Q. Two months ago, my financial adviser almost drove me crazy trying to get me to buy a disability policy. In addition to the merits of that type of insurance, he touted the financial strength of a certain insurance company and the unique benefit structure that company offered, and said it was the only company he'd recommend from which to buy a disability policy. Last week I called him and told him I'd decided to buy disability insurance and he showed up with a quote and an application for insurance with a different company. When I asked him what happened to the previous company he was so hot on, he said he'd changed his mind, and even though the premiums were slightly higher with this new company, he thought it would be a better buy. I thought that was a lame explanation and told him I needed to give this some more thought. It's quite a bit of money, and now I'm inclined to pass on any disability insurance purchase. What do you think about this type of coverage?
Your adviser may have been tempted to recommend a different company by the offer of "producer bonuses." A company may offer monetary incentives in addition to the first year commission if a certain amount of premium is placed with them within a stated time frame. Example: Place $80,000 of premiums with one company, and the normal commission is $40,000; if a producer bonus is offered, an additional $8,000 is added. But don't let your adviser's lame answer keep you from buying disability insurance; it is important coverage.
The following statistics come from the Council for Disability Awareness' Personal Disability Quotient risk calculator: A typical healthy nonsmoking man or woman age 35 has more than a 20 percent chance of becoming disabled for three months or longer during a working career, with a 38 percent chance that the disability will last five years or longer; the average disability lasts 82 months. The council also says that less than 5 percent of disabling accidents and illnesses are work-related. The other 95 percent are not work-related, which means they are not covered by workers' compensation. How long could you afford to be without a paycheck?
If you become disabled and are unable to work, without disability insurance there isn't any income to help with the house payment/expenses, start an education fund or save for retirement. Additional expenses may be incurred if medical insurance won't cover all the cost of home care and physical therapy.
These policies are not cheap, so it pays to shop. Like all insurance, disability policies have different features to choose from, and costs vary. Some insurers are more competitive in certain areas than others. Determine what is important to you, and look for the best coverage and price. Stick with financially secure companies. You want the company to be around and able to pay benefits if needed.
You may want to work with a fee-only adviser and pay him or her to analyze and find the best policy for you. Even after the fee, he or she should be able save you money by locating a low-load disability policy for you. Another alternative is to work with an insurance broker who is able to represent several companies and show you multiple comparisons of rates and benefits.
These basics of this type of insurance may be helpful:
Look for noncancelable coverage. The insurer can't change the benefits or the price of the policy. If you can't find noncancelable coverage because of your job classification or if the premiums are too high for your budget, look for "guaranteed renewable." Premiums can change, but only if premiums increase for all policyholders in the same job classification in your state.
Ask for quotes for different benefit periods. If you can afford a policy that will pay until age 65, buy it. Don't overlook policies with benefit periods of two, three, and five years if you can't afford a longer benefit period. These are relatively inexpensive and will provide income for a time while you readjust your lifestyle.
A waiting period is the length of time between the onset of disability and the time when disability benefit payments begin. A 90- or 180-day wait can reduce your insurance premium significantly. Make sure your emergency cash reserve funds will last at least as long as the waiting period you choose.
Definition of disability is important. The more expensive policies offer lifetime "own occupation" definitions. Unless you are in a highly specialized profession with a clearly defined job, this may not be the wisest use of your insurance dollar. A policy that pays benefits if you can't work in your own occupation for the first two years and then pays only if you can't work at any job you are reasonably trained for is much less expensive.
Integration with Social Security can save you premium dollars. This lets the insurer reduce your benefit payments by the amount of Social Security benefits you receive. Other extras are available, at a cost.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.
