Makeover: switching to supercheap term life

Kiplinger's Personal Finance Magazine, July, 1998

Because benefits for own-occupation policies depend on your ability to perform your occupation, it pays to define your job comprehensively on your application. If you're not sure what to include, have your agent ask the company's underwriting department under what circumstances you'd be considered disabled based on the job description you plan to submit.

Loss-of-income policies prorate your benefits based on the percentage of income you've lost. These tend to cost about 20% to 30% less than own-occupation policies, says Larry Schneider, who runs the Disability Insurance Resource Center, in Reston, Va.

Look for a policy with the least-subjective definition of disability. "You want one that gives you income replacement--one that can't reduce your benefits by what the company thinks you can do," says Tim Cummons, a disability consultant in Baltimore. "It gives more control to the policyholder."

You can also save 15% to 30% by buying some of your coverage as a social security rider, says Cummons. Your individual disability benefits will decrease by any benefits you receive from social security, but you'll still have the same amount of money to live on.

Some new policies cover accidents only and have shorter benefit periods. They're much less expensive--Provident's is one-tenth the cost of its souped-up policies--but you won't receive any monthly benefits if, for example, you get cancer and are unable to work. (Provident's policy does offer a rider that pays you a lump sum if you develop a major disease that's on its list.) For example, Robert Stuart would pay $136 per year for Provident's accident-only policy, which provides a $1,125 monthly benefit for three years after a 90-day waiting period and has a rider that provides a $14,000 lump sum for a specified illness.

If you have a home-based business without a long earnings history (like Deena Stuart, who started a day care center in her home seven months ago), you'll have a tough time finding a company to cover you, period.

HOW MUCH YOU NEED. Your benefit amount is based on your income, but you can choose the waiting period and the benefit period. The longer the waiting period and the shorter the benefit period, the lower the premium. Raising the waiting period from 60 to 90 days can lower the premium by 25% to 30%, depending on the policy, says Cummons.

Cummons recommends increasing the waiting period so you can afford a longer benefit period. That shifts your risk from the long-term to the short-term--it's easy to calculate how many days you'd be covered by sick leave and savings before coverage begins, but it's impossible to predict how long your disability will last. Most experts recommend buying coverage that lasts until age 65, if you can afford it. For example, 53-year-old Jim Matteson would pay $2,700 per year for a Guardian own-occupation policy that offers a $3,300 monthly benefit, after a 90-day waiting period, and can continue to age 65.

WHERE TO SHOP. If your employer doesn't offer disability insurance, check whether you can get coverage through a professional association or other group. You can often buy an individual policy from the agent who sells you life or auto insurance, but it's best to meet with a disability broker who works for several companies and knows the nuances of each policy. Guardian, Provident, Unum and Northwestern Mutual, which sells only through its own agents, have some of the best policies.