What factors relate to the cost of Disability Insurance?
- The type of disability contract: A "non-cancelable" disability contract guarantees that a company cannot cancel a policy or change the rates, as long as you continue to pay the premiums on time. A "guaranteed renewable" disability policy guarantees that the terms of your policy can't be changed, however premiums may be changed after a certain period (generally 2 to 3 years) and only if the change applies to all policies with similar benefits in your risk class. A third type of contract, often called an "optionally renewable" disability policy, is one that can be canceled by the company at renewal time, and may require you to have periodic physical exams. The contract that guarantees the most generally demands a higher premium.
- The waiting period: You select the amount of time you will wait before you receive your first disability payment. Generally, the longer the waiting period, the lower the premiums. Typical waiting periods are 30, 60, 90, 180, 365, 730 days.
- The benefit amount: The amount of monthly benefit you apply for directly relates to your premium. Generally, the higher the benefit, the higher the premium.
- The benefit period: The maximum length of time benefits will be paid. Your choices are typically 2 years, 5 years or to your normal retirement age. Generally, the longer the benefit period, the higher the premium.
- Your current health status and medical history: If you have a current health issue or previous injury, you may still qualify. An underwriter looks at each individual application and determines the risk factor. Some pre-existing conditions may be accepted with an exclusion amendment added to your policy (i.e.- a previous knee injury).
How can I save money?
There are two ways to keep the cost of disability insurance down:
- Electing a longer waiting period before benefits begin
If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days.
- Electing a shorter benefit period
In most cases, benefits are payable to age 65 -- the age at which you would normally retire -- instead of for a lifetime. However, choosing a benefit period of two-to-five years, ending before normal retirement age, could be penny-wise and pound-foolish. You might save money on premiums, but you could be without coverage when you need it most. Disability of long duration poses the greatest financial hardship.
How is a disability defined?
The definition of the disability will be outlined in your policy and may vary between companies. That definition will determine the circumstances under which you will be able to receive payments, and possibly whether you may be able to go into some other line of work while still drawing on your disability benefits.
Who needs disability insurance and when is the best time to buy?
Most people need some kind of coverage, which will replace most of their usual income in case they cannot work due to disability. When people without disability insurance become disabled, income stops or is reduced, and savings are drained. Some exceptions are those with high levels of investment income, students, or individuals whose spouse continues to provide enough income to cover expenses.
The best time to buy disability insurance is when you are young and without any major health concerns. This is because eligibility and premium rates are based on your age and how healthy you are. You should buy sooner rather than later as our health tends to deteriorate as we get older.
If I have a group disability policy, do I need an individual policy as well?
Group insurance plans through an employer can provide needed coverage. An individual needs to know if the plan covers illness and injury, for how much and for what period of time. Some group policies provide coverage only if injured on the job and only for a short period of time. Some employers provide no group coverage at all. Many individuals have multiple policies that cover long term disabilities.
If your employer offers a group long term disability (LTD) program or group short term disability (STD) program, it may replace a portion of your income should you become to sick or hurt to work, which typically does not include bonus income or commission income. This can be a valuable income replacement benefit and a good safety net, yet because the benefits are often taxed, some people find their group LTD benefits may not be enough. Group policies are also typically more restrictive with the definition of disability, offer no premium guarantees, can be cancelled at anytime, and typically do not cover partial disabilities.
Disability Benefits Are Taxable If Your Employer Pays The Premium. Can you live on 42% of your income?
Since group disability insurance benefits are usually taxable, even a typical policy covering 60% of your income might not be enough. Individual disability income (DI) insurance can help supplement your group disability benefits to better meet your income replacement needs.
****If you were earning $75,000 per year and had a group long-term disability plan that covered you for 60% ($3750 per month before taxes), after taxes you would end up with only 42% ($2625 per month after taxes) of your earned income assuming a 30% combined tax rate***
An affordable individual disability policy could provide you with a monthly benefit that is income tax free when you pay the premium. For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50% to 70% of income. Insurers won't replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.)
What is the application process and what type of medical exam is required?
