Most people understand the need for auto insurance, property insurance, and even life insurance. By comparison, very few people are aware of the need for disability insurance. And of those that do, many are unfamiliar with the process of vetting policies to find the one that works best for them.
The What and Why of Disability Insurance
“Disability insurance is a type of insurance that will provide income in the event a worker is unable to perform their work and earn money due to a disability,” Investopedia explains.
Depending on your occupation and other factors, disability insurance is usually fairly inexpensive. It can cost as little as 1 percent of your annual income (and could cover as much as two-thirds of your income). That’s not bad for a little bit of peace of mind!
There are two basic types of disability insurance:
- Short-term disability insurance. This type of policy gives you a portion of your salary if you’re unable to work for a short period of time – such as three to six months.
- Long-term disability insurance. This policy kicks in for a longer period of time – typically six months or longer. (Depending on the policy, it may provide payments for up to two, five, or ten years. Some policies even pay out until the age of 65, as long as you’re still disabled.)
Regardless of the type you pursue, disability insurance is offered through a wide variety of businesses and brokers. (And each provider has an array of options to choose from.)
The best way to search for and vet insurance policies is through a platform like Breeze, which allows you to get quotes in minutes from the convenience of a web browser.
4 Factors to Consider in a Policy
With so many different disability insurance policies to choose from, it’s important that you know which elements to consider and compare. Here are a few essential ones:
Always check the financial ratings of an insurer and do a little research on their history (particularly if you’ve never heard of them). After all, an insurance policy is only as good as the provider’s ability to pay out. If they go under, they won’t be capable of holding up their end of the bargain.
Cost is obviously going to be a major determining factor in the type of policy you pursue. Depending on your specific factors and whether you’re buying individually or as part of a group coverage situation, a policy could cost anywhere from a few hundred dollars per year to thousands. Again, you have to make the decision that’s right for you and your family.
3. Elimination Period
The elimination period is one of the most important elements of any disability insurance policy. This is basically the “waiting period” between the time when you become disabled and the day you first receive a disability check.
The longer you stretch your elimination period, the lower your insurance premium will cost. When choosing your elimination period, think about how much cash you typically keep in the bank and how long you’d be able to survive without income.
Generally speaking, 90 days is a good sweet spot for an elimination period – though you may choose something shorter or longer.
4. Benefit Period
The benefit period is another important consideration. This is the amount of time the policy pays out. It could be a year, five years, or even up until retirement age. Obviously the longer the benefit period, the higher the premium.
“Coordinating your elimination period and benefit payment period should be customized based on your financial profile and the other components of the long-term disability insurance plan to protect as much of your earnings as possible, for as long as possible,” finance and retirement expert Robert Powell writes.
No decision can be made in a vacuum. You’ll have to carefully weigh all relevant factors so that you make a choice that’s reflective of your needs, budget, and larger financial situation.
Are You Insured?
It doesn’t matter if you’re the CEO of a seven-figure business, or an independent contractor with your own small clients, a disability insurance policy is a must. Find a policy that fits your needs and look for the best possible rate. Hopefully you’ll never have to use it. But if you do, it could provide critical assistance in a time of great need.