Like many others in their 20s, I remember not being thrilled about the chunk of income that was taken every month by insurance. It always seemed like money that was going out and would never come back in and felt especially significant at a time when my income was low.
The temptation was always to either skimp on insurance, wait until my income increased, or bypass it altogether. The same holds true for many people today when it comes to income protection, an insurance policy that replaces your income if you are unable to work due to an accident or sickness. While the reluctance to spend more on insurable is understandable, it’s important to take the time to discuss the cost of waiting to purchase this important coverage.
Here are the three major costs to be aware of:
Cost 1: You’re most insurable when you’re young
When you are young, you are generally in the best health of your life. As you get older, nagging injuries and health issues tend to pop up. This can affect the policy terms of your disability insurance (DI) policy. The older you get when applying for DI coverage, the more likely it is that your policy will include restrictions like exclusions, ratings, and even being declined altogether.
For example, if you have a serious back issue, the insurance company may offer a policy with a back exclusion meaning that they would not pay out benefits if you were unable to work due to an issue with your back. Or, if you have a history of heart issues, the insurance company may include a modification like adding extra premium to cover their extra risk. Of our office’s current issued policies that were issued medically as applied for (no medical exclusions or modifications), 67 percent were under the age of 40! The time to get coverage is when you are young and at your most insurable. Many carriers will also allow you to purchase increase options which means you will be able to increase your coverage in the future to keep pace with your income but not have to complete any medical underwriting.
Cost 2: Premiums increase
The premium cost for coverage goes up as you get older. In addition to health considerations that may increase your premium, the cost for coverage is also based on age.
The chart below shows premiums of different occupations at age 25 and age 40—note there’s up to a 70 percent increase in premium from age 25 to age 40. If the 40 year old dentist purchases coverage and keeps it inforce until age 66, he will still end up paying out more total in premium than if he purchased coverage at age 25. He also misses out on 15 years of income protection.
|Male Rates||Dentist||College Professor||Pediatrician||Executive|
|Annual premium at age 25*||$1,198.40||$1,000.30||$880.95||$704.55|
|Annual premium at age 40*||$2,013.20||$1,704.50||$1,477.35||$1,181.60|
|Female Rates||Dentist||College Professor||Pediatrician||Executive|
|Annual premium at age 25*||$2,053.45||$1,637.65||$1,399.30||$1,119.65|
|Annual premium at age 40*||$3,326.05||$2,789.85||$2,382.45||$1,906.10|
*Premiums shown are for illustrations done for $3500/mo of benefit, with typical options including noncancellable (premiums cannot be changed), residual (return to work benefits), 3% COLA (inflation protection), 90 day wait, benefits paid to age 65, KS resident.
Cost 3: Peace of mind
While we tend to think we are invincible while we are young, the truth is that disabilities can happen to anyone at any age. The Council for Disability Report in 2014 shows that ages 40 and under filed 21 percent of all disability claims in 2013.
Know that there are ways to address the very real concerns about fitting the cost of income protection into your budget. There are a lot of options to keep the coverage affordable including multi-life discounts, business owner discounts, or simply making changes to the amount of monthly benefit or benefit duration. Many people start with a minimal benefit amount and include a rider called an increase option so they can increase their benefits as their income grows regardless of their medical insurability.
For more information about the importance of income protection and the risk of disability, visit www.RealityCheckup.org.