All disability policies come with a waiting period. This is true whether the type of disability policy that you purchase is a long-term or short-term plan. The waiting period with disability insurance functions very much like the deductible with auto insurance and with health insurance. It reduces the insurance company’s liability, by forcing you to shoulder at least some of the upfront costs of an insurable event.
If you’re buying disability insurance, there are a few things you will need to know about the waiting period so that you can purchase a policy as an informed consumer.
The Shorter the Waiting Period, the Higher the Premium
This is true because the shorter the waiting period, the more exposure the insurance company has to paying benefits early in the process. A longer waiting period does the opposite – it shifts more of the burden of your disability cost to you early on in the claim, which enables the insurance company to charge a less expensive premium.
If you are looking to make a disability policy more affordable, going with a longer waiting period is one of the best ways to do it. On a short-term disability policy, a typical waiting period is 30 days, but you can make it as short as two weeks, or as long as 90 days. The difference in premium costs will be substantial from one extreme to the other.
On long-term disability plans, the waiting period can run anywhere from 90 days to a full year. Once again, the difference in your premium will be significant. But you also have to be careful not to make the waiting period too long. A waiting period lasting a full year may save you a lot of money on the premium, but it may be very little help in the event that you need to file a claim for disability benefits.
Both the state of your personal finances and your work situation play an important role in how long the waiting period should be.
Some questions that you need to ask along those lines include:
How Long Can You Live Off Your Liquid Savings?
In some ways, this is the most important question to ask yourself when it comes to deciding on an appropriate waiting period for your disability insurance plan. The answer to this question is really about how long you can live without a paycheck, but before disability benefits kick in.
If you have an emergency fund that has at least three months of living expenses in it, you’ll be on safe ground taking a 90 day waiting period for your policy. Your expenses will be paid between the time you get your last paycheck, and your benefit payments begin.
Keeping this in mind, if you’re having difficulty being able afford a disability policy, you can work to get a lower premium by increasing your emergency fund to cover a larger number of months. For example, if you can increase your emergency fund until it is sufficient to cover six months worth of living expenses, you can then increase the waiting period on your policy to six months as well.
A bad choice would be to accept a six-month waiting period when you only have 30 days worth of living expenses saved. This strategy will save you money on your premium, but it will also leave you financially exposed for five months in the event you become disabled.
Whatever waiting period you choose, it should be correlated to the amount of money that you have available in your emergency fund.
Do You Have Any Other Income Sources?
If you are fortunate to have other sources of income, beyond earned income from your job, you will also have more flexibility in choosing a waiting period. This can include income from rental property, business interests, or investment income. Though you might normally reinvest this income for future growth, if you can tap it for living expenses during a time of disability, it will enable you to choose a longer waiting period.
Even if the other sources of income don’t completely cover your living expenses, if you can survive on them in combination with emergency savings, you will have the flexibility that you need to go with the longer waiting period.
What Kind of Disability Insurance Do You Have Through Your Employer?
If you are purchasing a private disability policy, to complement a plan that you have at work, you can synchronize the waiting period on your private policy to work with the employer-provided plan.
As an example, let’s say that your employer provides a short-term disability plan that pays benefits for up to one year. If you want to supplement this with a long-term disability plan, you can elect a one-year waiting period on the plan, knowing that the first year will be covered by your employer plan.
If you are planning to purchase a private policy, and you have a plan at work, make sure you have all of the details of your employer sponsored plan. You should try to coordinate the employer plan with your private plan, that way you can keep your premium to an absolute minimum, as well as avoid duplication of coverage.
What Kind of Work Do You Do?
The kind of work you do can have an impact on how long the waiting period on your disability policy needs to be. If you work in a professional capacity, such as accounting, engineering, law, or even teaching, you may be able to work in some limited capacity with various types of disabilities. For example, a disability that affects your legs may not impair your ability to do your job, as much as limit your ability to do it.
The fact that you may be able to return to work, even in a reduced capacity, more quickly than in other professions, might make you lean in favor of getting a shorter waiting period. Since it is more likely that you will be able to return to work quickly, there may be little benefit to you in taking an extended waiting period. It may be to your benefit to go with the shortest waiting period possible, thus maximizing the benefits from the policy.
It can be a bit more complicated purchasing a disability insurance policy than other types of insurance. When it comes to earning a living, there are a lot of variables. You have to do your best to calculate the impact of those variables on the policy you’re taking, right down to choosing the best waiting period. A good insurance agent should be able to help you do just that.