Waiting to Buy Disability Insurance…

Disability InsuranceYup, it’s disability insurance awareness month. So why not spend a little time discussing what could be one of the most important financial decisions you’ll make in your life?

And one such crucial decision younger professionals will often find themselves tasked with is whether or not it makes sense to purchase individual disability insurance when they kick off their career.

Why not Wait until I’m more likely to “use” it

As you might imagine, we’ve heard this before. The logic works like this, “I’m a young and healthy person and money is a little tight at the moment so I think I’ll hold off until I’m older and more likely to use that disability insurance policy, after all I wouldn’t want to pay all those premiums for all those years and not get anything for it.”

An epiphany worthy of being followed by #sheergenius. Or maybe not.

The problem for anyone who has ever dreamed up this brilliant strategy has forgotten one very important detail…the insurance industry thought of this one years ago.

And I don’t mean “years ago” like 5 years ago someone at the Berkshire Life home office said, “hey wait a minute” and put in motion a plan to deal with this whole how to we keep them from waiting business. I mean morel like several decades ago (close to 10 of them) someone used what was already relatively well known about mortality and applied it to morbidity.

In other words, you weren’t the first one to come to this ingenious discovery. The industry caught on to this one before you were born, and has already taken care of dis-incentivizing the waiting game. And how might they do that?

And you Thought Life Insurance got Expensive when you turned 50

Most disability insurance products follow a pretty steep pricing curve as age increases. The logic for insurers is pretty understandable and straight-forward. People in their 50’s who apply for disability insurance typically fall into one of two groups:

  1. Those who reach this age and suddenly realize they took a pretty big gamble over the last several decades. They also often come to the realization that if their retirement goals are ever going to be met, they’re going to need all of the income they can get, so protecting against an event that takes them out of work due to sickness or injury is prudent.
  2. Those who feel a twinge of pain somewhere that makes them say, “uh oh.”

Sadly, the latter is way more common than the former. And this adverse selection issue makes insurers hyper sensitive, and suspect of applications for older insureds. I’m not telling you not to apply if you’ve hit this age, as the pricing has already factored in this issue. I’m just saying that you haven’t set yourself up for the easiest adventure through underwriting.

Waiting does Help the Insurer

This point is one grounded beautifully in elementary probability. The younger you are, the fewer chances you’ve had to develop and/or undergo some major medical event. We don’t even have to take lifestyle and genetics into account on this one. It’s really is as simple as, the fewer observations, the lower the probability of a given event taking place. Not independently speaking, but conditionally speaking

Waiting to buy disability insurance won’t only make it dramatically more expensive, it could make it impossible for you to get. And the difference between an approved application and a declined application can literally be a few hours spent in the ER for pains that were never fully explained, but thankfully weren’t serious and didn’t kill you.

Time is Ticking and the Meter is going up

Unlike life insurance, which has enjoyed a trend of improving mortality for several decades, the morbidity information used to price and set reserves for disability insurance hasn’t improved. In fact, with advances in medical technology, improved life expectancy has come with a higher probability of disability—we can stop things that might have killed you a decade or two ago from doing that, but it doesn’t mean you’ll walk away from the event scratch free.

On top of this, accounting rules established in the early 90’s placed significantly higher reserving requirements for disability insurance. This move caused several carriers to exit the market place.

Increased morbidity, and higher reserves aren’t two variables that will bring disability premiums down any time, soon. Waiting may sounds like a good idea as a way to save some money and take advantage of buying in when you’re more likely to need the insurance, but this strategy has long been priced out of effectiveness.

Additionally, waiting can put you in a position where you can no longer get coverage, and that’s a situation that won’t save you any money at all. Disability insurance isn’t cheap, but when we’re talking about the driving force behind your life, your income, I have a hard time coming up with other more worthy of being insured.


One Response to “Waiting to Buy Disability Insurance…”

  1. Matt Ullery says:

    Very good article on disability insurance.

    I just put a DI policy in force last year at age 43. As you stated in the article, I realized disability represented one of the few remaining risks to reaching my retirement goals.

    The policy is not inexpensive by any means, but would have been much pricier had a I waited a few more years. I plan to keep the DI policy in force long enough to reach my retirement goals, and will either supplement it or replace it with some kind of long-term care insurance.

    Speaking of LTC, one faces a similar dilemma deciding if/when to purchase a LTC policy, just later in life.

    Thanks for the fine blog,
    Matt

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