What is transferring risk to an insurance company?
Transferring risk to an insurance company is the fundamental principle behind purchasing insurance. It is one method of dealing with the various risks we face in life, including the death, illness, flood, fire, tornado, car accidents, and disability. Because an insurance company is a large institution, it is in a much better position to shoulder risk than you are as an individual. In return for your premium, the insurance company agrees to pay a certain amount for a certain loss (in this case, disability), which may or may not occur. Insurance companies use actuarial tables and other factors to determine appropriate premiums for insurance coverage, and to make sure their risk is kept at an acceptable level. The insurance company does this not only for you, but for many other policyholders. By pooling risks in this manner, the insurance company is able to take advantage of the law of averages, since not every policyholder will become disabled (thereby collecting the policy benefits).
When is transferring risk an appropriate strategy?
There are certain circumstances in which transferring risk is typically more appropriate than other strategies. Transferring risk is appropriate when the probability of loss is small, but the severity of loss would be great if it did occur. That is why certain types of insurance, such as life insurance, health insurance, disability income insurance, homeowners insurance, and liability insurance are so important.
Keep in mind, your expenses are likely to increase dramatically if you become disabled, due to increased medical costs and the like. Even if your supplemental income would be enough to sustain your current living expenses, this income may not be sufficient in the event of disability.
How does transferring risk through disability income insurance protect you?
Coverage provided by government-sponsored disability plans (e.g., Social Security) is extremely limited, and the qualification standards are very restrictive. Very few people have enough supplemental income (such as earnings from investments) to carry them through a period of disability. Unless you are one of these lucky few, disability income insurance is worth considering.
Disability income insurance is purchased through an insurance company that pays you a predetermined benefit when you are too sick or too injured to work. In general, to be considered disabled, you must be unable to work and earn income. However, many policies take a more narrow view of this definition. You may be required to try working in another occupation if you can’t do your own job, or you may receive reduced benefits if you can do some, but not all, of the duties of your own occupation. Other policies consider you to be disabled when, because of illness or injury, you simply experience a loss of earnings.
Where do you get disability income insurance?
There are many sources of disability income insurance. In general, you can purchase an individual policy directly from an insurance company. You may be able to get group disability insurance though your employer as part of your employee benefits package, or through a trade association or other professional group. Credit card companies and other lenders typically offer credit disability insurance, which can be used to pay off your loans if you become disabled. Business owners often protect their companies by purchasing specialized disability policies on executives and key employees. You may even be able to purchase a limited amount of disability insurance through a rider on your life insurance policy.
Can anyone get disability income insurance?
Insurance companies have specific guidelines that determine whether or not you are eligible to purchase disability insurance and what your premiums will be. In general, you must be a good overall risk. On an application, you will answer questions regarding your age, income, occupation, health, and hobbies; you may be turned down for coverage if you pose too great a risk to the insurance company.
