Ten Ways to Lower the Cost of Disability Income Insurance for Dow Incorporated Employees

Research shows that for individuals nearing retirement, exploring the option of group disability insurance can be an effective way to lower the cost of coverage. Group insurance, typically offered through employers or associations, is often more affordable compared to individual policies.

What Is It?

If you do not have disability income insurance because you cannot afford the premiums, there are a number of strategies you can employ to make disability coverage more affordable. These strategies include eliminating unnecessary coverage, purchasing less than maximum coverage, and assuming a greater portion of the risk associated with funding your own disability. In general, these Dow Incorporated customers must adhere to two rules: (1) Purchase the highest-quality coverage you can afford, and (2) do not overpay for unnecessary coverage.

Example(s): When Ken's first child was born, he decided it was time to purchase disability insurance to protect his family's income requirements. He asked his insurance agent for a quotation on a noncancelable policy that would pay him a monthly benefit of $3,000. The elimination period of the policy was sixty days, and he could expect to receive benefits until age 65. Ken added a cost-of-living rider, prospective benefits increase rider, and automatic benefits increase rider to the base policy. However, Ken was horrified when he discovered the cost of such a policy. Therefore, he resolved on a policy that provided less coverage than he desired but was sufficient for his needs: a guaranteed renewable policy that would pay him a $2,000 monthly benefit after a 90-day elimination period with no additional riders.

Ten Ways to Lower the Cost of Disability Insurance

Choose a Longer Elimination Period

Choosing a longer elimination period used to be one of the simplest methods to reduce your disability insurance premium, as the length of the elimination period has a significant impact on the premium cost. However, it is becoming increasingly difficult for the majority of people to use this method because some companies are eliminating 30-day elimination periods or limiting them to low-risk individuals. Some businesses offer 60-day elimination periods, but at present, 90-day elimination periods are the norm. Therefore, this strategy may primarily benefit Dow Incorporated customers who can extend the elimination period to 180 days.

Example(s): Dick decided to purchase a 90-day waiting period disability insurance policy. He contemplated extending his elimination period to 180 days in an attempt to reduce his premium cost. He weighed the advantages and disadvantages of doing this. Dick needed to save money first. Second, if he ever became disabled, he would be responsible for providing for himself for at least six months before receiving disability benefits. By prolonging his elimination period from 90 to 180 days, he realized he could lose up to $3,000 in benefits (his monthly benefit was $1,000). However, he chose to extend his elimination period because he could not afford the disability premium.

Caution: Do not choose an elimination period that is prolonged than the period for which you can support yourself financially after becoming disabled.

Choose a Shorter Benefit Period

You will save a substantial sum of money by shortening the duration of your disability benefits. As a general rule, these Dow Incorporated employees should purchase the longest possible benefit period they can afford. However, it is also true that many disabilities do not last longer than four years, and some estimates place the duration at only two years. Therefore, it may make sense to purchase a disability policy with a five-year benefit period if you cannot afford a policy with benefits that last until age 65 or for life.

If you reduce your benefit period from age 65 to five years, you could save as much as 30 percent on your premiums. Additionally, these Dow Incorporated customers should evaluate whether purchasing an individual short-term policy makes sense. If you are already covered by a short-term policy at work, for example, you may need long-term coverage; therefore, it would not make much sense to reduce your benefit period at age 65.

Buy Less than the Maximum Coverage You Are Offered

Your insurance provider determines the maximum quantity of coverage you can purchase. The majority of insurers will strive to replace between 50 and 70 percent of your gross earnings (your earnings before taxes and deductions). If you believe you can subsist on a lower income after becoming disabled, you can choose to receive a monthly benefit that is less than the maximum amount. In turn, this will lower your premium. These Dow Incorporated employees can determine what they can afford by analyzing their need for disability income and comparing the cost of the minimum coverage they will need to the cost of the utmost coverage they can purchase. Then, determine the cost of purchasing a policy with a benefit that falls between the two extremes.

Example(s): Sue earns $3,000 per month, and after taxes and deductions, she takes home $2,400. Her insurance agent informs her that she can purchase a disability insurance policy that will pay her a monthly benefit of 60 percent of her total income, or $1,800 per month. This represents seventy-five percent of her take-home pay. However, Sue determines that she can afford to live on less, and she chooses a monthly benefit of $1,200. Reducing her monthly benefit reduces her monthly premium.

Eliminate Riders

You will save a considerable amount of money if you purchase a high-quality base policy and add few riders to it. The return of premium rider (which can double the cost of your policy) and the cost-of-living rider (which can add 40 percent to your premium) are among the most expensive riders. If you need more than a bare-bones policy, you should not eliminate riders entirely, but you should be careful to select only the riders you need and can afford.

Example(s): Ken desired to purchase disability insurance. After examining a number of policies and options with his insurance agent, he decided to purchase a high-quality base policy and add four riders to provide comprehensive coverage. After his agent informed him that his monthly premiums would be $350, Ken decided to eliminate three of the riders and was able to reduce his monthly premium in half.

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Choose a Step-Rate Plan

A step-rate plan is one in which the premium is initially modest, increases after a certain period of time, and then remains constant. If you purchase a step-rate policy, you will most likely receive high-quality coverage at an affordable initial premium. However, if you retain the policy for an extended period of time, you will pay a higher premium than you would for a level policy. Individual disability policies and group associations offer step-rate plans for purchase. Our Dow Incorporated customers may also purchase a disability plan that functions similarly to term insurance. The premiums increase progressively each year and accelerate as the insured grows older.

