is the waiting or “elimination” period proper for the insured’s circumstances? Commonly available periods may include 30, 60, 90,180 and 360 days. Naturally, the longer the elimination period one selects, the lower his or her premium payments will be. However, a person’s need, cash reserves and income sources should be the deciding factors in selecting proper elimination/waiting period.
- Benefit period: What benefit period should be selected? Since a long-term medical disability can be financially devastating, one should elect a long-term benefit where possible. Some companies offer lifetime benefit periods, but periods as short as 24 months to 60 months are also available.