7 Questions to Ask Before Buying Disability Insurance

Considering what would happen if you lost your job was a reality you, like many people, may have faced this past year due to the coronavirus.

Although the extent of the job losses this year were due to a global pandemic, job loss can be experienced at any time and for many reasons like disability.

Purchasing a disability insurance policy can help you stay financially stable if you become disabled and unable to work. If you're considering buying disability insurance to protect your income, asking the following seven questions will help you evaluate your needs and how to find a policy that meets them.

1. How does disability insurance work?
2. Do I need short-term or long-term disability insurance?
3. How much disability insurance do I need?
4. How much is disability insurance?
5. What riders are most important to me?
6. How long does disability insurance last?
7. How trustworthy is the company?

1. How does disability insurance work?

Disability insurance offers monthly payouts for a set period of time if you become disabled and are unable to work.

When you purchase a disability insurance policy, you can usually customize the monthly benefit amount, the waiting period, and the benefit period. You can also add riders to protect or enhance your policy.

The benefit amount is how much you'll receive from the insurer regularly during the benefit period. The benefit amount typically doesn't exceed 60 percent of your regular income.

The waiting period is the time you have to wait after filing a claim before the insurer will start making benefit payments. This period is sometimes referred to as the elimination or collection period. 

"Some policies allow you to collect within the next 30 days, while others can stretch it out to more than 700 days. Know which one would suit you best and get the most out of these services," advises David Meltzer, East Insurance Group CEO and insurance agent.

Waiting periods for short-term disability insurance are usually much shorter than waiting periods for long-term disability insurance.

The maximum benefit period is how long the insurer will make monthly payments after the waiting period ends.

The premium is the monthly fee you pay to have coverage. If you use post-tax dollars to pay your premium, your disability insurance benefits are not taxable. If your disability insurance policy is through your employer, you may need to pay taxes on the benefits.

Chuck Czajka, Macro Money Concepts CEO explains: "If your employer deducts the premium, your disability could be taxable to you. If you pay the premium first and then your employer bonuses you the cost of the premium, the benefit could be tax-free to you."

2. Do I need short-term or long-term disability insurance?

"When considering whether to purchase a disability policy, it is important to review your current needs versus the possibility of the future. Disability policies can range from relatively inexpensive to extremely expensive in terms of policy costs as well as the amounts of coverage; however, given the current state of the social safety net in the United States, they should be considered by anyone who has the means to access them," recommends Edward Guldi, workers' compensation and Social Security Disability attorney at The Perecman Firm, P.L.L.C.

As Guldi notes, workers' compensation and Social Security Disability benefits are part of the social safety net in the United States, and these programs often take months or years to start making payments.

Due to these delays, purchasing disability insurance can offer you more concrete peace of mind and a better safety net.

Short-term disability insurance

Short-term disability insurance generally pays benefits for a few months or up to a year. These policies usually have waiting periods of a few weeks. Policies are commonly offered by employers to employees. However, you may be able to find short-term disability insurance policies for individuals on the market. 

Before you buy a short-term disability policy, ask yourself these questions:

• How much money would I need to cover essentials if I couldn't work temporarily? Think rent, mortgage, utilities, food, gas, debt, etc. for up to three months.
• How large is my emergency fund? Seeing the amount you'd need to survive three months without income alongside your emergency fund will help you know how much you need to prioritize your savings. Keep in mind that you may also encounter medical costs, especially if income loss is due to an injury. Having more than the essentials set aside will help you maintain your financial security.
• How much are short-term disability insurance policies? If you don't have much savings set aside or want to grow your savings just in case, it may make sense to set up an automatic transfer to your savings account with the amount you'd spend on a short-term disability insurance policy.

Long-term disability insurance

Long-term disability insurance is more commonly purchased by individuals. While policies are also offered by employers, remember that the policy will expire when you leave your current employment. Depending on your job, you may be able to get a higher monthly benefit closer to your actual income than through a group policy.

Long-term disability policies can pay monthly benefits over the course of several years and have waiting periods that can be a few months.

As you consider long-term disability insurance, ask yourself these questions:

• How much money would I need to cover essentials if I were disabled and couldn't work for an extended period of time? Some injuries are long-lasting and can have permanent effects. Think about how much money you would need to cover essentials for a year.
• How long would my emergency fund last? Take stock of your savings and consider how many months you could last with just your savings. This information will help you determine a waiting period length that will meet your needs.
• How much are long-term disability insurance premiums? Make sure that rates are affordable and consider adjustments or riders that can help them fit your budget better.

