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Comparing Disability Income Insurance Policies

Individual disability income insurance is a very flexible product. Many types of policies with an array of features and options are available, allowing you to design a policy that fits both your needs and your budget. But because there's no such thing as a standard disability policy, comparing policies can be difficult. To make it easier, figure out the coverage and features you want before you begin to compare policies, so that you're comparing equivalent policies. You can obtain a great deal of information directly from insurance companies, including brochures that describe insurance products, specific insurance product proposals, and sample policies. Read this literature carefully, and ask questions if anything seems unclear. Here are some important things to consider before choosing a disability policy.

How does each policy define disability?

If you want to make sure your disability claim will be paid when you are sick or injured, it's extremely important to know how the policy you are buying defines disability. No standard definition of disability exists, so when you're comparing policies, you have to read the wording of each carefully. Do you want the policy to pay benefits only if you're completely disabled or if you can return to work part-time? Do you want coverage only if you can't work in your own occupation or if you can't work in any occupation? Remember, the more liberal the definition of disability is, the more expensive the policy will be.

What are the contractual guarantees of the policy?

Is the policy you're considering noncancelable and guaranteed renewable, or only guaranteed renewable? Does the policy offer special provisions (e.g., for rehabilitation coverage) or exclusions (e.g., for pre-existing conditions)?

What base and optional features does each policy offer?

Disability policies offer a variety of base and optional features. How long is the waiting period before you can begin collecting benefits? How long are benefits payable for? What optional benefits can you add? For example, can you add a cost-of-living rider to adjust the benefits for inflation?

How much does each policy cost?

Once you've found two or more equivalent policies that have the features you want, compare their premiums. Is one policy a better value for the price? If one policy is more expensive than the other, can you find an explanation for the disparity? Maybe the cost of additional riders is higher with the more expensive policy. It's possible that you overlooked an important provision, or that one policy is simply the better value.

Does each insurer have a good reputation?

Although it's unlikely that an insurance company will become insolvent, it has happened. To protect yourself, find out as much as possible about of each of the companies you are comparing. Several companies rate insurers on financial strength, profitability, and claims-paying ability (e.g., A. M. Best, Fitch, Standard & Poor's, and Moody's). You can also contact your state division of insurance.

Choose the policy that best suits your needs and your budget

After you've compared disability income insurance policies, you can decide which one to buy. In many cases, one policy is far superior to another, and your decision is easy. Sometimes, though, you'll have to spend time weighing the strengths and tradeoffs of each policy before you can decide which one is right for you. Of course, because disability insurance is expensive, the price of each policy is always a factor, but be careful not to buy a policy that's seriously lacking because it's cheaper. Quality of coverage is as important as price, something you'll find out if you ever file a disability claim.

Although the final decision always rests in your hands, a professional opinion can be valuable. Your insurance advisor or broker may be able to detect hidden weaknesses in a policy, explain confusing terms or provisions, and help you weigh the strengths and tradeoffs of each policy you are considering. However, don't let yourself be pressured into buying a policy you don't want or can't afford.