What is replacing or conserving disability insurance policies?
Any time you need to change or update your disability insurance coverage, you have to decide among three alternatives. Should you conserve (keep) the policy you have, making as many changes as you are allowed to under the terms of your contract? Should you completely replace an existing policy with a new disability insurance policy? Or, should you buy an additional disability policy that will supplement, rather than replace, existing disability coverage?
Determine what coverage you already have and coverage alternatives
Don’t rush into changing, replacing, or supplementing an existing disability income insurance policy without reviewing the coverage you already have. It’s a good idea to sit down with your insurance agent or financial advisor to look over your policy and to talk about your current and future insurance needs. You may be able to make limited changes to your insurance policy with little trouble. On the other hand, if you want to make a major change to your coverage, such as increasing your monthly benefit substantially, or if you are changing occupations, you may find that you’ll have to go through the underwriting process again.
Example(s): Nina was promoted from Assistant Widget Buyer to Vice President in Charge of Buying Widgets at the department store where she worked. She also received a 25 percent pay increase. When she contacted her insurance agent about purchasing additional disability income coverage, she learned that she didn’t need a new disability policy; her current policy benefit could be increased $1,000 per month with no additional medical underwriting required. Nina filled out a short application, and her request was processed right away.
Consider the consequences
Consider carefully the consequences of conserving or replacing a disability insurance policy. For instance, it’s often not wise to replace an existing disability policy. Remember, if you buy a new policy, you’ll have to go through the underwriting process all over again if it’s been several months since you went through underwriting for another policy. If you’ve suffered a disability, changed professions, or make less money, you may not be able to buy new disability coverage. On the other hand, if you decide to conserve a less-than-adequate policy, you might be sorry later when you suffer a disability and don’t have adequate coverage.
When will you need to change or update your disability insurance policy?
The following is a list of some common events that might trigger a change or update of your current disability coverage:
Your earnings increase or decrease
Your disability insurance benefit is based on your pretax earnings at the time you purchased the policy. You may need to buy additional coverage if your income goes up or elect a lower benefit if your income goes down. It’s possible you purchased a guaranteed insurability rider or a future benefits increase rider with your original policy that will allow you to periodically increase your benefits without going through medical underwriting.
Your occupation changes
You should report any job change to your insurance company, because a substantial job change may affect your insurance coverage. Your premiums may increase (if you’re switching to a more hazardous occupation) or even decrease (if you’re switching to a less hazardous occupation). Your policy may also change in other ways if you change occupations. Check with your insurance agent regarding your insurance company’s policies.
Tips: The best individual contracts have guaranteed premiums that will not change when your occupation changes, even if your new occupation is more hazardous than your old.
You need additional coverage
Perhaps you bought a less-than-adequate policy because it’s all that you could afford. Maybe you have short-term disability insurance, but you also want to be covered for long-term disability. Maybe you want an individual disability policy that will supplement existing group disability coverage you have. In this case, you may need to buy an additional policy.
It’s time to renew your policy
Some disability insurance policies, such as step-rate policies, work like term policies. The premium stays level for a few years, and then it rises at specified intervals. At the end of the term, you should review your coverage.
You get married or start a family
When you get married or start a family, you may start to look at life a little differently, particularly if you are the primary breadwinner in the family. If you became disabled, how would that affect your spouse or your children? You may decide to look at what disability insurance you have and consider buying more.
Example(s): Jim Anderson had short-term disability insurance through his employer. He considered himself to be adequately insured against disability until his children Betty, Bud, and Kitten were born. Suddenly he realized that if he were to become permanently disabled, his family would suffer because they relied completely on his income. The next day, he called his insurance agent and bought a long-term disability income insurance policy.
You’re nearing retirement
The closer you get to retirement, the less you may need disability insurance coverage. If you are only a year or two away from retirement, you may have saved up enough money to support yourself until you begin receiving a pension or Social Security.
Example(s): When Benny was 42, he bought a noncancelable disability income insurance policy that guaranteed to pay him benefits until age 65. When he was 60, Benny decided to drop his disability insurance coverage because he would be eligible to receive Social Security retirement benefits in two years. He figured that if he suffered a disability, he could rely on his savings to pay his bills. So he canceled his disability insurance policy, saving himself the $100 monthly disability insurance premium.
