What to Look For When Purchasing a Disability Plan

Here are some things you should be looking for in a disability plan.

• Look for company that is financially sound. The first question you need to ask is whether the insurance company you're considering is financially sound. You can check insurance company ratings at moodys.com, standardandpoors.com or ambest.com.

• Look for a policy that uses the "own occupation" definition of disability. The policy's definition of disability is extremely important, since it defines the circumstances under which you will qualify to receive benefits.

Own-occupation definition of disability pays benefits if you can’t work at your chosen field—e.g., attorney, doctor or teacher. Should you become unable to perform the duties of your own occupation as a result of injury or illness, you will receive benefits even if you earn income in another occupation. If you are a physician or dentist, your occupation will be your medical specialty.

Any-occupation definition of disability pays benefits if you can’t work at any occupation for which your education level and training has prepared you. For example, if you are an organic chemist conducting research in a lab and you become unable to perform the duties of your job, but you can teach chemistry in high school, you will not be eligible to receive benefits.

• Be sure that the policy is "non-cancelable." If a policy is non-cancelable, the insurer cannot change any policy provisions or increase premiums after the policy has been issued as long as the insured makes timely payments of premium.

• Select a benefit period through age 65. Make sure that you get a benefit period that go to age 65, at which time Social Security payments will begin. Many policies provide coverage for only two to five years, which may be an inadequate length of coverage.

• Consider adding a "Residual Benefits" rider. This benefit pays the difference between your salary prior to becoming disabled and the best salary you can earn after you become disabled. This rider not only protects you from the downside of any-occupation policies (being forced into a lower-wage career), but eliminates the situation in which you are forced to choose between staying at home so that you can collect disability or working part-time and losing your disability payments.

• Consider adding a "Cost-of-Living" rider. If you can afford it, a cost-of-living rider will protect your future benefits from the effects of inflation. This optional benefit increases the disability benefit by a percentage (generally 3 to 6 percent) or the latest Consumer Price Index measure after you have been on claim for 12 months. Some policies increase the percentage by simple measures and some by compound.

• Consider adding a "Future Increase Option." This optional rider will allow you to increase your policy's monthly benefit at specified dates (typically on the policy anniversary), with a requirement of only financial and not medical insurability.