Example(s): Fred purchased a term disability insurance policy from the Florida Gator Trappers Association when he was 30 years old. His monthly premium was $100, and it was guaranteed until he turned 35. At age 35, his monthly premium increased to $150.

Buy a Policy That Offers Special Rates to Preferred Risks

These Dow Incorporated employees may be able to save money on disability insurance if they purchase a policy from a provider that offers lower-than-average premiums to individuals with a minimal disability risk. This rating class (referred to as preferred or preferred to select) is typically comprised of nonsmokers; however, individuals in exceptional health may also be offered preferred rates.

However, if you are a smoker, you should be aware that rather than offering preferred rates to nonsmokers, many insurance companies simply increase the premiums smokers pay substantially.

Buy Disability Insurance through a Group

Purchasing group disability insurance is an efficient method to save money on premiums. Despite the fact that you may receive fewer and less flexible benefits, group insurance is less expensive than individual insurance. A major disadvantage of this form of insurance is that if you leave the group (by leaving Dow Incorporated, for example), you cannot maintain the policy. However, if this is the only form of disability coverage you can afford, you already have health issues, or you cannot obtain coverage in any other way, group disability insurance is preferable to none.

Don't Buy Coverage That Duplicates What You Already Have

If you want to maximize the value of your insurance coverage, consider how to combine a new policy with your existing coverage. For example, if you already have a short-term disability policy through Dow Incorporated that begins paying benefits after 30 days, it may not be cost-effective to purchase a duplicate individual policy. Instead, you should purchase a long-term disability insurance policy with an elimination period that overlaps with your short-term policy as little as feasible.

Example(s): Sue is covered by a short-term disability insurance policy at work that will pay her benefits for one year beginning 30 days after she becomes disabled. She then determines to purchase an individual long-term disability insurance policy with a 360-day elimination period and benefits payable until age 65. Although the premium for a long-term policy is higher than that of a short-term policy, she believes she will save money by not purchasing duplicate coverage.

In determining the maximum amount of coverage that can be issued, the insurance company may automatically take into consideration any existing disability insurance you have.

Buy a Loss-of-Income Policy

Disability insurance based on income loss is typically less expensive than disability insurance based on an occupational definition of disability. Specifically, policies with their own occupation-specific disability definitions are particularly costly and are offered much less frequently. When you purchase a loss-of-income (income replacement) policy, you reduce the insurance company's risk by receiving benefits proportional to the amount of income you have lost due to disability, which is typically less than 100 percent.

Shop Around

Compare the prices of comparable policies offered by different companies to ensure that you are purchasing the best policy at the most affordable price. You may discover, for example, that company A classifies your occupation in a lower-risk category than company B, thereby reducing your premium, or that company B charges you more for certain passengers than company A.

Strengths

You Won't Have to Do Without Disability Protection

Although you should purchase insurance that adequately protects you against disability, sometimes it comes down to this: either you purchase no disability insurance, or you purchase a cheap policy. Any coverage is generally preferable to having none.

Tradeoffs

You May End Up With a Policy That Doesn't Adequately Meet Your Needs

Dow Incorporated clients who attempt to reduce the cost of disability insurance may wind up with a less-than-ideal policy. This is one of the real risks associated with attempting to reduce the cost of disability insurance. Is it worthwhile to sacrifice coverage quality to save a few dollars or even several hundred dollars? That depends. Typically, the less you pay for disability insurance, the less coverage you will receive. However, it is also possible that you cannot afford the finest policy available. Moreover, you may not require the most extensive coverage available. When searching for disability insurance, you must determine which coverages are essential. Decide then which coverages you can do without. Don't skimp on the necessities, but avoid paying for the luxuries.

Questions & Answers

Is It Worth Sacrificing Guaranteed Premiums to Save Money by Choosing a Guaranteed Renewable Provision Instead of a Non-Cancellable Provision in Your Disability Policy?

By selecting the guaranteed renewable provision, you could save up to 30 percent on your premium. Moreover, selecting this option may not increase your risk as much as you may believe. The insurance company may increase your premiums, but only with the approval of your state's insurance department and not on an individual basis. Therefore, the majority of insurers rarely increase premiums, sometimes only once every few years.

Should You Purchase a Policy That Covers Only Accidental Injuries If the Premium Is Less Expensive Than One That Covers Both Accidental and Sickness-Related Disabilities?

Most likely not. If you purchase a policy that covers only accidents, your disability coverage will be extremely limited. Anywhere, at any time, and for any reason, impairments can occur. You are more likely to endure a disabling illness as you age than to be injured in an accident. If you purchase a policy that excludes illness, you might be taking on too much risk.

Conclusion

Securing disability income insurance to protect your financial well-being can be likened to managing your resources wisely for a long-awaited business venture. Just as you meticulously plan your budget to ensure a successful endeavor, selecting the right disability insurance is crucial. Consider it as optimizing your business expenses while maximizing your potential benefits. Choosing a longer elimination period is akin to strategically allocating your resources, making calculated decisions to minimize costs without compromising coverage. Similarly, opting for a shorter benefit period aligns with your specific business goals, tailoring the insurance plan to match your desired timeline. By conducting thorough research and evaluating different options, you can secure a disability insurance plan that safeguards your financial interests while maintaining a cost-effective approach to risk management.