Disability Income Insurance Provisions and Costs

**Selecting a Disability Income Insurance Plan**

You've decided to obtain disability income insurance and have done your homework to learn about the features of different plans. Double-check your knowledge to help you select the plan that’s right for you by answering the following questions:

1. **Job Preference:**
- You love your job and if you become disabled, you don’t want to do any other job. Yet, you'll need an income. Even though it will cost you more, you will buy a policy with a definition of disability that aligns with this preference.
- The cost is more because the insurer has flexibility when determining if you’re eligible for benefits.

2. **Income Coverage:**
- When you shopped for a disability income insurance plan, the likelihood of finding a plan that would pay 95% of your gross income was low.
- You found that the usual range of gross pay covered with disability income insurance is around 60-70%. These percentages are set because they discourage some people from relying solely on disability benefits instead of returning to work. Limiting the amount of disability benefits to these percentages usually covers necessities adequately and motivates people to recover and return to their full income level.

3. **Benefit Duration:**
- How long should you receive benefits? Upon retirement at 65, you expect to collect a pension, Social Security, and draw on your IRA.
- Your best friend works as a consultant, doesn’t report income, and has a small IRA. You will most likely buy a disability income insurance policy that covers you until retirement. You suggest that your friend purchase a policy that provides coverage throughout his working life.
- Your choice and suggestion are based on the fact that disability income insurance provides funds when income is lost due to illness or injury. If you become disabled after you retire, you won’t lose your pension, Social Security, or IRA income. If your friend becomes disabled, the small IRA may not be sufficient to provide for basic necessities. Additional income may be necessary to pay the simplest expenses.

4. **Probationary and Waiting Periods:**
- Disability policies include probationary and waiting periods.
- You plan to take a vacation to go helicopter skiing and will be sure to purchase your disability income insurance policy before the trip. You should also make sure to take your vacation after the policy’s probationary period expires, because if you get hurt during that time, you will not be covered.
- You’ve had a disability income insurance policy for many years. You have an emergency savings account that would support you for three months. If you lose income due to injury or illness, you plan to use these funds until the 90-day waiting period expires, after which you will begin receiving benefits from your disability income insurance policy.
- Probationary and waiting periods are similar in that they help keep costs down, but they also differ. Benefit payments—both current and future—are prohibited for injuries or illnesses that occur during the probationary period. This period is usually around 7-30 days. Benefit payments for injuries or illnesses that occur after the probationary period are made when the waiting period has elapsed.

5. **Noncancellation and Waiver of Premium Clauses:**
- A friend of yours has a great job that pays well. He plans to work all his life. His only source of income is his paycheck. He takes trips and enjoys other extras in life. Now that you know that becoming disabled can bring financial ruin, you’ll strongly recommend that your friend purchase disability income insurance. It is most important that your friend’s policy includes a noncancellation clause.
- You explain to your friend that a waiver of premium clause would relieve him of the responsibility of continuing to pay the insurance premiums when collecting benefits. But a noncancellation clause means he would always have coverage. If the insurance company canceled his policy and he became disabled, he’d lose a lot more than he would if he collected benefits and had to continue to pay premiums.

6. **Cost of Premiums for Men and Women:**
- The cost of premiums for disability income insurance with the same terms is generally higher for a woman than a man. A woman will pay approximately the same premium as a man her age for coverage with more restrictions than the man's. The reason is that statistically, women have a longer life expectancy and may file more claims.