Health coverage can't cure money woes: How to find disability insurance
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Hospitals stays are expensive. Medical insurance helps, but doesn't really cover the long-term economic consequences of getting sick or injured. A study published in February in "American Economic Review" finds hospital admissions are linked to lower probability of being employed and declines in earnings.
Disability insurance can help protect your income if you can't work due to illness or injury. But, the study notes, "Employer provision of sick pay and private disability insurance is fairly sparse, and public disability insurance is available only after a lengthy application and approval process."
Plus, people who look for long-term disability insurance can experience sticker shock when they get quotes.
The numbers show people need more income protection than they're getting if they're hospitalized. In the first three years after a hospital admission, 50- to 59-year-olds experience an earnings decline of about 19% compared to before hospitalization, according to the study, "The Economic Consequences of Hospital Admissions." Health insurance can help by covering more than 90% of the medical costs associated with a hospital admission, but health coverage still only reduces earnings declines by less than 10%.
"In other words, for those who have it, insurance for medical expenses is fairly comprehensive, while insurance for income declines is substantially less complete," the study said.
So how can you get disability insurance without going broke? After all, the point of disability insurance is to keep you afloat when you can't work for a paycheck. We asked Tyler End, Certified Financial Planner and general manager of disability product for Policygenius, for advice on getting affordable disability insurance.
Many agents only show you options from one or two carriers, End said. Make sure you talk to someone who is familiar with a variety of products.
Consider how much income you'll actually need if you can't work. You don't always have to pay for the maximum benefit amount. Tally your fixed costs and factor in any income your spouse makes, End said.
"But don't neglect retirement savings you would lose out on if not working," he said.
Many people pick policies that pay out until age 65. That makes sense if you're early in your career. But the average time people are out of work from injury or illness is about three years, End said.
Because of that, buying a five- or ten-year plan makes sense, especially if you're later in your career. In addition, a catastrophic disability lasting more than five years may qualify you for Social Security Disability Insurance.
The elimination period is how long you have to wait before the insurer pays out benefits. Lengthening that period is an easy way to reduce your costs, End said.
A 90-day elimination period (the length of time after a claim before an insurance company pays benefits) is most common, but extending it to 180 days can lower your premium. Just be sure your emergency fund can cover your expenses during this time.
Everyone should have own occupation coverage, which pays a benefit if you can't work in your own field, but there are two kinds, End said. Own occupation not working means your benefit goes down if you start working in another occupation. True own occupation pays a benefit even if you are working in another occupation.
"Most people prefer the stronger true own occupation coverage, but if you need to save money, own occupation not working is a great option," End said.
Many agents sell cost-of-living adjustment riders, which increase benefits along with inflation during a claim. But since most claims average three years, the benefit isn't that high. Better to save the extra money in an emergency fund, End said. You may instead want to buy a future increase option that allows you to increase coverage as your income rises.
Most individual policies are guaranteed renewable, so the insurance company can't cancel them as long as you pay the premiums, End said. A non-cancelable rider keeps an insurer from changing the premiums, but there's little risk of that. It's very difficult for insurance companies to change premiums. They have to prove to state insurance commissions that they're losing money on an entire occupation class in their state, End said.
"Especially if you are later in your career, the risk of a price change is low and it's better to save the premium dollars," he said.
The most important thing to remember when buying disability insurance is: Some coverage is better than none. Illness and injury can wreck your finances, and any buffer helps.
Image: Evgenij Yulkin
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