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Trim disability insurance costs

By Paula Pant ·
Monday, April 7, 2014
Posted: 5 pm ET

Perhaps you have experienced the following: You decide to purchase long-term disability insurance and collect quotes from a few insurance agents.

Then, your jaw drops.

Who imagined disability insurance would be so expensive? The monthly premiums rival the cost of a cellphone bill.

How can you reduce the cost of your disability insurance plan? Here are three tips.

1. Check with your employer

Buying an individual disability insurance plan on the open market will almost always be more expensive than purchasing group coverage through work. This is generally the case for all types of insurances, including health insurance and life insurance.

Check with your employer to see if your company offers a group plan. If the company does not, or if you're self-employed, move on to the next step.

2. Lengthen the elimination period

The elimination period is the amount of time that passes between when you incur a disability and when your benefits kick in.

For example, if your elimination period is zero days, you're eligible for benefits as soon as your disability begins. If your elimination period is 30 days, you'll need to wait for a month before you can begin claiming benefits.

The longer your elimination period, the cheaper your monthly premiums will be. Opt for a lengthy elimination period, and build an emergency fund that can cover the interim period of time.

Some agencies allow elimination periods as long as 365 days or 730 days (one or two years).

3. Contemplate your COLA rider

When you buy disability insurance, you have the option to purchase a "COLA" rider. This stands for "cost-of-living adjustment," and it adjusts payout levels based on inflation.

What does that mean? Let's assume you have a policy that covers you until age 65, but you become disabled at age 35. Your policy pays out $4,000 per month. In today's dollars, $4,000 per month will cover your living expenses. But 30 years down the road, inflation will erode away the value of those dollars.

The COLA rider will adjust that payout to keep pace with the increased cost of living.

Adding a COLA rider to your policy is expensive. It increases your monthly premiums. On the other hand, a COLA rider can be a lifesaver, especially if you're young.

Contemplate whether this additional cost makes sense in your budget. If you're close to the phaseout age (many policies end when the beneficiary turns 62, 65 or 67), you may not need the rider. But if you're young, the rider may be worth the added premiums.

Paula Pant helps people ditch the cubicle and live on their own terms. She's traveled to 30 countries, owns six rental property units and hasn't had an employer since 2008. Her blog, "Afford Anything," is the gathering point for a tribe that refuses to say "I can't afford it." Follow Paula on Twitter: @AffordAnything.


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