How to Determine the Cost of Disability Insurance
Disability insurance provides protection for you and your family in the event of an unexpected accident. If an injury prevents you from returning to work and you do not have the savings or other resources to pay your bills while you recover, you may find yourself in a seriously detrimental financial situation. With the right coverage, a disability insurance policy will replace the bulk of your salary for as long as you remain out of work. Policy provisions can be customized to meet your unique needs and available budget, so understanding the basic characteristics can help you understand what features will increase or decrease your monthly premium payment.
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Examine available elimination periods. The elimination period is the length of time that must pass after you first get injured but before you begin receiving the policy's benefits. Longer elimination periods result in a less expensive policy premium, and shorter elimination periods make coverage more expensive. Typical elimination periods range from 30 days to six months.
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Carefully choose a benefit period. The benefit period is the length of time that your policy will pay you. Once you begin receiving payments after your elimination period, those payments will continue until you are no longer disabled or until you have exhausted your available benefits. Longer benefit periods result in more expensive policies, while shorter benefit periods create less expensive plans. Typical benefit periods range from six months to five years, and many insurance companies even offer a "to age 65" option, which would pay you every month until you reach the age of 65 if you are permanently disabled.
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Consider your current gross income. The benefit amount is the actual sum of money the insurance carrier will pay you once you become disabled and the elimination period ends. Benefit amounts are based entirely on your current gross wages, and every state has established maximum benefit amounts for disability income policies. The vast majority of states enacted similar legislation restricting disability benefits to a maximum of 66 percent of current wages. Larger benefit amounts will result in a higher monthly premium, while lower benefit amounts will yield a lower policy premium.
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Consider opting out of additional policy riders. Most disability insurance policies contain optional provisions, or riders, that serve to enhance the basic program and further customize coverage to meet your unique needs. The most common rider is a cost of living adjustment. This rider, when added to a policy, increases your monthly benefit amount to account for inflation and shrinking economic capabilities. If your disability lasts longer than one year, your benefit amount will increase by a certain percentage and will continue to increase every year thereafter. This rider is entirely optional, and while it appears sensible, it also may make your policy noticeably more expensive.
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