When Should You Drop a Disability Insurance Policy?

Updated

If you bought disability insurance at some point in the past, it was probably because you were worried about not being able to pay your bills if you became sick or injured and couldn’t go to work every day. You may have done the math and realized that you and your family couldn’t survive financially if you didn’t bring home a paycheck; that the mortgage, student loans, credit card debt, and all of your day-to-day expenses couldn’t be paid if you couldn’t work.  

Jump ahead to these sections:

But situations change, and what was once a good financial strategy may no longer be. People cancel insurance every day. Life insurance companies have fully staffed departments that work with policyholders who want to cancel their policies, as do disability and health insurers. 

In this article, we’ll look at reasons why you might want to drop your disability insurance, what to do before you cancel your policy, replacing instead of dropping your disability policy, how to cancel your coverage, and more.

Financial planners universally agree that disability insurance is a critical piece of any long-term financial plan for people who depend on their income from a job. The information contained in this article will help ensure you’re dropping your coverage at the right time and for the right reason. 

Why You Might Want to Drop Your Disability Insurance Policy

When you contact the agent or company that sold you your disability insurance policy and tell them you want to cancel your coverage, the first question they’re going to ask you is “Why?” Your answer will probably fit into one of the four most common categories of reasons why people cancel:

  1. You got a new job, and the employer provides disability insurance.
  2. You can’t afford the premiums any longer.
  3. You experienced a financial windfall and no longer need income protection.
  4. You’re close to retirement age and can replace lost income through savings.

These are all valid reasons, but canceling your coverage should be considered carefully. If you cancel and want individual disability insurance coverage in the future, you’ll need to take a new medical exam and qualify all over again, and your rates may be higher because of changes in your age, health, or income. 

Let’s look briefly at things you should consider for each reason given above before you drop your coverage. 

You want to cancel because your new job provides group disability insurance

It’s important to understand that, unlike your personal disability policy that can’t be canceled, group disability insurance isn’t portable, meaning when you leave your employer, you won’t be able to bring your coverage with you. This can be a problem if your health has declined since you took the job because you may be unable to qualify for a new individual policy.

Non-portability is also a drawback since your rates will be higher on your new individual policy because you’ll be older when your policy is issued. Disability insurance rates are based on your current age when you buy a policy, which is why financial advisors always recommend that you purchase life and disability insurance when you’re younger and healthier. 

Employer-provided disability insurance may also have lower coverage amounts than your current policy since it may not take into account any bonus or commission income. Your net benefit may also be less because you’ll be taxed on your group disability benefit if your employer pays your premiums. 

Group disability insurance almost always costs less than individual disability insurance, but the drawbacks mentioned above are worthy of careful consideration. 

You want to cancel your coverage because you can’t afford the premiums any longer:

Disability insurance is a vital safeguard to you and your family’s financial health; other cuts to your budget may be more prudent. If you become disabled and can’t work, you may end up in a more difficult financial situation than if you had kept your policy. 

Debt.org offers some tips on how to tighten up your budget so you can keep your disability insurance:

  • Start tracking your spending habits
  • Get on a monthly budget
  • Re-evaluate your subscriptions
  • Reduce electricity and water use
  • Lower your housing expenses
  • Consolidate your debt and interest rates
  • Eat at home
  • Shop with a list
  • Put a freeze on your credit cards
  • Use cash only
  • Pay off your outstanding debts

You want to cancel because a windfall means you’re no longer reliant on the income from your job:

A good question to ask in this case is “Will the money definitely last the rest of your working life?” Unfortunately, inheritances don’t always last as long as we think they will. Tax increases, rising inflation, and lack of financial self-control can erode a legacy faster than you anticipated. Consider continuing to protect your income with disability insurance despite having extra money. 

You want to cancel because you’re close to retirement age and could live off of savings if you become disabled:

This might be a valid reason to cancel your policy since most policies will only pay out benefits up to age 65 or 67. If you have substantial savings at this point, it may make more sense to save or invest your remaining premium payments. But, be sure the savings or investment account you’ll be depleting if you become disabled before you retire isn’t your retirement account. Disabled or not, you’ll need retirement money to maintain your standard of living for years to come after you retire. 

Replacing vs. Dropping Your Disability Insurance Policy

Instead of dropping your disability insurance policy, it can sometimes make sense to replace it. There are risks in doing this, namely that replacing your coverage will require you to complete a new application and undergo a new medical examination. In addition, your new policy could come back with exclusions or ratings that will increase your premium. 

But, there are a few instances where it may benefit you by replacing your current policy. For example, if you can save at least 20% on your premiums and the new policy provisions are as good, or better, than your current policy, it may be a smart move for you. 

Another reason to replace your policy and not drop it is if you have coverage through an association where your premiums are increased every year, which often happens with group insurance. You may pay more initially for your new individual policy, but you could end up paying significantly less long term. 

Last, sometimes you may recognize that you bought an inferior disability insurance product from the wrong insurer. For example, if you’re a physician and you purchased your disability insurance from the same company you bought your car insurance from, you may find you’re not covered in your medical specialty, and it would be worth replacing your current policy with more comprehensive coverage. 

Reducing or Modifying Your Disability Insurance Coverage

Once you’ve paid off your mortgage or student loans and your kids are off on their own, it may be time to reevaluate how much your monthly benefit needs to be. The most significant way to reduce the fixed monthly costs on your disability insurance policy is to reduce your monthly benefit. 

Another way to reduce your premium is to decrease the time you’ll be receiving benefits (benefit period). For example, you can save 20% or more by reducing your policy’s lifetime benefit to an age 65 benefit. Or, since most disabilities last just under four years, change your benefit period from age 65 to five years, which will significantly reduce the premium. 

Removing riders from a policy can also cut premiums by 10% to 20%. For example, a Cost of Living Rider (COLA) may be important when you’re younger because you have the longest potential benefit period, but once you’re in your 50s and have other assets you can rely on, this rider may be an unnecessary expense.

It’s important to keep in mind that once you make changes to a policy, like reducing your benefits or benefit period, increasing or reversing these changes will require medical underwriting. If you’ve had a change in your health condition, you may not want to make reductions or modifications because they may be irreversible. 

How to Cancel Your Disability Insurance Policy

Canceling disability insurance isn’t a complex process, but you do want to dot your i’s and cross your t’s. Here are three easy steps to cancel your coverage:

Step 1: Get the necessary forms from your agent or the insurer. Most companies make these forms available on their company website, or their policyholder service department can email them to you. 

Step 2: Complete the forms accurately; provide all requested information. Be sure you include the policy number and the date of cancellation (when you want coverage to end).

Step 3: Submit the forms to the insurer. This can usually be done online, but you can also do it on the phone with the insurer’s policyholder service department or through snail mail. 

Once you cancel, be sure to contact your bank or credit union to stop automatic payments (if you were paying this way).

After you’ve stopped paying premiums, you’ll have a 31-day grace period, during which time you can change your mind or file a claim. If you do file a claim during this grace period, you’re going to have to pay another month’s premium in order to get your claim paid.

Once the grace period has expired, you won’t be able to file any further claims. However, you can request to have your policy reinstated, which some companies will do as long as you pay any past-due premiums.  

Before You Drop Your Disability Insurance Policy...

Before canceling your disability insurance policy, consider getting with your financial advisor and reviewing your entire financial situation. Disability insurance is one of the cornerstones of your long-term financial plan; consulting with a professional will give you peace of mind no matter what you decide to do.

Categories:

Icons sourced from FlatIcon.