What is it?

If you don’t have disability income insurance because you can’t afford the premiums, you should know that there are several strategies you can use to make disability coverage more affordable. These strategies include eliminating coverage you don’t need, buying less than maximum coverage, and assuming more of the risk of funding your own disability. In general, you should follow two rules: (1) buy the best quality coverage you can afford, and (2) don’t pay for what you don’t need.

Example(s): When Ken’s first child was born, he decided that it was time to buy disability insurance to protect the income needs of his growing family. He asked his insurance agent to quote him a price on a noncancelable policy that would pay him a $3,000 monthly benefit. The policy’s elimination period was 60 days, and he could expect to receive benefits until he was age 65. To the base policy, Ken added a cost-of-living rider, a future benefits increase rider, and an automatic benefits increase rider. However, Ken was shocked when he saw how much he had to pay for such a policy. So, he settled on a policy that covered less than he wanted but was adequate for his needs: a guaranteed renewable policy that would pay him a $2,000 monthly benefit after a 90-day elimination period with no additional riders.

Ten ways to lower the cost of disability insurance

Choose a longer elimination period

Choosing a longer elimination period used to be one of the easiest ways to lower your disability insurance period because premium cost is largely affected by the length of the elimination period . However, it is becoming more difficult for most people to use this strategy because some companies are doing away with short elimination (30-day) periods or offering them only to low-risk individuals. Some companies offer 60-day elimination periods, but currently the most common elimination period is 90 days. Thus, this strategy may primarily benefit people who are able to extend the elimination period to 180 days.

Example(s): Dick decided to buy disability insurance with a 90-day waiting period. He wanted to lower his premium cost, so he considered extending his elimination period to 180 days. He balanced the benefits and the risks involved in doing this. First, Dick needed to save money. Second, if he ever became disabled, he would have to find a way to support himself for at least six months until his disability benefits began. He realized that he would potentially lose $3,000 in benefits (his benefit was $1,000 per month) by extending his elimination period from 90 to 180 days. However, since he couldn’t afford the disability premium otherwise, he opted to extend his elimination period.

Caution: Don’t opt for an elimination period longer than the period you could afford to support yourself after you become disabled.

Choose a shorter benefit period

You will save a significant amount of money by reducing the length of your disability benefit period . The general rule you should follow is to buy as long a benefit period as you can afford. However, it’s also true that many disabilities don’t last more than four years, and some estimates say only 24 months. So, buying a disability policy with a five-year benefit period may make sense if you can’t afford to buy a policy with benefits that last until age 65 or for a lifetime. If you reduce your benefit period from age 65 to five years, you might save 30 percent or more of the premium cost. You should also determine whether buying an individual short-term policy makes sense. If you are already covered by a short-term policy at work, for instance, you might need long-term coverage , so reducing your benefit period from age 65 wouldn’t make much sense.

Buy less than the maximum coverage you are offered

Your insurance company will determine the maximum amount of insurance you can buy. This figure will not equal 100 percent of your salary, but most insurers will aim to replace 50 percent to 70 percent of your gross earnings (your earnings before taxes and deductions). However, if you think you can survive on less income after you become disabled, you can elect to receive a lower monthly benefit than the maximum allowable. This, in turn, will reduce your premium. One way to figure out what you can afford is to analyze your need for disability income, then compare the cost of the least amount of coverage you will need to the cost of the maximum coverage you can buy. Then, find out how much it would cost to buy a policy with a benefit somewhere in between the two extremes.

Example(s): Sue earns $3,000 a month and takes home $2,400 after taxes and deductions. Her insurance agent tells her that she can purchase a disability insurance policy that will pay her a monthly benefit equal to 60 percent of her gross earnings, or $1,800 a month. This is the equivalent of 75 percent of her take-home pay. However, Sue decides that she really could afford to live on less, and she opts for a $1,200 monthly benefit instead. Lowering her monthly benefit lowers her premium.

Eliminate riders

You will save quite a bit of money if you buy a good-quality base policy and add only a few riders on to it. Some of the most expensive riders include the return of premium rider (which can double the cost of your policy) and the cost-of-living rider (which can add 40 percent to your premium). If you need more than a bare-bones policy, don’t eliminate riders altogether, but be careful to choose only the riders you really need and can afford.

Example(s): Ken wanted to buy a disability insurance policy. After reviewing some policies and options with his insurance agent, he decided to buy a good-quality base policy and added on four riders that would provide comprehensive protection. However, after his agent told him that his premiums would be $350 a month, Ken decided to drop three of the riders and was able to cut his monthly premium in half.

