Monday, April 4, 2011
The Overlooked Insurance
Is this the insurance Boomers and pre-Boomers overlook the most? Quite possibly. Last week, we talked about the idea of disability policies in your personal finance framework. This week, we're going to take a look at some of the add-ons that you might consider when buying a policy.
Shoppers know what a value is. Except when it comes to buying cars and insurance. Then, we often lose sight of what value is by adding stuff to the purchase which can increase the cost. Want the spoiler on the car? It’ll cost more. The upgraded sound system? More. Leather, sunroof, alloy wheels? More, more and more money out of pocket. And most shoppers know they can add these extra items on after the purchase. But few seldom leave the show room with the stripped down version of the car, the basic model, with the intentions of adding on the features we think we need.
Our conversation about disability insurance also has the same sort of stripped down version – the basic coverage that replaces some, not all of your income should you not be able to work. Now, we're going to take a look at the seriously upgraded policy that most of us find not only enticing, but worthwhile. These add-ons are referred to in insurance jargon as riders. Are they worth it or can we do it alone with less?
Let’s discuss what you can add-on to these basic policies and what they may cost you for this peace of mind.
The first of these add-ons is often the Cost of Living Adjustment or COLA. We know how our money can erode over time with inflation. So it can be suggested that if you have agreed to a set benefit, that benefit, the longer it is in place will be worth less with each passing year. The COLA rider is intended to protect you from this risk and usually kicks in after first full year the policy is play or even after the first year of your disability. They offer an enticing increase, sometimes as high as 6% every year that you are disabled and receiving benefits. Sounds good but could cost you about 40% more than the basic coverage.
Most people who use a disability policy do so because they can’t work. But when an agent offers you what is called a residual disability rider, they are suggesting that even though you are hurt, you might be able to return to work in a limited fashion and because of that, this policy makes up some, not all of the difference in your pay. It typically provides a partial benefit when your earnings are reduced by at least 15-25% as a result of an injury or illness. But it will cost about 20-25% more if your policy doesn’t have it already built-in.
Think you might need more insurance at some point down the road? While most of us either fall into one of two categories: over insured or under insured, this rider called a future increase offers a sort of Goldilocks add-on. It suggests that if at some point in the future, you might like to increase your monthly benefit, because the benefit you have “just isn’t quite right”, you can do so without re-applying and submitting to additional medical examinations.
All you need do is pay for the rider (sometimes 10% more in premiums) and should you decide to exercise it, simply prove that you make more now by providing the right financial documentation. To do so without the rider means you will need to get another medical exam.
The catastrophic disability rider sometimes called the 2 of 6 rider (meaning you are unable because of your disability to perform 2 of the 6 basic morning duties: getting out of bed, going to the bathroom, showering, getting breakfast, brushing teeth, getting dressed) allows you to purchase an additional benefit amount that will be paid if you are catastrophically disabled. Catastrophically disabled means you have a complete and irrecoverable loss of sight in both eyes, hearing in both ears, speech; or the use of both feet, both hands, or one foot and one hand. Alzheimer's Disease or other irrecoverable forms of dementia or senility are also considered. Keep in mind that this is not a Long Term Care policy. Some policies include this; others don’t. That’s the best way to compare the true cost of this benefit against a separate LTC policy.
The automatic increase benefit is available with most carriers at no additional cost. The AIB rider will increase your monthly benefit amount by 5% of the original benefit at each policy anniversary, for the first 5 anniversaries. Your premium will be increased based on attained age at each anniversary. If you have this rider and chose not to accept the annual increase, you can do so by submitting a written request to the insurer.
The own-occupation rider allows certain occupation classes to upgrade the definition of disability to a “true own-occupation” definition. If this rider is added to your contract it will replace the standard definition of disability offered, to one that states “You will be considered totally disabled if due to injury or sickness you are unable to perform the material and substantial duties of your regular occupation”. Good luck finding this but if you do, it can be worth the cost, which is about 10% more in premiums. If you are in a relatively hazardous job, this sort of rider can also retrain you after a period to do another job.
By having a refund of premium or as it is sometimes referred to as the good health benefit rider on your policy, the insurance company will refund a percentage of the premium paid over a defined period of time that you remain healthy and not on disability claim, until age 65. This costs a lot and if you do have a claim, it will be all for naught.
This one is quite possibly the best rider available in part because it actually lowers your premium in many cases as opposed to increasing it. Called the Social Security rider It is actually a bet with the insurer that suggest that, if you should be come disabled, and Social Security coverage kicks in, the insurer is off the hook for a percentage of the benefit owed. I actually have this and should I become so disabled that Social Security kicks in, the insurer is only obligated to pay 20% or what they may have owed me. But as Social Security suggested, the next step in life if you qualify for Social Security is death.
Like all insurance policies, shop around, be sure that your employer doesn’t already cover you in some way and be careful you don’t buy coverage that might be better suited as a stand alone policy.
And one last note: the more you have saved in an emergency account, the less you have to worry about some of these riders. While all insurance is designed to never be used, an emergency account can make it easier to forego exercising the policy or adding on expensive riders you may never need.