The Difference Between Quality and Cheap Coverage
Unlike many types of insurance coverage, with disability insurance, the lowest premium is not the ultimate goal. If that is your goal when shopping for disability, you may find that when you need the policy, it won’t be there.
Low priced insurance doesn’t always mean cheap, of course, and some policies and carriers are capable of giving lower rates because of your situation, the size of their company, and other factors.
The question is: Does that cheap rate come with cheap coverage, or is that a quality contract that provides an affordable rate with coverage that truly benefits you?
Unlike, say, a term life plan or insurance on your teenager’s car, disability insurance requires that you look beyond the monthly or annual premium price and look at all of the coverages included in the disability plan itself. Including when it will actually activate to pay a benefit.
Professionals such as lawyers or physicians are especially vulnerable to badly-written disability policies. This is mainly due to the very definition of what disability might be in the policy itself. The amount paid out may also be of concern.
We have covered disability definitions in an earlier article, which you can read by clicking here. However, the payout or benefit payment is something we have only generally discussed.
Most disability policies pay a monthly premium to replace a portion of your income. Most pay this as a tax-free income benefit, meaning it’s considered non-taxable income by the IRS. So if your income from your occupation is $15,000 per month, on which you are required to pay taxes, your actual take home income may be 20-30% lower than that. If your disability benefit pays 60% of your income tax-free, you would only be taking a loss of 10-20% of your take home income.
This is extremely important and knowing whether your disability benefit is tax-free is one of the many things you need to know about your policy.