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7 Things to Consider Before Buying Disability Insurance

Consider these essential details when deciding between disability insurance policies.
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Business owners buy insurance to protect many things: health, life, liability, vehicle, and inventory are just a few. But what happens if you become sick or are unable to work for a long period of time?

Disability insurance replaces income lost due to injury from a catastrophic accident or illness beyond 90 days. It generally replaces 60 percent of the policyholder's income from the previous year, up until retirement age (normally around 65 years-old). Chris Peck, CEO of Stamford, Conn.-based CBP, an insurance brokerage firm that works with small and medium- sized businesses, says that disability insurance is usually not on a business owner's radar, but it should be. "A business owner's greatest asset is their earning potential," Peck says.

Related: Quick Guide to Reduce Insurance Premiums and File Effective Claims

When considering disability insurance, consider these factors.

1. Assess your risk.
Peck suggests speaking with several insurance agents to discuss your specific needs. "You want to make sure you're not spending unnecessary premiums for risks you may not have," he says. Insurance companies consider a number of factors to quantify risk, says Katherine Woodfield, a New Jersey-based consumer advocate and author of (Dog Ear Publishing, 2012). For example, insurers have a Standard Industry Code for every occupation, which is used to consider characteristics of which industries are consider high-risk.

2. Apply while you're healthy.
Buy disability insurance before you need it -- when you're healthy. Many policies require medical underwriting which may include a review of your medical records, blood tests and a physical.

3. If you have an older policy, consider stacking.
If a healthy 20-year-old purchases disability insurance and holds onto it into her 40s, she may be making three times what she did when she got the policy and therefore would have more income to replace if she was injured. Assuming the owner has a good rate, Woodfield suggests keeping the first policy and “stacking” it with another policy to cover the difference in income.

4. Figure out your average income.
The amount of disability insurance you're eligible for depends on your net income. With entrepreneurs, whose income levels may vary from month to month, it's tricky for insurance companies to figure out what their predictable income is, Woodfield says. In that situation, an insurer may ask you for your last three years' of tax returns and divide the amount by 36 months to arrive at your average monthly income.

5. Drop your policy when you hit retirement age.
If you're over 65, there's no point in paying for disability insurance, Woodfield says. For example, if your doctor diagnoses you as disabled at age 65, you will be considered retired and the insurance policy won't pay. So once you hit retirement age, even if you are still working, drop your policy.

6. Comparison shop.
Both Peck and Woodfield recommend speaking to several advisors, preferably independent consultants who work with a number of insurance companies. Ask the advisor whether there are any questions (for example a family history of cancer) on a specific insurance policy that would automatically disqualify you from coverage.

Make sure you know the policy's definition of disabled, as the definition may vary among carriers. Also, find out which insurance carriers the advisor has access to, and ask them to perform a needs-analysis for you. A needs-analysis reviews expenses such as mortgage, car payment, debts, savings and retirement to calculate what you would need in the event of a disability. View a sample need-analysis worksheet here. 

7. Don't choose on price alone.
"Consumers need to be really aware that the prices are aligned with the features and benefits of the policies," Woodfield says. If you're a small-business owner, you may want to consider applying for group coverage for your employees, with policies that don't require medical history.

According to Peck, a middle-of-the-road individual policy may cost $2,000-3,000 in premiums per year, while group coverage for ten employees can cost $300-500 for the entire group.

Related: Business Interruption Insurance: What It Will -- and Won't -- Cover