Buying Long Term Disability Insurance on a Budget
The time has arrived for you to take that step towards purchasing a disability insurance policy in order to protect your future earnings. You’ve done your online research, you’ve solicited quotes from online brokers, now the emails are rolling in offering various options. Immediately you notice that the average cost of coverage is somewhat unsettling. So, what options are available that will allow you to protect your income without going broke doing it? How can you buy long term disability insurance on a budget?
Luckily, there are things you can do that will lower the cost coverage and still yield an adequate level of protection.
Most consumers are surprised to learn that long term disability insurance premiums are approximately 2-5% of their annual income. It’s possible that they do not know someone that is disabled and has therefore never considered the cost of coverage.
However, once you realize that your probability of becoming disabled for 90 days or more throughout your career is relatively high and your income is the most valuable asset you have, it should become quite apparent that protecting that income is not only an option, but essential.
Limitations in positive cash flow can directly limit what you are able to purchase. However, compromise and re-prioritizing is often necessary. You will need to be cautious because compromising on long term disability insurance could make the difference in whether you receive benefits to adequately support you in the time of need. As mentioned previously, there are things you can do to lower the cost of coverage while still receiving sufficient coverage.
- Consider shortening your benefit period. The shorter the length of time that an insurance company is required to distribute payments, the greater the premium is reduced. While most insurance providers offer benefits until 65, there are some that offer a lifetime option. If you are in your upper 40’s, possibly consider a 5-10 year benefit period.
- Consider a reduced benefit amount. The Future Purchase Option offered by long-term disability allows you to increase your coverage annually as your income increases; however, you will be paying a higher premium. Additionally, the Future Increase Rider (FIO) allows you to purchase additional coverage without a further medical examination. This allows you to protect your income regardless of any possible changes in your health. Eligibility is determined by income, employment, and additional disability insurance whenever you want to increase your coverage.
- Consider a modified own-occupation policy. Even though a true own-occupation policy offers the best protection, a modified own-occupation policy is better than not considering either. A true own-occupation (own occ) provides full benefits in the event of disability regardless if you are performing a job different than your normal occupation. With a modified own-occupation policy, you may not be eligible to receive full benefits if you decide to perform a different job while disabled. If your job is not a specialized occupation, a modified occ policy will be adequate.
- Consider a Cost of Living Adjustment (COLA) rider. This long term disability insurance option helps your benefits progress even during times of inflation while involved in a claim. A COLA rider that begins increasing benefits after four years is less expensive and continues to offer long-term protection during times of inflation. Typically, these benefits increase after you have been disabled for at least 12 months.
- Finally, do not compromise on the financial strength of the insurance company providing your coverage. Know the company’s financial strength rating, provided by A.M. Best. You can adjust and compromise on the benefit period, the benefit amount, and the COLA rider, but your policy is ultimately only as strong as the company backing it financially.
Find a Way to Get Covered!
In the end, do not allow the cost for coverage to prevent you from following through with a long term disability insurance policy. As suggested above, there are multiple ways to lower your cost of coverage and still provide a substantial level of protection. It is imperative to communicate your specific needs and concerns with your insurance agent. Insurance is their expertise, and they know exactly how to provide you with the coverage and price you can live with.
Don’t make the mistake of believing Social Security Disability will save the day if you become disabled. It may or may not help you. Most people that apply are turned down on the first application and then will typically reapply using a disability lawyer. If you are fortunate enough to hire an attorney who is motivated, your application might be approved and benefits will begin in a year or two. How will that work out for you?