For the vast majority of people disability insurance may turn out to be an absolute waste of money. Why? While there are individuals that experience a disability and claim before the age of 65, for most, no disability claim will arise over their lifetime. We all hope to be in this latter category.

See if this sounds familiar. You just received your disability insurance premium statement ($1,500) and you say to yourself, "I really did not want to pay that premium last year, but I did just in case I got disabled." You did not get disabled, and in hindsight, you see the premium as a complete waste of money. Now it’s time to pay the premium again, and you have the same decision to make. You then go ahead and pay the premium out of fear that you will get disabled.

How would you like to purchase "free" disability insurance?

While there is no such thing as free disability insurance, there is a program that comes very close. Here’s how it works.

Let’s assume you are a male age 45, and a non smoker. Recently, you acquired a disability insurance policy with a $5,000 a month benefit and the premium every year is $1500.00. The plan provides for benefits after a period of 90 days and will run until you reach age 65.

If you purchased a return of premium rider on your disability insurance policy (ROP DI), your new premium, instead of being $1,500 is now $2,300 every year. For this example let’s just look at the next 10 year window. For a traditional premium of $1,500, the total amount paid after 10 years will be $15,000 and the return of premium after 10 years will be $0. Compare that to a ROP DI policy premium of $2,300, for which the total amount paid after 10 years will be $23,000 and the return of premium after 10 years will be $16,122.

With the return of premium, you got back from your disability insurance carrier $16,122, which was not your entire premium paid but instead is 70% of your 10 year premium. Was the insurance free? Let’s continue to look at the numbers.

If you did not purchase return of premium disability insurance, you would have had an extra $800 to invest in the stock market each year for 10 years. If we project the gross investment return was 8%, you would have approximately $12,516 in a brokerage account at the end of the 10 year period.

When you compare $12,516 to the $16,122 you received tax free from your return of premium disability policy, you would have done $3,606 better with the return of premium disability insurance at the end of 10 years than investing the difference in premium in the stock market (which has no guarantee). So, by purchasing return of premium, the disability insurance was not only free, but you received back $16,122 which was more than your traditional disability insurance premium would have been over that 10 year period.

Why isn’t everyone purchasing return of premium disability insurance?

Well for starters there are only a few insurance companies that offer the plan. In addition, if you already own your disability insurance and have had it for a few years, you are not likely to get it today for the same price as when you originally purchased it.

On the other hand, there are several options that may be attached to your policy. These provisions that allow for the indexing of the benefit amount, both pre and post claim. There are riders that extend the definition of your own occupation, benefits for partial disability, future insurability options and the list goes on. Return of premium, may not be as important as some of these options to you…so you are encouraged to consult a member of the Barrons advisory team to establish what plan, features and benefits are right for you.

This brings us back to the opening statement of this article, where we indicated that the vast majority of people do not get disabled and therefore feel like their disability insurance premiums might be a complete waste of money. If you know for a fact you will be getting disabled in the next 20 years, you should buy regular disability insurance policy with no return of premium. However, if you are in the majority and are tormented by paying disability insurance premiums you know will never be put to use, then we would suggest that you seriously consider return of premium disability insurance.

This example is for illustration purposes only, while every attempt has been made to ensure the accuracy of this information Barrons or its affiliated companies cannot be held liable for errors or omissions. Actual numbers at time of illustration may vary.