[Editor’s Note: This is a guest post by Insurance Agent Jamie Fleischner, CLU, CHFC, LUTCF, President of Set for Life Insurance. she is a long-time advertiser on the site, but neither she nor I was paid for this post.]
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Many articles are written about what to look for when shopping for a disability insurance policy. These articles focus on what’s potentially ahead and the risks you need to cover. Most doctors and dentists purchase their individual disability insurance policies when they are young and have just completed their residency or training. they are typically in their early 30s with a time frame of about 30 years. as such, it is critical to insure this risk as well as possible. this means loading the policy with the most available riders and the longest available benefit period to insure the worst case scenario.
reassess your disability insurance needs
Most people buy their policies, add them when their income increases, and don’t reevaluate them until they’re ready to retire. however, it’s wise to reassess your disability insurance coverage as you reassess other areas of your financial life. how has your life changed? Have you paid off your student loans? your mortgage? Are you married with two working spouses? Have the children grown up and are no longer dependent? As these life changes occur, you may need to change your disability insurance coverage to follow suit. Just as it’s wise to increase your insurance deductibles to lower your fixed monthly costs, as you can absorb more out-of-pocket costs, you may be able to lower your fixed cost
of your disability insurance as your needs change.
when to cancel your disability insurance policy
It is essential to maintain your disability policy as long as you depend on your income. the policy was purchased to protect your income. As long as you are working and relying on this earned income to pay your bills, you need to make sure that important earned income is protected. once you reach a state where you are financially independent and no longer dependent on your income, you may consider dropping your coverage. If you’re retired and no longer working and able to live off your assets, you can safely drop your coverage since you can rely on your own resources to live on.
Some policies automatically expire at age 65. Before you cancel your coverage, you should assess your situation. if you are very ill and likely to have a claim, you should keep your policy. In this situation, you may not be able to go out and buy your policy again, especially at the same rate. therefore, it is important to consider multiple factors before canceling your policy entirely. Keep in mind that once you cancel your policy, you may not be able to buy that policy back at that price, as you will now be older and probably less healthy. therefore, you must be sure that you are financially independent and no longer dependent on any income.
when to replace your disability insurance policy
It often doesn’t make sense to replace coverage, especially if you’ve had a policy in force for a long period of time. replacing coverage requires a new application and medical underwriting. If you’ve had an adverse change in health, your new policy may come back with exclusions or qualifications, costing you more premium dollars. If it’s been a few years since you initially bought your policy, your new policy may be more expensive since you’re older.
However, there are some cases where it makes sense to override your current policy. If you can save at least 20% on your premiums on the new policy and the provisions of the new policy are comparable or better, it may make sense to replace the policy. [I don’t know about you, but if the policy is better, I would switch even without a savings premium]. this is especially true if you are a woman and paying full female rates. If you can get a unisex policy at a discount, you can save more than 60% off your current rate.
If you have coverage through an association where rates increase each year or have a policy with a company, it may make sense to replace that policy with a fixed-premium policy. As a result, you may end up paying much less in the long run. If you have disability insurance with a company that doesn’t specialize in medical disability insurance, you may want to consider replacing coverage to ensure you have the best provisions to meet your needs. Sometimes people buy their disability insurance from the same company that bought their car insurance. These policies often do not adequately cover you in your medical specialty and are worth replacing to provide more comprehensive coverage.
when to reduce or modify disability insurance coverage
Once you’re in a position where your fixed monthly expenses are lower, like paying off a mortgage or student loans or your kids aren’t home, it may be time to reevaluate how much monthly benefit you need. Reducing your monthly benefit is the most significant way to reduce your fixed monthly policy costs. most policies have linear rates. As such, if you cut your monthly benefit in half, this would cut your premium expense in half. Other ways to reduce the premium include shortening the benefit period. For example, if you have a whole life policy, you may be able to reduce it to a 65-year benefit period. this can result in a 20% or more premium savings. Reducing the 65-year policy to a 5-year benefit can also significantly lower the premium. Before shortening your benefit period, evaluate your financial situation to make sure you can bear the risk on your own if your benefit period is shortened. removing riders, such as the cost of living rider, can also result in a 10-20% reduction in premium. cost-of-living riders increase your policy benefits after you’ve been on a claim for at least one year. This rider is important in your early years, as it has the longest potential benefit period. once you are 50, you have a lower potential benefit period. You may also have other assets to tap into in the event of a claim. removing this rider may result in reduced out-of-pocket fixed costs in premium payments.
The most important thing to keep in mind is that once you reduce your benefits or benefit period, increasing or reversing this change would require a medical underwriting. As such, if you have had a change in health, you may not want to make this change as it may be irreversible. Make absolutely sure that any changes you make do not create a potential liability that you cannot absorb with your own assets. On the other hand, by reevaluating your coverage or making changes, you may be freeing up fixed monthly expenses that can be better spent or saved elsewhere.
[editor’s note: A consideration for late-career physicians not mentioned above is that most policies only pay until age 65/67 or for two years, whichever is longer. therefore, the same premium that would give you 30 years of benefits if you were disabled at age 30 may give you only 2 years of benefits if you were disabled at age 60. while some may see this as “fair” since you’re more likely to be disabled by age 60, I see it as too expensive. Even if you’re not financially independent at age 60 or 63, it may not be worth paying for this. Hopefully, if you get information like that on this site early in your career, you won’t have to deal with this dilemma, as you’ll be financially independent long before you’re 60.]
what do you think? Have you cut, canceled or changed your disability coverage? why or why not? How much more did you pay or save? comment below!