Buying Insurance

Lesson 7: Disability Insurance

Types of Disability Insurance

Disability insurance comes in two basic types: short term and long term. Short term disability insurance is typically designed to provide benefits for 90 to 180 days. Long term disability insurance may provide benefits for 1 to 3 years or to age 65. Why the limitations? The answer is that the insurance companies have a concern (insurance jargon:moral hazard). They do not intend to design a disability policy that would tempt people never to return to work. Also note that the payments you receive from disability insurance are typically a percentage of your current income, usually 70% to 80%. This payment schedule is again related to moral hazard. Disability insurance will keep you from going under financially for a period of time, but it isn't so generous that you are tempted not to go back to work. You can protect yourself against future needs for increased disability income by purchasing the "guaranteed purchase option" which guarantees that you can increase your coverage every 2 to 3 years by the amount you have selected regardless of your health. It is also a good idea to purchase a cost of living adjustment rider (COLA) since this adjusts existing benefits annually based national cost of living adjustments. For more pointers on creating your own disability insurance specifications see Hungelmann, pp. 279-80.

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