First of all, if you are reading this article because you are a young professional in the market for Disability insurance, Congratulations! You are taking a step that many people do not take until it is already too late. Disability insurance protects the most valuable financial asset we have - the ability to earn an income.
Purchasing a quality Disability insurance policy while you are young is one of the hardest yet smartest financial decisions you will ever make. Think about all of the goals, hopes and dreams you have. Aside from finding a life partner and perhaps starting a family, they will all most likely rely on one very important thing - money. We all know that money does not grow on trees and so the only way to have it, is to work hard and earn it. Being able to work and earn an income is our greatest financial asset. It allows us to accomplish all of the goals, hopes and dreams we have. But what happens when an unexpected injury or sickness prevents you from earning an income. A total disability is equivalent to an economic death, but even a partial disability can cause a severe financial struggle. Disability insurance is a product created to solve this exact uncertainty. If due to an injury or sickness you are unable to perform your occupation and earn an income, this coverage can supplement up to 60% of your income on a tax-free basis while you are disabled. As a young professional it is important to obtain a quality policy that protects the life style you have today but also the life style you will have tomorrow.
One of the initial things you should consider is how much coverage to begin with. As a young professional, you are probably earning less money now than you will ever earn again. Additionally, the life style you maintain is probably fairly simple and less expensive than it will be in the future. Aside from outstanding loans, debts and regular living expenses, you hopefully do not have very many financial responsibilities at this time. Nonetheless, it is important not to spend all of your money on insurance premiums either. In order to help keep the premiums on your policy reasonably priced, you should obtain a little over the minimum amount of money you need to satisfy your current monthly expenses. This will allow you to sustain your current lifestyle, in the case of a disability, without being a financial burden to someone else.
There are a few contractual features I suggest you seriously consider when designing your policy. For starters, you want your coverage to be non-cancelable, which means that regardless of all circumstances, as long as you pay premiums on time the insurance company cannot cancel your policy, change its premiums, or modify any provisions until you reach age 65. Most likely you will have this insurance policy for the next 30 or 40 years of your life, and although it is unlikely for an insurance company to actually change anything, a guarantee is much more preferable. Having a Disability policy that is cancelable is equivalent to accepting a promise from someone who maintains the rights to change the promise - your income is far too important to take that risk.
Next, you want to be sure the policy you purchase has a definition of disability that truly protects your occupation or specialty. More than likely you have worked very hard to get to where you are and should protect your future with equal interest. Each insurance company you look at will use a slightly different description of what constitutes a total disability. Some definitions require that you are unable to perform a specific occupation and others will require that you are unable to perform any occupation. There is even a version known as a True Own-Occupation definition, which allows you to receive benefits while gainfully employed in a new occupation, as long as you remain unable to perform the original occupation. The more specialized your profession, the more important it is that you protect it. As a brain surgeon, a hand tremor can prevent you from being able to perform surgery, but perhaps not from practicing a different form of medicine. For specialized professions such as a brain surgeon, it makes sense to focus on obtaining a policy that has a True Own-Occupation definition of disability. For many other professions, it can be considered a bonus but not so much a necessity. Regardless, you want to be sure that the definition states it will pay a benefit when you are unable to perform "your occupation" and not "any occupation".
In addition to having a quality definition of total disability, you need to be sure that your policy will protect you from a partial disability as well - this is known as a Residual Disability. Similar to the definition of total disability, every insurance company will have its own version of a residual or partial disability benefit as well. Traditionally, residual benefits will be paid when you have experience a 15-20% loss of income, due to an injury or sickness. Benefits are normally paid proportionately to the loss of income experienced, so if your income reduces by 50%, you may be eligible for 50% of your monthly benefit. Because most disabilities are caused by sickness, and most sicknesses do not appear overnight, you are more likely to suffer a partial disability than a total disability. Some companies will provide residual disability benefits in a standard policy and others will require that you select it as an optional rider. Regardless of the setup, residual disability benefits are an essential part of a quality disability contract so be sure to include them in your policy.
At this point you have created a solid contract and the only thing left to decide will be which optional riders you need. First and foremost, you should be reminded that Disability insurance is a product used to protect your income. Throughout your career, you should expect your income to increase and thus must have the ability to increase your disability coverage as well. You can achieve this with two of the optional riders available with most major Disability carriers.
The first is with an Automatic Increase Option rider which will automatically increase your disability benefits by 3-5% each year, for the first 5 years of the contract. There is no cost associated with this benefit and you are not required to accept the increase if you do not want to. Automatic increases do not require medical information or financial documentation to occur. Quite simply, unless you request not to have an increase, both the benefit and premium will increase at each of the first five policy anniversaries.
The second and most important way to protect your future earnings is by purchasing the FIO (Future Increase Option) rider, which allows you to increase your monthly benefit on each policy anniversary. A policy owner can exercise these increases regardless of any changes in health by simply providing financial documentation (tax returns) that warrants an increase in benefits. Although there is an extra cost associated with this benefit, as a young professional it is pertinent for you to have an FIO rider included in your policy.
If you decide to go with a "to age 65" benefit period, you may want to consider one other rider - the COLA (Cost Of Living Adjustment) rider. The COLA rider is designed to hedge the risk of inflation on a long-term disability claim. This rider will adjust your monthly benefits by 3-6% each year that you remain disabled, beginning after year one. Similar to the FIO, this is an optional rider and there is a cost associated with this benefit. The average long-term disability claim lasts 2.5 years - clearly a 2.5 year claim does not warrant a need for the COLA rider since it will not be worth the cost, unless you become disabled within the first few years of owning the policy. For someone who experiences a 20-year claim though, the COLA rider may just be a lifesaver. This rider cannot be described as necessary or unnecessary. It is simply a question of whether the protection it offers is of value to you.
The top Disability carriers will also offer other optional riders that I have not discussed, such as: Catastrophic disability benefits, Return of premium, Spousal disability benefits, etc. Aside from Catastrophic benefits, these riders are not commonly used and usually do not make financial sense to obtain, even if you are willing to spend the extra money. If you would like to add catastrophic benefits because of how inexpensive they are, great! Do not waste your time with the others though.
The final and most important part of obtaining a Disability insurance policy is for you to work with a Disability specialist. A lot of insurance agents out there are licensed to sell Disability insurance, but probably should not be. There are a lot of details involved with purchasing Disability insurance and the person you work with may very well end up serving as your advocate. Please make sure you work with an agent that is experienced in this specific type of coverage.
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