Disability Insurance

Disability Insurance

Disability insurance is an important part of a financial plan for those still in their working years. Your current and future lifestyle depends on your ability to earn income. If you are involved in a disabling accident and do not have disability insurance coverage, your financial security could be jeopardized. You may not have the income to pay your current bills or to save for your future goals. A proper disability insurance policy can help you eliminate these risks.

Disability insurance can sometimes be confusing because there are so many options. It is important to know what your options are, and which benefits are best for your situation. Some of the more common policy features are described below.

Base Disability Benefit: This is your amount of basic monthly coverage available.  This is based on a percentage of earned income, usually 60% or more.

Social Security Benefit: Some policies will pay an additional monthly amount if you are not eligible for disability benefits from social security.

Presumptive Disability Benefits: Some policies will pay total benefits up to the maximum benefit period if you permanently lose your hearing, speech, sight, or the use of two limbs.

Residual Benefit Rider: This rider pays a benefit even if you are not totally disabled.  It pays a percentage of benefits based on your percentage of lost earnings (50% earnings reduction = 50% benefit).  This rider encourages the recipient to be gainfully employed without a severe reduction in paid benefits.

Recovery Benefit Rider: A benefit that is paid when the recipient returns to work full-time but has a reduction in earnings.  This is beneficial for a person who is self-employed or works on commissions since the ability to generate new business likely suffers during a disability.

Premium Waiver Benefit: This feature will waive all premium payments while you are receiving disability benefits.

Maximum Benefit Period: The longest continuous period of time a policy will pay disability benefits.  This could be for as short as two years, or up to the age of 65.

Guaranteed Renewable Provision: As long as premiums are paid on time, the insurance company guarantees until the termination date that they will renew your coverage and not change any feature of your policy, except for the premium.  Premium rates are not locked in, and may increase over time.

Non-Cancelable Provision: This is the same as Guaranteed Renewable, but premium rates can NOT be increased as long as premiums are paid on time.

Elimination Period: This is the period of days that you must wait until you can receive disability benefits.  It is measured from the first day of disability.  Typical elimination periods are 90 days or 180 days.  It is often thought of as a deductible.

Definition of Disability:  Insurance companies use different definitions to define disability.  Depending on which definition your policy uses, you may or may not be considered disabled. Some companies also only use a definition for a certain amount of years, and then switch to another stricter definition. The following are sample definitions.

Own Occupation: This is the most liberal definition because you are still allowed to work in another occupation.  You are considered totally disabled if, because of sickness or injury, you are:

(1) unable to perform the substantial and material duties of your regular occupation, and

(2) receiving care by a physician which is appropriate for the condition causing the disability (or the physician provides acceptable certification stating that continued care would not benefit you).

Modified Own Occupation: Same definition as Own Occupation, but a third component is introduced:

(3) not gainfully employed.

Any Occupation: This is the strictest definition.  While numbers 2 and 3 remain the same, number 1 is switched to “unable to perform any occupation in which you could reasonably be expected to perform satisfactorily based on your education, training, experience, and physical and mental capacity.

Cost Of Living Adjustment (COLA) Rider: After 365 days of being on a disability claim, this rider pays an additional benefit based on a percentage of the base amount.  The percentage is based on the prior year’s CPI (Consumer Price Index).  Some riders will pay up to 6%/year.

Future Purchase Option Rider: This rider allows the policyholder to purchase additional coverage up to a predetermined amount at each policy anniversary.  Additional coverage is not subject to the requirements of medical underwriting, but it is to financial underwriting.