While no one likes to think about dying prematurely, many people have at least pondered their mortality enough to be prompted to buy life insurance. But most people are completely unprepared for another much more likely scenario - an illness, accident or other tragic event that keeps them out of work for a long time or permanently. (Learn to translate this complicated policy so you can rest assured you're covered. See The Disability Insurance Policy: Now In English.)
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Fess up, you haven't really thought about it, have you? The truth is, so few people are covered for disabilities that most would quickly get into financial trouble if they got sick or hurt and couldn't work. That's why anyone who works should try to make room in their budget for disability insurance. Here are six features to look for in a good policy.
The Best Possible Definition of Disability
Policies that consider you disabled - and thus eligible for benefits - if you can no longer do your specific job are uncommon nowadays. So if you find one and can afford it, grab it. Otherwise, you'll probably have to settle for a policy that only defines disability as being unable to fill any number of roles you're suited for by education and experience. As you can imagine, such policies are less apt to pay out.
An Appropriate Waiting Period
You generally want a policy that specifies a six-month waiting period after the onset of disability before benefits kick in. A shorter waiting period will cost you more and usually isn't necessary because most people have access to some sort of short-term disability insurance, which usually covers the first six months of a disability. Some states have statutory short-term disability plans and many employers offer such plans on an optional basis. Individuals can also buy short-term disability insurance on their own.
The Longest Possible Benefit Period
Although you can buy policies that pay out for two or three years, a much longer benefit period is recommended - at least up to age 65. Disability can occur at a young age and be long-term or permanent, so it's best to have coverage that can carry you through your working years if such a policy fits your budget.
A Competitive Monthly Benefit
If someone tries to sell you disability insurance that pays less than 50% of your usual monthly salary, take a pass and look elsewhere. A good policy typically provides at least 50 to 60% of what you were making before becoming disabled. A total benefit of 65% or more is possible, but you'd have to buy several disability policies.
Because inflation erodes the value of money over time, an inflation-protection feature is desirable if you can afford it. It raises the policy benefit by a preset amount each year so your benefit's purchasing power remains current. (If you worry about inflation and longevity risks, this may be the investment for you. To learn more, read Inflation-Protected Annuities: Part Of A Solid Financial Plan.)
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A Favorable Renewability Feature.
Run the other way if someone tries to sell you disability insurance that's conditionally renewable, even if the price seems right. Such a policy is good for the insurer, not you. It essentially allows the insurer to frequently raise the premiums or even cancel the policy if it becomes concerned you're too high a risk.
Ideally, a disability policy should be non-cancellable, meaning the insurer can't raise the premium or cancel on you. However, most policies are now guaranteed renewable, which is a step down from non-cancellable in that the insurer can raise your premium, but only if it's also doing so for a large, homogeneous group and with state approval. A guaranteed renewable policy can't be canceled, though.
The Bottom Line
Disability insurance is crucial, but most people don't bother to buy it. That's a risky decision because if you become seriously ill or injured and are no longer able to work, disability insurance could keep you out of the poor house. It won't replace your entire paycheck, but it should replace at least half - and that may mean the difference between solvency and financial ruin. (Insurance was a latecomer to the American landscape, largely due to the country's unknown risks. Check out The History Of Insurance In America.)
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