Caution: Consider dropping your disability income insurance carefully, even if you are close to retirement. You may need more income than you think if you become disabled because your medical costs will likely substantially increase.
When the disability product you have purchased changes
Your insurance company may occasionally notify you that the disability product you originally bought has been modified by the insurance company. Often these changes will benefit you and affect all individuals who bought the original product. You may receive a policy endorsement that tells you what contract provisions are changing. You should keep this endorsement with your original policy.
Why replace your existing disability income insurance policy?
Because you’ve lost your group or association coverage
If you lose your job, you will lose any employer-sponsored disability insurance coverage you were entitled to. If you have disability coverage through a group association, you may lose that coverage if the association withdraws its endorsement of a disability insurance contract or if you discontinue your group membership.
Example(s): When Isaac was a bartender, he purchased disability insurance coverage through the United Bartenders Association of Pittsburgh. When he decided to go back to school, he quit his job and stopped paying his Bartender Association dues. Because he was no longer affiliated with the group, he also lost his group association sponsored disability income insurance and had to replace it with a new policy.
Because you’re unhappy with your coverage
You may have purchased a disability insurance policy that you’re now dissatisfied with. Perhaps you’ve got a short-term policy through your employer (you’re paying the premiums) and you think your money would be better spent on a long-term individual disability income insurance policy.
Because you can no longer afford your premiums
If you’re paying for a policy but can no longer afford the premiums, you should consider replacing your existing disability insurance policy with a less expensive policy rather than doing without any disability insurance. There are different ways to do this. First, ask your financial advisor or insurance agent about other policies that may be more affordable. Second, consider buying group disability insurance, because it is often less expensive than individual disability insurance.
Why conserve your disability insurance policy?
Because you’ve suffered an illness or accident
Once you’ve suffered a disabling illness or accident, replacing your current policy with a new policy may not be to your advantage. You may find it difficult to buy an affordable disability policy, you may only be able to buy a restricted policy, or you may be unable to buy a policy altogether (insurance companies generally will not issue you a policy while you are disabled). Hanging on to the policy you’ve got (as long as it is noncancelable or guaranteed renewable) is your best protection against loss of income due to disability.
Example(s): Charlie hurt his back cliff diving in Acapulco and received disability benefits for a year. After he had fully recovered, he canceled his individual disability insurance policy because he started a new job and became eligible for group disability coverage through his employer. However, he was laid off from his job two years later, and his group disability insurance coverage ended. When he tried to buy a new individual disability policy, he was offered only restricted coverage at a high premium, because he was considered to be a disability risk due to his previous back injury (not to mention his risky hobby).
Because your policy adequately meets your needs.
Don’t be pressured into buying new or additional disability insurance if your existing policy already meets your needs. Provided that you are in good health and you meet the underwriting requirements, you should be able to buy disability insurance at a later date if you need to. However, do a fair and honest evaluation of your disability insurance needs to be sure that your coverage is adequate.
Because you only need to make minor changes
Sometimes, you only need to make minor changes to your disability insurance policy. You may have moved or have gotten married, so you need to change your address or your name. You may have decided that you want to raise your benefit amount slightly or change your elimination period. These are all examples of minor policy changes that can be taken care of by notifying your insurance agent and filling out and signing a change form.
Why buy an additional disability insurance policy?
Because you want to keep your existing policy but need more coverage
You may be happy with your existing disability policy, but you want a higher monthly benefit. Perhaps when you purchased your policy, you earned less money. Or, you may have elected to receive a lower monthly benefit than you were entitled to because you wanted to lower the premium cost. In either case, you may need to purchase an additional disability insurance policy. Before you do this, however, make sure that your existing policy can’t simply be increased. In addition, be aware that your insurance company will take into account any existing disability coverage you may have before issuing you a new disability policy. Your existing coverage may reduce the amount of new coverage you can buy.
Tax considerations
If you are considering buying or replacing employer-sponsored group disability coverage, you should be aware that if your employer is now or will be paying any part of the premium, all or some of your disability benefit may be taxable.
