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The two-minute guide to disability insurance

Analaura Luna

Disability insurance is one of the most complicated personal insurance products. Trying to decipher the language of a disability insurance policy requires either a background in contract law or the experience that comes from dealing with disability insurance policies on a regular basis. To help you with this process let’s take a look at what disability insurance is, why it’s so important and what you need to look for in a policy.

The first thing it makes sense to do is to define disability insurance. Essentially disability insurance provides cover by replacing a portion of your income if you become disabled and are unable to work, and will typically cover around 75 per cent of your previous earnings. Depending on the policy you take, this benefit will be paid for a fixed period of time or until you reach a certain age. There’s usually also a waiting period that applies, meaning that you have to hold the cover for a certain length of time after the disability occurs before the company will start paying a claim. Most disability policies commonly offer a 30, 60 or 90-day waiting period, so you’ll have to wait 90 days before a benefit is paid to you. Some insurers offer shorter waiting periods, but you’ll usually end up paying a higher premium in exchange for this.

One question that we need to answer is why you need disability insurance in the first place.  Unless you are very wealthy, your largest asset is your ability to generate income. Pretend that this ability is a money machine in your backyard that churns out money year after year. Given that this is your most important asset you might spend some money to build a shed over the money machine to ensure it will continue being able to work for a long period of time, right? Well, disability insurance is part of the shed. To illustrate this point, multiply your current annual salary by ten years. In most cases you’ll wind up with a pretty big number and it makes a lot of sense to spend a little bit of money to protect you and your family from the financial devastation that would occur if you became disabled and unable to earn your income.

Finally, you need to know what to look for in a disability insurance policy. First of all it makes sense to deal with a personal insurance agent who is both a broker, so that you can be assured of getting the best deal, and is also someone who deals with disability insurance policies on a regular basis. Make sure that your policy is non-cancellable and guaranteed renewable, which means that the insurance company cannot cancel your coverage if their actual experience with other people in your industry is unprofitable to them.

Disability insurance is a critical component of the overall stability and strength of your financial plan. Take the tips laid out in this article and make sure to secure your policy for the lowest possible price without compromising the quality of your protection.

If you liked this article you might also be interested in these other articles about personal insurance covers:

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Want more? Take a look at the rest of our articles on personal insurance covers.

Tags: personal insurance, personal insurance covers, insurance covers

Author's Biography

Analaura Luna is an author, wealth adviser and founder of Your Family Your Money. Your Family Your Money’s goal is to simplify traditionally complex financial strategies, demystify financial jargon and debunk common financial myths, becoming every family’s first stop for financial advice, information and inspiration.