- Disability insurance can be complicated, but there are three main points I always review with my clients when advising them on a policy.
- First, it's important to understand the difference between any-occupation and own-occupation policies. Own-occupation policies provide broader coverage.
- Next, be sure you choose an appropriate elimination period — i.e. the amount of waiting time before your benefits kick in — and understand that the underwriting process takes time.
- Policygenius can help you compare disability insurance policies to find the right coverage for you, at the right price »
For those in their working years, I believe that disability insurance is an essential part of protecting your most important asset: your ability to earn income. In the event that you become disabled in some way (sickness, injury, etc.) and lose the capacity to work, a disability insurance policy provides benefits to the insured.
While disability insurance can be complicated and specific, there are three main points I always review when advising clients.
Understand the type of policy you're purchasing
Depending on the insurance carrier providing the coverage, there are different variations/interpretations of policy types, but they basically break down into two categories: any-occupation and own-occupation. These definitions determine whether or not the insured will receive benefits in the event of a disability.
Any-occupation policies cover a policyholder who is unable to work in employment that is in line with the person's education and experience.
Own-occupation policies provide coverage when an individual cannot fulfill responsibilities of their specific occupation, even if they still have the ability to work in another occupation.
Clearly, own-occupation policies better protect income, but that means higher premiums paid by the insured.
Let's take a look at an example to provide clarity about the difference between these types of policies. Barbara has been a surgeon for five years. On her way from the hospital one evening, she unfortunately gets into a car accident that causes damage to her right hand. The injury is so serious that working as a surgeon is currently not an option, but Barbara could still be employed as a general practitioner.
An any-occupation policy would not provide benefits in this scenario because despite her injury, she has the ability to find employment in the medical field (i.e. consistent with her education/experience).
With an own-occupation policy, Barbara would be entitled to receive the insurance benefit until her hand fully heals and she can return to working in surgery.
Note that benefits would continue even if she decided to pursue another occupation outside of the medical field temporarily, highlighting the flexibility of an own-occupation policy.
Understand the policy's elimination period
An elimination period in a disability insurance policy is the amount of waiting time required before you can receive your benefits.
Take our previous example, Barbara. If her policy has a 90-day elimination period, that means she'd have to wait 90 days from the car accident to receive the policy's benefit.
Insurance carriers offer different elimination periods for a policyholder to choose from. Each company has their specific offering, but in my experience, I have seen the following range of options: 30, 60, 90, 180, or 360 days. It is important to note that choosing a shorter elimination period results in higher premiums paid by the insured, and vice versa.
Striking a balance between obtaining appropriate coverage and keeping premiums affordable depends on each individual's specific financial situation. One question that someone can ask themselves when making an elimination period choice is, "In the event of a disability, do I have enough cash reserves available to last me through the extent of the elimination period?"
Understand the underwriting process
The underwriting process for obtaining disability insurance is definitely the item that is most complex and specific to each individual insurance carrier. Each company has their own way of assessing disability risk, and certain companies will be willing to insure higher-risk policyholders, while some will not.
Yes, it is good for someone to pursue getting disability insurance with a strategy in mind, but all final details (e.g. benefit period/amount, rate class, premium amount) are subject to the insurance carrier's full underwriting process.
Some items that a company will request from an individual applying for disability insurance are: medical history (including an exam), and income documentation.
By reviewing an applicant's health, companies are evaluating the risk of a disability occurring (and probability of recovering if they were to become disabled). Earnings are verified because the maximum coverage offered by an insurance carrier is generally around 60% of monthly income. This percentage provided is not higher (i.e. closer to 100%) to ensure that those who are receiving these insurance benefits still have an incentive to return to work (meaning the carrier no longer has to pay the claim).
There is a high level of due diligence, so this process can sometimes take longer than expected, for example, if additional medical records are requested from an applicant's physician. To provide quality coverage to policyholders, these insurance carriers have to stay compliant with their underwriting guidelines.
Martin A. Scott, CFP, is the founder and financial planner of Lasting Wealth Principles, a fee-only comprehensive financial planning firm.