People often make the mistake of shopping for an individual disability insurance policy the same way they would for a term life, or car insurance policy.
The concept seems simply enough, "If I get disabled, the insurance company should pay me." Therefore many shoppers spend time comparing quotes from different disability insurance carriers, and trying to find the lowest price.
The internet makes this task even easier when a shopper can simply search for disability insurance on Google, and request free quotes from the top ten search results.
According to statistics, 66% of the people who buy a disability insurance policy in this way will never have a problem because 66% will never become disabled for 90 days or longer before they retire.
However, 33% will become disabled before they reach the age of 65, and therefore will need to understand how the individual disability insurance policy purchased will work.
Buyer beware, not all disability insurance policies work the same way. In fact, no two policies are the same at all.
Definition of Total Disability
The first thing you need to compare is the definition of total disability. This will dictate exactly what the insurance company will pay out a total disability claim for.
While many carriers have slight variations on this definition, there are essentially three major definitions in use in the market today.
The most comprehensive is a Pure Own-Occupation definition of total disability. This definition will result in you being paid the total monthly benefit if a sickness or injury prevents you from being able to perform the material and substantial duties of your regular occupation, even if you are engaged in some other capacity.
The middle definition is a modified own-occupation or income replacement definition. The definition will begin the same way as a pure own-occupation definition does, except for the last sentence which will say so long as you are not engaged in any other occupation. This means the policy will pay you so long as you are not earning any earned income while on a claim.
The third major, and least comprehensive, is the gainful occupation definition which starts the same way as the previous two, however adds the language are unable to perform any occupation for which you are qualified by education, training, or experience. This means the insurance company could say that while you can not work in your current occupation they believe you could do something else, and therefore not pay your benefits.
As you can see, the three definitions are very different, and depending on your income and occupation, the price could be different as a result.
Residual or Partial Benefits
There are so many variations to residual or partial benefits that I could not possibly cover them all in this article.
If you take anything away from this article, make sure you understand when and how the residual or partial disability benefits pay in your individual disability insurance policy.
There are policies out there that allow professionals an unlimited recovery benefit as part of their residual benefits. This means that any fee for service professional would be paid under their residual disability rider for the entire benefit period until they financially recovered, not just until they physically recovered.
There are also policies that just pay a straight forward percentage of the monthly benefit depending on your percentage loss of income, and policies that pay a limited partial benefit.
The scope of benefits is extremely large, so make sure you understand the differences before selecting a policy on your own.
Inflation Protection
My feelings on inflation protection are mixed. It is something you always want to have if you are on an extended long term disability insurance claim, however if you only have a short term claim it is not going to help you.
If you are younger, I recommend purchasing this option every time because there is a longer period of time that inflation could affect your benefit amount while on claim.
If you are older, feel free to make your own decision. You can always buy it now, and drop it later on in life when inflation is not much of a threat to you.
I hope some of these tips help you make an educated decision when purchasing your own individual disability insurance policy.
It is not a contract where browsing by price will give you the best deal, it will only mean you bought the cheapest disability insurance policy out there.
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