Policy Decisions

HAVE YOU PROTECTED your paycheck? As I discussed in my article last week, becoming disabled is a serious financial risk—and typically the best way to get coverage is through your employer. What if you don’t have long-term disability insurance through work or if coverage isn’t sufficient? An individual long-term disability policy can fill the gap.

Disability insurance is one of the more complicated products to price, because insurers need to assess two dimensions of risk. First, how likely are you to become disabled? Second, if you became disabled, how much would the claim cost the insurer?

To assess these factors, insurers need to review information about your health, occupation and income. This results in an application process that usually takes at least four weeks and sometimes far longer. Because the risk of becoming disabled is relatively high, the cost of insurance can be substantial. Take a 35-year-old accountant in good health who wants to protect 60% of her $100,000 salary. She would probably pay $200 to $250 per month for coverage.

Want to get your disability policy in place as quickly and cheaply as possible? I run a website that sells insurance, including disability policies. Before folks even apply for coverage, I recommend they take these three steps:

Step No. 1: Decide how much coverage you need.

If you have a clear idea of what you need, you’ll be able to make quicker decisions and are less likely to be swayed into buying too much coverage. To determine your coverage needs, start by adding up the critical expenses that your income covers, such as rent, food, utilities and childcare. From that sum, subtract income that would continue coming in, even if you stopped working. That might include investment or rental income, as well as payments from any other disability insurance. Adjust these amounts for the taxes that would be owed.

That’ll tell the gap you want to fill with an individual disability policy. For example, if you have $5,000 of critical monthly expenses and $1,500 of after-tax passive income, you’d want to target a disability policy that pays you $3,500 after-tax.

Step No. 2: Make sure you’re a good candidate for coverage.

Insurers will want to see at least two years of consistent employment or business income, as well as a current fulltime occupation where you work at least 30 hours per week. Health is also an important factor in determining eligibility. If you’ve had a history of health problems that have prevented you from working, it could be difficult to get coverage.

If you don’t meet all these criteria, it doesn’t necessarily mean you can’t get coverage. But it’ll likely take longer and you’ll have to consider a wider range of insurers. Also, your coverage options could be limited.

Step No. 3: Get a few quotes and decide on a policy you can afford.

Assuming you’ve made it through the first two steps, next you’ll want to get some quotes, so you can get a sense for affordability. The key policy choices that will drive pricing are:

• Benefit amount. This is the monthly sum you’d receive if you became disabled.
• Benefit term. How long will benefits be paid if you became disabled? Available terms are two, five and 10 years or, alternatively, until age 65 or 67.
• Waiting period. How long must you be disabled before you can start receiving benefits? Available “elimination periods” are 30, 90, 180 and 365 days.
• Definition of disability. If you have highly specialized skills, such as working as a doctor, an “own occupation” definition gives you more protection and should be selected, if possible. That means the insurer can’t turn down your claim by arguing that, even if your disability prevents you from working as a doctor, you could do some other job. Meanwhile, if you’re more of a generalist—let’s say you’re an office manager or a salesperson—an “any occupation” definition might be a better fit and it’ll save you money.
• Partial disability benefits. This feature allows you to go back to work part-time and still receive a portion of your disability benefits to cover lost income. If you can afford it, get a policy that includes this feature.

My advice: Start by getting quotes for a policy with benefits until age 65, a 90-day waiting period, an “own occupation” disability definition and partial disability benefits. This is a very strong policy and as much as you likely need. If the quotes come back higher than you can afford, you can adjust some of the benefits down, based on your personal preferences.

For example, you might be comfortable with just 10 years of benefits or a 180-day waiting period. Another common money saver is to have a disability definition that’s “own occupation” for two years, but then switches to “any occupation” after that. Always purchase a “non-cancelable” policy. This means the insurer can never increase your rates or cancel your policy so long as you’re paying the premiums.

Besides the above, there are a few other features you could add on. You might pay extra for the option to increase the policy’s coverage at a future date. You might also opt for catastrophic disability benefits, where the policy pays more if you’re so severely disabled that you need help with things like bathing and dressing. But these are secondary features and should be considered only once you’ve decided on the base policy benefits.

Once you’ve completed the above three steps, you’ll be ready to apply. The application process is similar to life insurance. You’ll likely need to complete a health exam and submit financial documentation. Have your past two years of tax returns and recent W2s ready, so you can provide them quickly if the insurer requests them. Also, if you’re required to undergo a health exam, schedule it as quickly as possible. While the exam should only be 30 minutes, it takes time to schedule and get the exam results back, so getting it done quickly will help move your application along.

Finally, make sure you’re upfront about your health history. If you’ve had health challenges in the past or are taking medications today, insurers will eventually find out. Better to share the information upfront, so you don’t end up being declined months down the road.

Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for income annuities, long-term-care insurance and other insurance products. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles were Works If You Can’t and Bet Your Life. Dennis can be reached via LinkedIn or at dennis@saturdayinsurance.com.

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