QuickTips: Disability Insurance

Understand the basics. The most important thing to understand in any disability insurance policy is how disability is defined. Some policies define disability as being unable to perform your own occupation, some define it as being unable to perform any occupation you're suited for, and some define it as a combination of these two. Other policies provide income-replacement to cover a shortfall in earnings if you can't continue your regular occupation, but can do another. In any case, to make sure you have an incentive to return to work, disability policies typically limit benefits from all sources to no more than 70% to 80% of your income.

Get all the details. Before you buy any disability insurance, review the Outline of Coverage and ask for the insurance company's financial ratings from independent sources including A.M. Best, Standard & Poor’s, and Moody's. Then read the policy itself, not just the promotional materials. In addition to how disability is defined, how much benefits are, and how long they’re paid, here are some key considerations:

• How long after you’re disabled do benefits begin? Waiting periods typically range from the 31st day to six months after the onset of a disability.

• Is partial disability covered in addition to total disability, and under what circumstances?

• Does the policy pay residual benefits, or partial payments, to help make up the difference in your income if you’re able to work, but unable to fulfill all your job responsibilities?

• Are full benefits paid in the event of specified conditions? These so-called presumptive benefits are typically paid in the event of loss of sight, speech, hearing, or limbs.

• Are there pre-existing condition exclusions that exclude benefits for any current health problems you have?

• What are the exclusions and the caps on benefits for certain conditions?

• How is other disability coverage taken into account when calculating benefits?

Understand the renewal provisions. There are four main types of renewal provisions:

• Noncancelable provisions are the most generous, but they’re no longer widely available. Under this provision you have the right to continue a policy as long as you pay the premiums for a stated number of years, or to a stated age, and the insurance company can’t change the premiums or benefits.

• Under guaranteed renewable provisions, which are more common, insurers will automatically renew your policy with the same benefits, but can increase premiums if they’re also raising them for an entire class of policyholders.

• Under optionally renewable provisions, policies are extended at each premium due date only at the company’s option.

• Under conditionally renewable provisions, policies may be terminated at renewal time under certain conditions stated in the contract.

Make sure your coverage keeps pace with your future needs. To keep up with your rising income, check if your insurer offers a guaranteed insurability option, which allows you to buy additional coverage at specified dates, without having to submit further evidence of insurability. Also look into a cost-of-living adjustment benefit, which will increase your benefit payouts by a specified percentage after each year of disability.