How to Insure Your Income: Analyzing Coverage

Once your needs analysis is completed, your focus should change to comparing disability income policies. Once again, this process usually runs better if you use a formal method of review.

There are some recurring considerations that form a framework for coverage comparison. This framework can help you determine how each kind of insurance relates to your needs, goals and ability to pay for the insurance. The considerations that build this framework are:

• The length of the elimination period (EP). This is the waiting period between when you make an income insurance claim and when the coverage begins. EPs work much like deductibles in auto or homeowners insurance -- the larger they are, the cheaper the coverage.
• The length of the benefit period (BP). This is the amount of time that the income insurance will pay benefits. It relates directly to the total loss figure that we considered earlier in this chapter.
• The amount of the monthly benefit. Different forms of income insurance will treat this item differently. As we've seen before, it may be the single most important factor for most people.
• The occupational classification of the person insured. This relates most directly to workers' comp and other job-related coverage. But it also impacts the cost of most individual coverages.
• The inclusion of optional benefits. These usually are based on your individual needs and financial goals -- the subjective factors that are difficult to quantify.

Most of these specific considerations can be adjusted to provide for an increase or decrease in the premium, which should be considered if the price of the policy is a critical factor.

As we've noted, the elimination period is similar to a deductible -- but it is what insurance professionals call a time deductible, instead of a dollar deductible. The longer the period of time that you can go without collecting disability benefits, the smaller the premium for any insurance will be. Thus, a plan with a 30-day EP will have a considerably higher premium than a plan with a 90- or 180-day EP.

Usually, a plan with a 60-day EP will cost approximately 20 percent less than a plan with a 30-day EP. Most insurance companies will offer elimination periods from 30 days to as long as two years.

Even though a savings in premium can be realized with the longer EP, it may not be in your best interest.

If you choose a 90-day elimination period, you will not begin to accrue a benefit until the 91st day of a disability. The insurance company won't issue a claim check until the end of the month. Therefore, you'll wait roughly 120 days -- four months -- from the onset of the disability until you receive any benefit.