As you're evaluating long-term disability insurance policies, don't focus on the premium costs. While the premiums should fit your budget, you also need to pay attention to policy terms and coverage offered.

Guldi recommends noting when the benefit period ends and whether or not there are benefit payment reductions over time.

"Additionally, most plans have some sort of offset built into the policy either for worker’s compensation, social security or other sources of income. When shopping for a policy, it is important to look at all of the terms of the policy many times it is not a simple comparison the policy that costs $150 a week and pays $45,000 a year may be loaded with offsets that the policy which costs $225 a week and pays $45,000 a year does not have. Make sure to read and understand all of the terms before picking your policy," he concludes.

3. How much disability insurance do I need?

In most cases, you'll be capped at 60 percent of your current income. Some exceptions to the 60 percent cap are available for some jobs including doctors. You may be able to get a lower premium if you opt for a lower benefit amount, but you'll receive a lower benefit when you make a claim.

As you decide how much disability insurance to buy, keep your financial needs in mind.

4. How much is disability insurance?

Monthly premiums for disability insurance vary based on how you customize your policy.

Generally speaking, higher benefit amounts, shorter waiting periods, longer benefit periods, and adding riders increase your monthly premium. The reverse generally decreases the monthly premium.

5. What riders are most important to me?

You can add riders to your disability insurance policy to add value and protect your policy. A few examples of riders are:

• Cost Of Living Adjustment (COLA) — adjusts your benefit amount automatically to account for inflation.
• Future purchase option — allows you to buy additional coverage later if your income changes.
• Noncancellable — prevents the insurer from cancelling your policy or changing benefit or premium levels. It can be a rider or included in a policy.
• Own occupation definition — defines disability as your own occupation so you'd receive a payout if you can't do your own occupation but could find work in another field.
• Residual disability — pays partial benefits if you are partially disabled and can't work a full schedule.

Justin Nabity, CFP®, CLU®, ChFC® and Physicians Thrive founder highlights the importance of coverage for partial disability:

"Statistically, you are more likely to become partially disabled than totally disabled. If a disability policy did not include the right clauses for residual benefits, you could go through a period during which your income is collapsing, while still needing to make payments and receiving no payout from the insurance company."

Rider offerings can vary by insurer, so check to see what's available. If there's a specific disability insurance rider you're interested in, you'll want to find an insurer that offers it.

6. How long does disability insurance last?

Unlike term life insurance policies that expire after a set period of time, your disability insurance coverage remains intact as long as you make the premium payments and the insurer does not cancel your policy.

As far as disability benefits go, you'll receive benefits through the maximum benefit period or until you return to work if you file a claim and start receiving benefits. Check your policy's terms to learn more about the specifics.

7. How trustworthy is the company?

With all insurance companies, check the financial strength ratings. These ratings indicate how financially stable and reliable the insurer is. High ratings are a good indicator that the insurer will be able to meet its claims obligations. Avoid companies with low financial strength ratings.

You'll also want to look into the company's track record of paying claims. Danielle Barak, CLTC, Northwestern Mutual financial advisor recommends looking at a comparison report:

"Prior to purchasing a policy, people should look for the company's integrity. Since disability insurance is not black or white, it’s important to understand the insurance companies' claims process and how often they pay out their claims. I suggest that my clients review a company comparison report. How challenging it is to get insured and how many claims the insurance company pays out, says a lot about the company. Disability insurance is an important policy to research and work with a financial advisor on, to make sure that one understands the ins and outs that are covered."

Considering and comparing multiple insurers and policies can help you find a policy that meets your coverage and budget needs. Working with an independent advisor can help you find the best fit.

"People should be looking for an experienced and knowledgeable team that is independent (not someone who only works for one insurance company) to work with them to find the options best suited for their unique situation," suggests James Jaderborg, CLU, ChFC®, North Star Consultants & North Star Resource Group associate partner financial consultant and wealth manager.

Customer reviews are also helpful when evaluating companies. They can give you insight on the customer experience, which can further help you find a good disability insurance company to work with — whether you work with an insurer, agency, or insurtech company.

Finding a trustworthy insurer will help you have peace of mind when purchasing disability insurance. Looking at financial strength ratings, comparison reports, customer reviews, and getting help from professionals will help you find a good company and policy that meets your needs.