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 Controlling Your Cost Of Disability Insurance
Perhaps you'd like to purchase disability insurance, but feel that the premiums are too costly. If so, be aware that there are several strategies to make disability coverage more affordable. These strategies include eliminating coverage you don't need, buying less than maximum coverage, and assuming more of the risk of funding your own disability. In general, you should follow two rules:
1) buy the best quality coverage you can afford, and,
2) don't pay for what you don't need.
Ten tips for lowering your bill
Choose a longer elimination period
Your elimination period is the number of days (after you become disabled) you must wait before receiving benefits. Because premium cost is greatly affected by the length of the elimination period, choosing a longer elimination period has traditionally been one of the easiest ways to lower your disability insurance cost. However, some companies are now doing away with short elimination (30-day) periods or offering them only to low-risk individuals. The most common elimination period is now 90 days. If you have such a period, you can still benefit if you can withstand an elimination period of 180 days.
Choose a shorter benefit period
You can save a substantial amount of money by reducing the length of your disability benefit period. The general rule is to buy as long a benefit period as you can afford, but this is not always necessary. Many disabilities don't last more than four years, so buying a disability policy with a five-year benefit period may make more sense than buying a policy with benefits that last until age 65 (or for life), especially if cost is an issue. If you reduce your benefit period from age 65 to five years, you might save 30% or more of the premium cost.
If you are already covered by a short-term policy at work, however, you might need long-term coverage. In that case, purchasing a policy with a shorter benefit period would not make sense.
Buy less than the maximum coverage you are offered
Your insurance company determines the maximum amount of insurance you can buy. This figure will not equal 100 percent of your salary, but most insurers will aim to replace 50 to 70 percent of your gross earnings (your earnings before taxes and deductions). However, if you think you can survive on less income after you become disabled, you can elect to receive a lower monthly benefit. This, in turn, will reduce your premium. One way to figure out what you can afford is to analyze your need for disability income, then compare the cost of the least amount of coverage with the cost of the maximum coverage you can buy. Then find out how much it would cost to buy a policy with a benefit somewhere in between the two extremes.
Eliminate riders
A rider is a provision attached to a policy that adds benefits to or changes the original policy. You may save quite a bit of money if you buy a good quality base policy and add only a few riders to it. Some of the most expensive riders can double the cost of your policy. If you need more than a bare-bones policy, don't eliminate riders altogether, but be careful to choose only the riders you really need and can afford.
Choose a step-rate plan
A step-rate plan is one whose premium is initially low, then increases after a certain period of time and remains level. If you purchase a step-rate policy, you'll likely get high quality coverage at a low initial premium. However, if you keep the policy long enough, you'll end up paying a higher premium than you would pay for a level policy. Step-rate plans can be purchased as individual disability policies or through group associations. Another similar option is to purchase a disability plan that works like term insurance. Premiums are gradually increased yearly and increase more rapidly as you get older.
Buy a policy that offers special rates to preferred risks
You may be able to save money on disability insurance by purchasing a plan from a company that offers lower than standard rates to individuals who are at especially low risk for disability. This rating class (called preferred or preferred select) most commonly consists of nonsmokers, although individuals in excellent health may also be offered preferred rates.
Buy disability insurance through a group
One quick way to save money on disability premiums is to buy group disability insurance. Although you may receive fewer and less flexible benefits, group insurance is cheaper than individual insurance. One major drawback to this type of insurance is that if you leave the group (for example, if you quit your job), you can't keep the insurance policy in force. However, if this is the only type of disability coverage you can afford, or if you already have health problems or can't otherwise get coverage, having group disability insurance is a lot better than having none.
Don't buy coverage that duplicates what you already have
If you want to get the most insurance coverage for your money, consider how to integrate a new insurance policy with coverage you already have. For instance, if you already own an employer-sponsored short-term disability policy that would begin to pay you benefits after 30 days, it might not be cost-effective to buy duplicate individual coverage. Instead, it would be better to buy a long-term disability insurance policy with an elimination period that would overlap as little as possible with your short-term policy.
Buy a loss of income policy
Disability insurance based on loss of income is generally cheaper than insurance based on an occupational definition of disability. In particular, policies with "own occupation" definitions of disability are especially expensive and are being offered much less frequently. When you buy a loss of income (income replacement) policy, you are lessening the insurance company's risk because you receive benefits in proportion to how much income you have lost as a result of disability, which in most cases is less than 100 percent.
Shop around
Compare the pricing of similar policies at different companies to ensure that you're getting the best possible policy at the best possible price. You may find, for instance, that company A classifies your occupation in a lower-risk category than company B, thus lowering your premium somewhat, or that company B charges you more for certain riders than company A.
Are there any tradeoffs to lowering the cost of your policy?
One of the real dangers in trying to reduce the cost of disability insurance is that you might end up with a less-than-perfect policy. Is it worth risking the quality of coverage to save a few dollars or even a few hundred dollars? That depends. Perhaps you simply can't afford the best policy out there. In addition, you may not need the most comprehensive coverage available. When you're shopping for disability insurance, decide what coverage you absolutely need; then decide what coverage you can live without.
Can you get away with buying a policy that covers only accidental injuries?
Probably not. If you're buying a disability policy that covers only accidents, you're buying very limited coverage. Disabilities can happen anywhere, at any time, and for any reason. As you get older, you're more likely to suffer a disabling illness than to get hurt in an accident. You may be taking on too much risk if you buy a policy that excludes sickness.
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