What to Look for in Disability Insurance

Article excerpt

Most people, however grudgingly, realize that they need some sort of life insurance, but many do not plan for the possibility that they will suffer a debilitating accident or illness during their working years.

What is the risk that the average individual will suffer a disability? According to one disability insurance brochure, the "probability of at least one long-term disability (90 days or longer) occurring before age 65 is: 50% for age 25; 45% for age 35; 38% for age 45; and 26% for age 55." However, according to the U.S. Public Health Service, lawyers, accountants, physicians, and dentists had a 4% incidence of a disability lasting 60 days or longer during their careers. Unfortunately, research has proven unsuccessful at obtaining any useful morbidity (sickness and accidents) statistics from various insurance companies selling disability insurance policies that would clear up this discrepancy.

How should disability insurance be viewed? As with other insurance, it depends on the extent of existing savings and the number of people dependent on the worker for support. A young professional with several children, for example, should consider disability insurance a necessity. However, an older professional who has sufficient assets to protect himself and family from a loss of income due to a disability is in less need of such a policy.

Policy Options

Disability insurance has important policy options from which the insured can select. The premium cost of the policy will depend on the policy options selected. With proper attention to rational risk management, consumers can customize their coverage to meet their particular needs.

* Benefit Period. This is the period the insurance company is obligated to pay the monthly disability benefits. Common benefit periods are five years, to age 65, and lifetime. Obviously, the longer the benefit period selected, the higher the premium.

Although the risk of a disability lasting more than five years is very low, I would not recommend that a young professional select such a short benefit period. The greater concern here should be catastrophic disability.

For most individuals, optimal coverage would be (when available) lifetime for an accident-induced disability and to age 65 for a sickness-induced disability. My rationale is that an accident-induced, life-long disability may not reduce the insured's life expectancy, while a lifelong disability caused by sickness probably will.

However, there is at least one situation in which a five-year benefit period may make sense: If you are fortunate enough to be a child of wealthy parents and stand to inherit a substantial sum, say, more than $1 million, in the not too distant future. A five-year benefit period may be rational in this situation, because the chances of a disability lasting longer than five years is very remote, but if it did the large inheritance in the future would provide a secure asset base.

* Waiting Period. This is the period between commencement of the disability and payment of monthly benefits. The longer the waiting period, the lower the premium. Waiting periods run from 30 days to one year.

For most young professionals, a 90-day period is a good compromise between getting benefits earlier and having lower premiums. For young professionals with several young children, a spouse who works only in the home, and perhaps outstanding college loans, a 30-day waiting period may be more appropriate. But this short waiting period should be increased as soon as the family is able financially to handle the longer waiting period.

As professionals progress in their careers, they should reassess disability-income insurance needs. If significant assets have been accumulated allowing for a good deal more disability income self-insurance than was possible when they were young, professionals should probably reconsider their waiting period. …