Sunday, November 12, 2006

Thoughts on buying personal disability insurance

I've had fairly good experiences with Standard, AXA MONY, and Berkshire for disability insurance.

We actually had a claim with MONY (now owned by AXA) and it was handled very well.

I don't have a large enough base to compare other carriers, but here are a list of shopping principals you should consider:

1. Try to get own occupation disability coverage - this means if you're a brain surgeon and can't be a brain surgeon, you'll receive disability payments, even if you could be something else - like a janitor.
2. Try to purchase inflation indexing or some type of annual increase in coverage. Don't let inflation erode your coverage. This may sometimes be called a COLA (cost of living adjustment).
3. Rates (premiums) will only go up as you age - don't buy the argument that you can always buy more in the future - what happens if a medical condition eliminates your future insurability.
4. See if your policy has a buy up option where you can add more coverage without requiring medical underwriting.
5. Be careful which companies you're dealing with. Make sure they are financially stable.
6. Don't let expensive prices be used as a proxy for stability. Policies can be expensive, but the company can still mismanage their finances and operations. Northwestern Mutual reps have justified their higher premiums (in my case) by saying it increased stability - while a good company - it's simply not true.
7. Buy your individual policy before you have group coverage at work. You generally can't get an individual policy if you have group coverage - or the individual policy might provide lower levels of coverage.
8. Most disability policies are sold by life insurance sales men. These are the same men that would try to sell you whole life insurance, expensive annuities, variable annuities, etc.... Find out what your agent sells - if he's also interested in selling you whole life or annuities - run (at least if you're under 40).
9. Make sure you can pay for disability insurance using post tax dollars - this way the benefits are tax free. If you're in an upper income tax bracket, there will be less lost income when you compare disability benefits to post tax earnings.
10. Self-insure the first 90 or 180 days, if you can. A disability policy will be cheaper if you can handle a longer eliminiation period - which is the number of days you must be disabled before the policy kicks in.
11. The more clearly and factually you can prove your income, the more disability coverage you will get - if you receive a large bonus each quarter - make sure you have documented proof you've received it the last few years.
12. The underwriters may need a letter verifying your income and planned income from your employer - possibly even a contract, pay stubs, etc....
13. Whatever you do, do NOT lie. If a lie can be proven, your premium payments were wasted.
14. If you are a female, try to buy disability insurance with another person - preferably a male. If you have a savvy agent he will combine you into a group and you will receive lower - gender nuetral rates. The male may see a slight increase.
15. Stay healthy - it may have a positive impact on underwriting.
16. In general, if you can form a small group with 1 or more people, you may see discounts of up to 25%. You'll be paying these premiums until your 65... the discount is worth it!

And now for a strategic question:

If you have disability insurance, does it make sense to have long term care insurance as well?

I'll try to write a post on this topic tomorrow.



BAD said...

Thank you makingourway! Lots of great info there to consider :)

- Tricia

FIRE Finance said...

Thanks for this informative post. We have listed you as one of our favorites from the Carnival of Personal Finance #74. Keep up the good work.

Anonymous said...

I'm lucky to have short term and long term disability through my job.

But I do also recommend AXA, it's the best one yet.