Once all of your questions have been answered and you are ready to move forward with the disability policy that is right for you, we will call you to complete the application together over the phone. Insurance applications are not the easiest documents to complete. We make it easy for you by completing all of the necessary forms for you. All required forms will then be sent or e-mailed to you for your review and signature. Once we receive all completed forms back from you, everything will then be sent to the appropriate insurance company to go through the underwriting/review process. The underwriting process, which typically takes anywhere from 6-8 weeks, is a review of your application, financial documents, medical exam results, and your physician's records to determine your eligibility for the insurance plan that you have applied for.
A medical exam is required for most disability insurance companies. This process can be completed in your home or any other convenient location. The exam takes about 15-30 minutes and is conducted by a licensed paramedical or medical doctor. An exam generally involves a blood and urine specimen, blood pressure reading, height and weight measurement, a series of questions regarding your medical history (past or upcoming surgeries, treatments and any other past or current medical conditions. You will also be asked for the names and addresses of any doctors you are currently seeing or have seen in the last five to ten years) and sometimes an EKG depending on the amount of insurance you are applying for.
Below are some helpful tips for your medical exam as well as an insurance timeline so that you have an idea of how the process works.
Medical Tips (if an exam is applicable)
1. Get a good night's sleep before the exam.
2. Try to fast at least 12 hours before the exam - this will help your cholesterol and blood sugar levels.
3. Wear a short sleeve shirt.
4. Try to refrain from drinking caffeine or alcohol and engaging in any strenuous activities for at least 12 hours before the exam.
5. Have your driver's license available.
6. Have your personal doctor's information available (i.e. business address, telephone numbers, etc).
Insurance Application and Underwriting Timeline
- Application is sent to you and a Paramed exam date has been tentatively scheduled (if applicable).
- Review the application for accuracy.
- Sign and date where highlighted on the application.
Day 12 - 17
- You have completed your paramedical exam (if applicable).
- We receive your completed application in our office for processing.
- Your application package is sent to the insurance carrier for underwriting review.
- The insurance carrier is underwriting your application. They may request information from your doctor. Sometimes there is a delay in your doctor's office response time and this can add an additional week or two to the underwriting time.
- The policy is approved and sent to our office for inspection.
- The policy is sent to you.
- There may be forms to sign and premiums to be submitted. Please do not hesitate to get that information back to our office, so that you can start enjoying your disability insurance protection immediately.
When does my insurance coverage begin?
Most companies provide temporary and conditional coverage at the completion of the medical exam provided a premium payment is made when the application is mailed. This coverage is subject to the conditions outlined in the conditional receipt. If you are replacing an existing policy, it is very important to continue coverage until a new policy is approved at a satisfactory premium.
When do I make my first payment?
You may make your first premium payment with the application if you would like conditional coverage during the time your policy is being underwritten. Coverage will begin in most cases after the medical exam is completed. However, most insurance companies do not require that a premium payment be made at the time of application. Your first premium payment may be made when your policy is delivered. In that case, coverage begins when the policy is accepted and you pay your first premium.
What determines the rating I will receive on my application?
In order to receive preferred rates, you must be in excellent overall health and lead a healthy lifestyle. Each company determines limits on weight to height, cholesterol, blood pressure, and you must not have any significant personal health issues. Family health history is also a factor used in qualifying for low preferred rates. You cannot use tobacco of any type. You must not have a history of alcohol abuse or drug use. You may not be involved in hazardous activities. All of these factors are considered together when determining your insurability.
How much disability insurance do I need?
You need enough coverage to provide you with sufficient income to live on until you are able to return to work or receive other financial resources (retirement, social security, etc.). The benefits you purchase through a disability policy is quoted as monthly income that you receive if disabled. Consider your monthly income after taxes as the base amount you would need. If you have other sources of income, that should be considered in the amount you apply for. In addition to the monthly amount, an individual needs to consider the length of time you want to collect benefits, and when you would need them to begin. Pay attention to the premium amount also. Don't buy more coverage than you can reasonably afford.