Affordable Insurance That Works When You Can't

If you're in the market for individual disability insurance, you could be in for some surprises. Claiming that they are not making enough money in the business, insurers are revamping many of their policies. The result is both good and bad news for consumers. On the downside, women, certain professionals, and other people deemed to be higher risks will have to shell out more money. For example, insurers are charging more to customers in states such as Florida and California and are reclassifying professions so that those with higher claims, such as dentists, pay more. The most dramatic change occurred earlier this year when major carriers switched to gender pricing, charging women an average of 25% more on premiums depending on age because they are more likely to become disabled.

If you are in one of these groups, you may want to buy a policy now, before all insurers go ahead with changes. For example, there is still a window of opportunity for women to lock in gender-neutral rates: New York Life Insurance, for one, hasn't made the switch yet.

But some of the changes could be beneficial to buyers--and might make the coverage more affordable. Individual disability insurance has always been very expensive. Policies often cost as much as 2% of annual income a year--a stiff $2,000 in premiums for someone making $100,000. One big problem was that insurers sometimes made it impossible for policyholders to refuse certain benefits that added to the cost. On top of that, agents were trained to push optional riders that would be needed only in the worst possible scenario.

Now, some insurers are starting to repackage high-end policies, allowing customers to leave off benefits they don't want to pay for. They are also encouraging agents to show clients where they can cut to save on premiums. "In the 1990s, it has become clearer that there has to be a balance between cost and coverage," says Ralph Christiana director of disability operations at Provident Life & Accident Insurance. Buying insurance is always an odds game, but if you are willing to "bet with the odds," you can drop some of the most cherished provisions of the high-end policies and really bring down the premiums, says Robert Littell, an Atlanta insurance consultant.

TIME SQUEEZE. One recent example: While all top-of-the-line policies for the last 20 years have been "noncancelable," which means the insurer can neither stop covering you nor raise your premiums, Provident plans to introduce a "guaranteed renewable" plan to this market. The company still won't be able to drop you, but it can increase premiums for your class of insured. Guaranteed renewable policies, which are being considered by other major carriers, will cost 15% to 20% less than the noncancelable versions, says Provident's Christiana.

In shopping for a new policy, the first thing you'll want to ask is how much coverage do you need. People who have employer-sponsored group disability insurance typically don't need additional coverage, says Harvey Sobel, a principal with benefits-consulting firm William M. Mercer. Some 98% of 1,400 large companies recently surveyed by Mercer offer long-term disability benefits to their employees. But some workers--either because their group policy is inadequate or they think they will need individual coverage in the future and may not qualify for it at that time--might want to purchase a small supplemental policy that gives them the option to buy more insurance.

Sixty percent of your income is the amount most insurers will allow you to protect, since they don't want to create an incentive for you to stop working. But given that payments from individual pmlicies are not taxed, a 60% benefit can equal up to 90% of your original pretax salary. If you could live comfortably on less income than you are bringing home, consider scaling back on the monthly benefit. Two-income couples may not require as much coverage if they are saving a lot of money and could get by on one person's salary.

If you skimp now to make the policy more affordable, you should still ante up for a rider allowing you to purchase more coverage later. This is especially true for young people so they can boost coverage as their income rises.

Rather than limit the monthly benefit, it often makes sense to scale back on the time period covered. The costliest plans provide lifetime benefits--something a young person who lacks a retirement nest egg ought to consider. Most people buy policies that cover them to age 65. Another option is to purchase a five-year policy. A 50-year-old man can save $800 a year on premiums by choosing a 5-year instead of a 10-year plan, says Littell.

People with a big chunk of savings also may be able to stretch out the "elimination period," or the amount of time you must wait until you receive benefits. Ninety days is a good middle ground, but if you have enough savings to get by for six months or a year, you can cut costs.

INCOME DROPS. Another way to save--and one insurance companies are especially keen on lately--is for you to accept tougher standards to become eligible for benefits. Some policies pay only if you are unable to perform your own job or any "reasonable" occupation. But professionals, such as doctors and architects, have been encouraged to buy "own occupation" policies that allow them to receive full benefits when they can't work in their profession but are able to get some other kind of job.

Likewise, insurers are trying to sell professionals "residual benefits" riders. This way, the insurance company will make up the shortfall if you return to work but your income drops 20% or more. The coverage may be less important for people with a set salary than it is for those who are self-employed. It could take them a while to build their business back up to

its former level after a prolonged illness, says Michael Ginsberg, Paul Revere Insurance Group's director of sales.

Insurance agents have also tended to recommend expensive cost-of-living adjustment (COLA) riders that allow benefits to rise with inflation. But such protection isn't so important today because inflation appears to be under control. And if inflation does kick in, you should be able to add back the COLA rider.

After you've decided on the structure of your policy, you might be able to save more on premium costs just by asking. Some offer a discount if you include several years of tax returns as income-verification documentation with your application or prepay a few years of premiums all at once. You also should ask your insurance agent for "list-billing." If you sign up with other lawyers in your firm, for example, you could save as much as 20%.

HEALTHY REFUND. If you still can't stomach paying thousands for a disability policy you may never use, you might want to consider a "return of premium" plan. Paul Revere offers a rider where you pay 15% more in premiums, but if you haven't been disabled after five years, you get a check equal to your first year's premium. For people who have some extra cash, Royal Maccabees Life Insurance has a plan where you pay about 50% more in premiums to get back 80% of all you paid after 10 years, less any claims. For example, a 35-year-old non-smoker could pay $1,860 a year for 10 years and receive a check for $14,350 tax-free from the insurance company. Return of premium turns a disability policy into a savings vehicle that doesn't offer a bad rate of return, says Littell. But few companies offer it, and some states frown on the plans.

By shopping around and making some intelligent choices, you can craft a policy without draining your bank account. Even if it isn't absolutely top-of-the-line coverage, in a crisis, some disability insurance is certainly better than none.


-- Reduce the length of time you are covered. You can buy lifetime coverage, but if you have adequate savings to supplement Social Security, you don't need benefits past age 65.

-- Settle for a smaller monthly benefit. Most people seek to have 60% of their income replaced. But you could save if you can get by on, say, $2,000 a month instead of $3,000.

-- Lengthen the time you have to wait until you begin to receive benefits. Most people choose 90 days, but if you have enough savings to get by, wait six months or a year.

-- Allow tougher standards to qualify as disabled. Policies that pay benefits only if you are unable to perform any other "reasonable" occupation are less expensive than those that consider you disabled if you can't stay in the type of job you're already in.

-- Skip the cost-of-living adjustment (COLA) rider. With little threat of inflation, you can feel more comfortable knowing you would receive the same benefit year after year.

-- Provide copies of your tax returns. Some companies give you a 10% discount if you submit your last few years' returns.

-- Prepay premiums. You may be able to get a 10% discount for doing the company this favor as well.

-- Ask for "list-billing." If your agent signs up a few people at the same time, you may get up to a 20% discount.



For a 40-year-old nonsmoking Ohio male in a top-rated occupation earning $60,000 a year*


Lifetime payments, $3,000 a month, 60-day waiting period, cost-of-living adjustment, residual bene-fits, option to buy more


Payments last to age 65, $3,000 a month, 180-day waiting period, no riders


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