Choose a step-rate plan

A step-rate plan is a plan whose premium is initially low, then increases after a certain period of time, afterwards remaining level. If you purchase a step-rate policy, you’ll likely get high-quality coverage at a low initial premium. However, if you keep the policy long enough, you’ll end up paying a higher premium than you would pay for a level policy. Step-rate plans can be purchased as individual disability policies or through group associations. Another similar option is to purchase a disability plan that works like term insurance. Premiums are gradually increased yearly and increase more rapidly the older you get.

Example(s): When he was 30, Fred bought a term disability insurance policy through the Florida Gator Trappers Association. His premium was $100 a month, guaranteed until he reached age 35. At age 35, his premium cost increased to $150 a month.

Buy a policy that offers special rates to preferred risks

You may be able to save money on disability insurance by purchasing a plan from a company that offers lower-than-standard rates to individuals who are at especially low risk for disability. This rating class (called preferred or preferred select) most commonly consists of nonsmokers, although individuals in excellent health may also be offered preferred rates.

Tips: If you smoke, however, be aware that instead of offering preferred rates to nonsmokers, many companies simply increase substantially the premiums smokers pay.

Buy disability insurance through a group

One quick way to save money on disability premiums is to buy group disability insurance. Although you may receive fewer, less-flexible benefits, group insurance is cheaper than individual insurance. One major drawback to this type of insurance is that if you leave the group (by quitting your job, for example), you can’t keep the insurance policy in force. However, if this is the only type of disability coverage you can afford, or if you already have health problems or can’t otherwise get coverage, having group disability insurance is a lot better than having none.

Don’t buy coverage that duplicates what you already have

If you want to get the most insurance coverage for your money, consider how to integrate a new insurance policy with coverage you already have. For instance, if you already own a short-term disability policy through your employer that will begin to pay you benefits after 30 days, it might not be cost effective to buy duplicate individual coverage. Instead, it would be better to buy a long-term disability insurance policy with an elimination period that would overlap as little as possible with your short-term policy.

Example(s): Sue is covered by a short-term disability insurance policy at work that will pay her benefits starting 30 days after she becomes disabled for a period of one year. She decides, then, to buy a long-term individual disability insurance policy with an elimination period of 360 days that will pay her benefits up to age 65. Although the premium cost is higher for a long-term policy than for a short-term policy, she feels that she will actually save money if she doesn’t duplicate coverage she already owns.

Tips: The insurance company may automatically take into account what disability coverage you already have in determining the maximum amount of coverage you can be issued.

Buy a loss-of-income policy

Disability insurance based on loss of income is generally cheaper than insurance based on an occupational definition of disability. In particular, policies with own occupation definitions of disability are especially expensive and are being offered much less frequently. When you buy a loss-of-income (income replacement) policy, you are lessening the insurance company’s risk because you will receive benefits in proportion to how much income you have lost as a result of disability, which in most cases is less than 100 percent.

Shop around

Make sure that you compare the pricing of similar policies at different companies to ensure that you’re getting the best possible policy at the best possible price. You may find, for instance, that company A classifies your occupation in a lower-risk category than company B, thus lowering your premium somewhat, or that company B charges you more for certain riders than company A.

Strengths

You won’t have to do without disability protection

Although you should buy insurance that will adequately protect you against disability, sometimes it comes down to this: Either you buy no disability insurance protection, or you buy a low-cost policy. Any coverage you buy is generally better than no coverage.

Tradeoffs

You may end up with a policy that doesn’t adequately meet your needs

One of the real dangers in trying to reduce the cost of disability insurance is that you might end up with a less-than-perfect policy. Is it worth risking the quality of coverage to save a few dollars or even a few hundred dollars? That depends. In many cases, it’s true that the less you pay for disability insurance, the less coverage you will get. But it’s also true that you simply may not be able to afford the best policy money can buy. In addition, you may not need the most comprehensive coverage available. When you’re shopping for disability insurance, decide what coverage you absolutely need. Then, decide what coverage you can live without. Don’t compromise on the essentials, but don’t pay for the extras.

Questions & Answers

Is it worth sacrificing guaranteed premiums to save money by opting for a guaranteed renewable provision rather than a noncancelable provision in your disability policy?

Opting for the guaranteed renewable provision may save you as much as 30 percent of your premium cost. In addition, electing this provision may not increase your risk as much as you might think. Although the insurance company can raise your premiums, they can’t do it on an individual basis, and they must have the permission of your state’s insurance department. So, most insurers don’t raise premiums frequently, sometimes only once every few years.

Should you buy a policy that covers only accidental injuries if the premium is cheaper than one that covers disabilities due both to accidental injuries and sickness?

Probably not. If you’re buying a policy that covers only accidents, you’re buying very limited disability coverage. Disabilities can happen anywhere, at any time, and for any reason. As you get older, you’re more likely to suffer a disabling illness than get hurt in an accident. You may be taking on too much risk if you buy a policy that excludes sickness.