How to determine the right level of disability insurance based on a person's lifestyle

Question

I'm trying to determine what level of disability insurance is right for me.

A thought crossed my mind: certain people experience less risk of disability. A person who works from home is at less risk than a police officer or a construction worker.

I work from home as a programmer. It would take quite an accident for me not to be able to work for an extended period of time and not be able to provide for my family.

I understand that there are different types of accidents and I'm not trying to say that I am the person least at risk. However, I wonder how one chooses insurance based on their lifestyle and is this a reasonable question to ask? The agent was not able to provide that information.

The options I have are receiving payments for 2 years, 5 years or until 65 years of age after disability.

I'm approaching 40, non-smoker and drink very little. I've added this bit of information because it's on top of the document they gave me. I assume it might be relevant.

Answer 1

Most people think of disability as a catastrophic event not likely to happen to them because they work in low risk jobs. In reality, disability is more likely to be caused by illness rather than injury. You can Google for the statistics.

I would suggest that you imagine the worst case scenario where your income is gone and evaluate the plans available in that context. Short term plans will be far less costly. Longer term plans until age 65 will be more costly but they will cover the unimaginable. I don't know if they still offer them but some older policies paid for life. You can reduce the cost of the policy by taking a longer elimination period before the policy kicks in. That may offer you the more ability to purchase a higher benefit and/or a longer term term policy.

There are some variations that you should investigate:

1. An “own occupation” (often called Own Occ) policy covers you if you cannot carry out your own occupation. This is desirable because there insurance may pay you nada if you can do another job (imagine something like collecting tolls on the Interstate).

2. Another choice is a Residual policy which means that if you can go back to work but if you are limited to part time, they will pay you a percentage of your lost income. If my recollection is right, you have to choose either Own Occ or Residual. The only way around that would be one of each policy, each at half the benefit and cost, assuming the insurance company(s) are willing to provide that.

3. The policy should be noncancelable, which means the premium is fixed and cannot be cancelled as long as you pay on time. Only the company going under is a terminal event so choose a major carrier that is reputable. If disabled, the premium is no longer due.

4. If offered, consider a policy with COLA benefit so that your benefit keeps up with inflation.

I bought disability insurance 30+ years ago so at best, these are recollections of the past and may not pertain to today. I don't think that there is any one size fits all rule of thumb out there where you can plug in numbers for an answer nor can anyone tell you exactly what you need.

All insurance is a waste of money until you need it. The question is, what trade offs are you willing to make and at what cost in order to insure that you and your family are not devastated by the unexpected? It's not an easy decision because future needs are unknown (Own Occ versus Residual). Like all insurance, the younger you are when you begin, the lower the cost so if you feel it's necessary, do it now. You can always bump up your coverage at a later date if your health is still good.

Lastly, I know a few fellow alumni who experienced such life changing events. IMHO, those who fared best bought Own Occ policies with a COLA when they were young.

Good luck.

Answer 2

As mentioned above, it is not likely to be an accident that disables you, but an illness. I went from perfectly normal, working fulltime and hiking on weekends to bedridden in a matter of weeks. Then I was lucky enough not to die (though my diagnosis had a 5% survival rate with old treatments; I got an experimental one that worked) and was left unable to work at all for months. After about 6 months I was able to do a little, but no more than an hour at a time or two hours a day. It's been about a year of that so far, even though my treatment is over and I am now being monitored (still under active care.) And yes, I work from home as a programmer, do not smoke, barely drink, etc.

My company (which I own) provides insurance: short term for total disability between 30 days and 6 months (before 30 days we decided to self insure) and long term for 6 months to 5 years. However I discovered that they demand you apply for the government disability pension, which is taxable, and lower their (tax free) payments to you by the same amount, lowering your actual income. And once I started working again I discovered that they'll only cover you for two years if you're working part time, instead of the 5 years if you're not working at all. I intensely dislike my insurance agency. I recommend you do some research into these sorts of things.

On the actuarial side you can be sure that if you multiply out your chance of getting something you are paying a slightly higher premium than the odds would suggest. That's to pay for them running the program. But like life insurance and house-burning-down-insurance, it's all about "How would you cope if you needed it?" and I put it to you that you would not cope well at all. Especially when you're ill, it's not just you who doesn't work, typically your spouse doesn't either and you lean hard on family and friends. Had I died, my husband would have got my life insurance, but since I was lucky enough to survive, we really needed that income.