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Perhaps you'd like to purchase disability insurance, but feel that
the premiums are too costly. If so, be aware that there are several
strategies 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,
2) don't pay for what you don't need.
Ten tips for lowering your bill
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Choose a longer elimination
period
Your elimination period is the number of days (after you become
disabled) you must wait before receiving benefits. Because premium
cost is greatly affected by the length of the elimination period,
choosing a longer elimination period has traditionally been one
of the easiest ways to lower your disability insurance cost. However,
some companies are now doing away with short elimination (30-day)
periods or offering them only to low-risk individuals. The most
common elimination period is now 90 days. If you have such a period,
you can still benefit if you can withstand an elimination period
of 180 days.
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Choose a shorter benefit
period
You can save a substantial amount of money by reducing the length
of your disability benefit period. The general rule is to buy as
long a benefit period as you can afford, but this is not always
necessary. Many disabilities don't last more than four years, so
buying a disability policy with a five-year benefit period may make
more sense than buying a policy with benefits that last until age
65 (or for life), especially if cost is an issue. If you reduce
your benefit period from age 65 to five years, you might save 30%
or more of the premium cost.
If you are already covered by a short-term policy at work, however,
you might need long-term coverage. In that case, purchasing a policy
with a shorter benefit period would not make sense.
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Buy less than the maximum
coverage you are offered
Your insurance company determines 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 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. 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 with 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.
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Eliminate riders
A rider is a provision attached to a policy that adds benefits to
or changes the original policy. You may save quite a bit of money
if you buy a good quality base policy and add only a few riders
to it. Some of the most expensive riders can double the cost of
your policy. 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.
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Choose a step-rate plan
A step-rate plan is one whose premium is initially low, then increases
after a certain period of time and remains 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 as you
get older.
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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.
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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 and 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 (for example, if you quit your job), 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.
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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 an employer-sponsored short-term
disability policy that would 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.
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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
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.
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Shop around
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. |
Are there any tradeoffs to lowering the cost of your policy?
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. Perhaps you simply can't afford
the best policy out there. 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.
Can you get away with buying a policy that covers only accidental
injuries?
Probably not. If you're buying a disability policy that covers only
accidents, you're buying very limited 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 to get hurt in an accident.
You may be taking on too much risk if you buy a policy that excludes
sickness.
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