The disability insurance maze: How to select and purchase a policy

Personal finance isn’t just about growing your finances — it’s also about protecting what you have. Most experts advise insuring your home, your car, your health and your life. What many of us never get around to doing is insuring our earning power.

According to The Wall Street Journal in a December 2006 article “The Growing Appeal of Disability Insurance”:

Even consumer advocates who are often critical of the insurance industry for pushing unnecessary products (such as life insurance for someone with no dependents) say that a disability policy can be a smart buy. “Disability insurance would probably be the one insurance product that is undersold,” says J. Robert Hunter, insurance director for the Consumer Federation of America.

If you have benefits through your employer, you are probably smugly thinking that you are already covered. Check again. You likely have a false sense of security and don’t have coverage. If you do have coverage, it likely is for short-term only (for example, just for five years), or the benefits paid are not enough. What you need is long-term coverage, until social security kicks in (at age 65).

If your employer is paying the premium, you will be taxed on the benefits, so factor that into your calculations. According to the Bureau of Labor Statistics, less than a third of all workers in private industry have long-term disability insurance. Only 40% of managerial and professional workers do. What’s your situation?

If you have a coverage gap, or if you are self-employed, you need to find your own disability insurance. Unfortunately, it’s not easy. In fact, it’s been one of the most confusing processes I’ve ever undertaken.

Why Do You Need Disability Insurance?

During your working years, you are more likely to face disability than death. Nearly one out of every three workers will suffer a disability lasting three months or more at some point during their career, according to the Life & Health Insurance Foundation for Education (LIFE).

And disability isn’t a one-time event. The repercussions can continue for months — sometimes years — impacting the financial security of you and your family. If you can’t do your job, money isn’t coming in, and the bills start piling up. As financial guru David Bach puts it: “What this means to you and me is that the greatest threat to our ability to finish rich may be the risk we all face of serious injury or illness! And the younger you are, the greater your risk actually is.”

Also, according to The Wall Street Journal article:

Americans are recovering and living longer from accidents and diseases such as cancer, but they aren’t always able to go back to their jobs. And some research, such as a recent Hartford Insurance Co. study, suggests that rising rates of obesity and diabetes are leaving workers disabled at younger ages than in recent past. Cancer was the number one cause of long-term disability last year at the largest disability insurer, UnumProvident, the company says. Other top causes include complications of pregnancy, musculoskeletal diseases, back injuries and heart disease.

What Should You Look For in a Disability Insurance Policy?

• Look for an “own occupation” policy. This means that if you can’t do your current job, the coverage will protect you. If you have an “any occupation” policy, then as long as you do any job including sweeping floors in a warehouse, flipping hamburgers or making telesales calls, then the policy will not pay out. One quote I received had “own occupation” for the first two years of disability and then sneakily changed to “any occupation” after that.
• Look for coverage to age 65 when your retirement benefits will kick in. Amazingly, I only asked for quotes for coverage to age 65, but time and again companies came back with policy quotes for five years and ten years. The policies are cheaper so can be more attractive to people but they don’t make sense to me. It still leaves our family at risk in the event of a long term disability.
• Figure out how long you can last before the disability benefits start. Once again, the benefits of an emergency fund come to the fore. If you have a healthy emergency fund and can last for six months (or longer, particularly if your employer has a short-term plan in place), you can save significantly on premiums. Get quotes for 90 days, and 180 days or more so you can consider what works best for your financial situation. Interestingly, LIFE says that 70 percent of working Americans only have enough money to be off work for one month before everyday expenses would force them to go back to work. If they can’t work, then the only option is debt.
• Decide how much you want in benefits. Many policies will offer a benefit equal to about 60% of your gross income. If you are paying your own premiums, you will not be taxed on the benefits, so factor that into your calculations. My husband and I decided to ask for less to save money on the premiums. We worked out how much we would need each month to cover our mortgage, with a little bit extra to help towards other costs. The plan is that I will increase my earnings (I only work part-time now) to cover the gap. It’s a little risky as it doesn’t allow for me to stay home and look after my husband if that’s necessary, but we are balancing that risk against what we can afford in insurance premiums while still saving for the future.
• Insurers rank you according to your occupational class. A general contractor, like my husband, is in a higher risk category. At first, I thought this was only because he was in what could be considered a high-risk profession. I’ve subsequently learned that insurers are also wary of underwriting someone whose income is harder to verify. This includes home-based people like freelance graphic designers, writers, consultants and accountants. However, the longer you have been running your business, and the more records you have to prove your income (generally, they look for three years’ worth), the lower your risk to the insurance company. Interestingly, rates are higher for women than for men of the same age, because the risk of a woman suffering a long-term disability is higher.
• Make sure that your policy is guaranteed renewable. This means that your coverage is guaranteed renewable to the termination date (in our case, to age 65) as long as the premium is paid on time. The insurer cannot change any feature of the policy, except for the premium, until the termination date. The premium can only be changed if the change is made for all policies with the similar benefits insuring the same risk class.

