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How to Insure Your Income: EP and Benefit Periods

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 liquid assets you have in reserve.

A caveat: Don't count on Social Security to cover your income insurance needs. It can be a secondary level of coverage -- but not much more than that.

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 doesn't begin providing benefits soon enough.

Remember: After the EP is satisfied, you begin to accrue benefits -- with the initial check arriving about one month later. So, a 30-day EP would result in the first check being issued about 60 days after the onset of the disability.

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 expenses -- which puts you in the same place as someone making less money. A corporate executive earning $250,000 per year may not have any more liquidity than a worker earning $25,000.

The best way to be sure you can live with a longer EP (90-day periods are common, but six-month EPs exist) 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.

Once you've figured out what kind of elimination period you can tolerate, you need to choose the length of time that benefits will be paid. The most common benefit periods are one year, two years, five years and to age 65. In some cases, a lifetime accident and/or sickness option may be included in the policy.

Like the elimination period, the benefit period is a reflection of the premium you pay. The longer the benefit period, the higher the premium. Short benefit periods mean lower premiums, especially when they are coupled with long elimination periods.

The following chart illustrates this concept.

The Premium and the Benefit Period

Male, age 45, $1,000 monthly benefit payable to age 65

Benefit Period Annual Premium

1 Year $ 255
2 Years $ 330
5 Years $ 510
To Age 65 $690
Lifetime $ 830

If you determine that a 30-day elimination period is adequate, then it would be reasonable to consider a two- or five-year benefit period. On the other hand, when evaluating the risk of a permanent disability and the potential lifetime loss of income, quite possibly a to age 65 benefit period should be considered.

Following an analysis of all of the facts and your needs, the deciding factor may well be the cost of the policy. In this case, ask yourself: Should you use your resources to pay for a shorter elimination period, or use the premiums to cover a longer benefit period?

Although insurance experts normally discuss disability income benefits in terms of monthly amounts, they look at the bigger picture when determining the benefit period. The potential loss of income due to a permanent and total disability can literally be in the millions of dollars.

For example, a 40-year-old earning $50,000 per year who becomes totally disabled stands to lose more than $1.2 million before age 65 if the disability becomes permanent.

And, as we've seen, the older you are at the onset of a disability, the more likely it is that you will not recover or will not recover fully. This observation suggests that you should get the longest benefit period possible. However, this has to be weighed along with the larger premium required for the longer benefit period.

If cost is an issue, then you may have to consider a shorter benefit period, or longer EP, or both. A five-year benefit period would result in a substantially lower premium than a to-age-65 benefit period. Of course, the hope is that if a disability strikes, it will not be permanent. If it is not, then a shorter benefit period will not harm you.

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