What to look for in a disability insurance policy
The COVID-19 pandemic has shown how unforeseen events can affect well-being and financial stability. You may have friends or family members who have been physically and financially affected by the coronavirus. Or you may have been personally affected. Although no one has a crystal ball to predict the future, there are ways to protect yourself and your family against the unexpected.
Chances are you’ve thought about how life insurance could protect your family in the event of an unexpected death. But have you thought about what would happen if an illness or injury prevented you from earning your usual income? How would you and your family pay your monthly bills and maintain your lifestyle?
You may think that you are covered by disability income protection benefits offered by many employers, such as group insurance for short-term and long-term disability. Short-term disability usually pays benefits for a few months if you’re unable to work, and when that runs out, long-term disability benefits kick in. What you might not know, though is that long-term disability insurance typically only pays 40% to 60% of an employee’s base salary up to a specified maximum.
What is income protection insurance?
Income protection insurance, also known as individual disability insurance, pays benefits on top of long-term disability, which will cover more of your income. Some individual disability insurance policies even cover bonuses, commissions, or other incentive compensation not covered by long-term disability insurance. By adding income protection insurance, you’ll receive more benefits so you can continue to pay your bills and maintain your lifestyle well into the future.
The monthly benefit amount you receive is based on your income at the time of policy purchase and will begin to be paid after you reach a benefit waiting period. Benefits will be paid until you recover or the maximum benefit period is reached, whichever comes first.
When you apply, you will choose the waiting period and maximum benefit period that are right for you. For example, if you have significant savings, you may feel comfortable choosing a longer waiting period to reduce the cost of your policy. Although all income protection policies should have these options, not all policies are the same. So be sure to look for these key features to ensure you’re protected when you need it most:
Coverage that increases with your income
You will want buy a policy that will allow you to increase your coverage as you earn more money. If you were to purchase a policy today, you would qualify for a specific monthly benefit that reflects your current income. But what monthly benefit would you expect in 10 years? For example, if you earn an annual salary of $100,000 today and receive a 4% raise each year, you will earn $148,000 in 10 years. It’s important to have the flexibility to increase your coverage to fit your future and support your lifestyle for the duration of the policy.
Benefits that keep pace with inflation
It’s also important that your benefits keep pace with inflation. As we emerge from the pandemic, the United States continues to experience high levels of inflation. In fact, the Bureau of Labor Statistics reported in March 2022 that the consumer price index rose 7.9% over the previous 12 months. In such inflationary conditions, it is important that benefits keep pace with rising costs. Look for an income protection policy with a rider that will adjust benefits each year to match the Consumer Price Index.
Paid coverage when you can work but not at full capacity
Having a Residual Disability Rider will help fill the void if you are disabled but can still work, but not at full capacity. Some residual riders pay half of your monthly benefit up to a certain period, such as a year. Others pay proportionally to your loss of income. And some will pay a benefit if you return to full-time work, but your income still lags due to your disability.
Coverage that pays more if you’re severely disabled
If you become catastrophically affected by a disability – losing your sight or hearing or two or more limbs, for example – a catastrophic disability rider will pay an additional benefit on top of your monthly benefit. This could help your family pay for additional care you may need, such as a home health aide.
Coverage that pays when you’re caring for a loved one
Imagine if your spouse or child fell seriously ill and you had to choose between working full time or staying home to help care for your loved one. Consider a policy with a Family Care Benefit that will pay benefits if you take time off work – and lose income – to care for a family member, such as a spouse, parent or child. Adding a family allowance can also protect you, even if you are not the one who is sick.
How much does income insurance cost?
Income protection insurance is not expensive. It typically costs 1% to 2% of your salary, and premiums can be adjusted by choosing shorter or longer waiting periods or maximum benefit periods. And unlike benefits provided by your employer, an income protection insurance policy will belong entirely to you. You can change jobs and keep your policy and as long as you pay your premiums you will be covered until the termination date, which is usually retirement age.
In these uncertain times, protecting against the unexpected is essential. With income protection insurance, you can be sure that you and your family will have a stable income, even if you are unable to work due to illness or injury. Talk to your financial advisor about income protection insurance to find the best policy that meets the needs of your lifestyle and budget. You’ll be glad you did.
Vice President, Individual Disability Insurance and Business Transformation Office
Jeremy Horner, Vice President, leads The Standard’s Individual Disability Division and Business Transformation Office. Horner joined The Standard in 2009. He has held various management positions in the Corporate Financial Services division for its first nine years, and all aspects of the IDI business since March 2018. Horner is a Chartered Accountant and has a bachelor’s degree in accounting and a master’s degree in accounting from Brigham Young University.