The Insurance Buying Guide: Choosing an Elimination Period
Most of these variables can be adjusted to provide for an increase or decrease in the premium, and should be considered if the price of the policy is a critical factor. For instance, the elimination period is similar to a deductible -- but it's a time deductible, instead of a dollar deductible. The longer the EP, the smaller the premium. The shorter the EP, the higher the premium. Thus, a plan with a 30-day EP will have a considerably higher premium than a plan with a 90- or 180-day EP.
An illustration of this trade-off can be seen in the following chart:
The Premium and the Elimination Period
Male, Age 45, $1,000 Monthly Benefit Payable to Age 65
Elimination Period Annual Premium 30 Days $690 60 Days $550 90 Days $495
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 ranging 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.
For example, if you choose a 90-day elimination period, you will not begin to accrue a benefit until the 91st day of a disability. However, 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.
When determining which elimination period to elect, you must answer the question, "How long can I go without any income from my disability income plan?" The answer to this question will depend on the size of your monthly income insurance need and the amount of cash savings or the size of the liquid assets you have in reserve.
Every situation is different, but you probably will end up choosing among 30-, 60- or 90-day elimination periods. A policy with no EP is usually very expensive. A policy with more than a 90-day EP usually doesn't begin paying benefits soon enough.
It's usually a mistake to assume someone who has a higher income can live with a longer EP. If you make more money, you often have bigger ex-penses -- which puts you roughly in the same place as someone making less money. A corporate executive earning $250,000 may not have any more liquidity than a worker earning $25,000 per year.
The best way to be sure you can live with a longer EP is to make sure you have short-term disability insurance to cover you during the wait. This short-term coverage is what's provided by most work-related plans.