Buying disability insurance is hard. It’s confusing, and you can’t do it by simply filling out a form online. There are a number of avenues to try:

Applying Directly to Companies

You can search online for “disability insurance” and check which companies offer this type of product. After searching, I went to the MetLife and Mutual of Omaha sites and sent in details online asking for a broker to contact me. Never heard back from either one. Life got busy and I left this task for several months. I tried again on both of these sites. After a week or two (including a week-long conversation with a customer service rep of MetLife while she kept apologizing to me that no one was calling me and I kept emailing back to say that I still hadn’t heard from anyone), I got calls from both companies.

The MetLife agent told me he thought my husband would be in an occupational class that would give us a better rate. I subsequently found out that this would never have made it through underwriting. Also, the policy he suggested was “own occupation” for the first two years of disability and then “any occupation” after that.

The Mutual of Omaha agent told me that they do not insure general contractors to the age of age 65 and that the best he could offer was a 10 year policy with fewer benefits than we needed. He also told me that no one does guaranteed renewable in our state any more.

Working With Professional Organizations or Associations

If you have a trade association, you can often take advantage of their group policies. I spoke to J. Robert Hunter, insurance director from the Consumer Federation of America, who recommends that you still shop around because there are some very bad group policies out there. I called our local builders association to see what they offered. Through MetLife, the association had the same policy offered by the MetLife agent, which would cover my husband to age 65, but has a change from “own occupation” to “any occupation” after two years of disability. That was a deal-breaker for us.

Finding a Broker

The standard advice is to ask friends and family. We didn’t know anyone who had purchased disability insurance. We asked our AllState house/auto insurance agent for a recommendation, and he passed us on to a colleague. AllState doesn’t offer disability insurance, but she worked with another company to come back with a quote that offered “own occupation” coverage for two years and changed to “any occupation” after that. In addition, the policy was only for five years which the broker told me was the only option given my husband’s occupation as a general contractor.

Through additional online research, I learned that Assurity and The Standard both offer policies for general contractors. I called Assurity and they could not sell to me direct, so they put me in touch with an agent. Turned out this agency (Disability Insurance Services) could only sell to brokers, so they volunteered to put me in touch with one. The broker took my details and sent them to DIS. DIS then worked with eight different insurance carriers and sent back what they recommended as the best options in less than 24 hours. I finally felt like I had cracked the system.

Unfortunately, the options came back with just one policy that worked which was with The Standard. It was also much more expensive than we had been anticipating.

Frustrated that I only had one quote that actually matched what we needed (and facing a difficult conversation persuading my husband that we needed to spend this kind of money on insurance), I went to the Massachusetts Mutual Life Insurance site and found their local representative. The contact there was incredibly responsive but ultimately let me know that they do not underwrite general contractors.

The Final Result

We ended up buying The Standard policy. Frankly, we had no other choice. The policy was the only one to have everything we wanted: “own occupation”, valid to the age of 65, a waiting period of 180 days and guaranteed renewable. This was also a policy which we had been told by at least two agents was not available for us in our state.

What Can You Learn From My Experience?

I asked Bob Hunter from the Consumer Federation of America if my experience was “normal” for someone buying individual disability insurance. He said that it was likely “typical.” Here’s how you can make your experience easier:

• The best option is to find a broker who can get you several quotes from different companies. Bob Hunter also recommends this as the easiest way to buy disability insurance. One way to find a broker would be to call Disability Insurance Services and ask them to recommend a broker in your area. (Numbers for different regions are on the contacts page on their website.) Or call the insurance companies directly and ask for a local broker contact. Finally, try the Yellow Pages and see if any insurance brokers say they specialize in disability insurance.
• Research, research, research. Check the relevant sections in your favorite personal finance books for things to look for when choosing a policy. There’s more to know and think about beyond the basics I’ve covered here. Also, check the industry ratings (Moody’s, Best, etc) of the different companies and also do some sleuthing about which ones have class action lawsuits against them.
• Don’t trust the advice and opinion of one person. My experience shows that there is a lot of conflicting advice out there. Bob Hunter says that some of the people selling insurance frankly don’t really know what they are doing. Make sure that you work with more than one person. Try working with a broker and also directly with some other companies.
• Get it in writing. The MetLife policy which changed from “own occupation” to “any occupation” after two years of disability was offered to us by three different people. The third person — the agent from Mutual of Omaha — told me that “no way would they make your husband flip burgers.” I felt that it was not clear so contacted MetLife directly for a better explanation. The person I spoke to said that it was a “grey area and not 100% clear.” Bob Hunter confirmed that we were reading the policy the right way and should avoid it as it did not fit with what we were looking for.
• Try, try, and try again, particularly if you work in a higher risk occupation. If you are a freelancer, you may need to wait to apply until you have been in business for three years.
• Your emergency fund gains even more importance when considering disability insurance. If you can save enough to protect you for six months (or more) instead of three months, you can save significantly on premiums.

I know that’s a lot of information, but I hope my experience can give you a head start when shopping for disability insurance.

This article was written by Suzanne S. It’s very long, but it’s about an important topic. Suzanne’s previous articles at Get Rich Slowly include Letter to a Godchild: Passing on Financial Wisdom and Smart and Simple Financial Strategies for Busy People.