Disability Insurance Policy Options

Disability insurance should be better named as “income insurance.” It makes more sense to call it this because if you get injured or become sick you may not be able to work and this type of insurance gives you the type of coverage that will provide a monthly cash benefit for you.

By having this type of insurance, its benefits can help you secure your lifestyle and current standard of living just in case your regular cash flow happens to stop because you can no longer work.

Disability insurance policies come with a wide variety of options such as the following:

Automatic Increase Option

This option increases the insured’s monthly benefit annually for a specific number of years.  With this, the premium also increases each year because you are getting extra coverage. This option increases the individual’s benefits along with inflation without having to adjust it every year.

Benefit Period

The benefit period is the maximum number of months that the insured individual is eligible to collect benefits on a disability claim. The benefit period starts after the elimination period has been completed.  Benefits continue until you return to your job or the benefit period has been exceeded.

A policy is generally considered short term if the benefit period is 90-180 days.  Long term policies pay benefits for two years or more or even until age 65 or for life. Chose one that will be specific to your needs.

The average duration of a disability lasting longer than 90 days is less than 5 years across all age groups.  Many people usually decide to receive benefits for 5 years.  Depending on your situation, upgrading a policy from 5 years coverage to coverage until 65 or for life may not involve a significant jump in premium.

Cost of Living Adjustment

Optional coverage that increases the monthly benefit on an annual basis based on the CPI up to a stated maximum in the event benefits have actually been paid for at least one year.  Whereas the future increase option and automatic increase option raise the benefit prior to a claim, the “COLA” applies during a claim.

Elimination Period

This is the amount of time between the start of a disability and the start of eligibility for benefits. This is a period that must pass until the insured individual will begin to receive benefits. The most common elimination period for an individual disability insurance policy is 90 days.  A shorter waiting period is usually available, but for a higher premium and longer elimination periods (180, 365, 720 days, etc.) generally cost less.  Because benefits are generally paid at the end of each month during the benefit period you can expect to receive your first check at the end of month. As well as 4 checks with a 90 day elimination period.

When reviewing a new policy, make sure the elimination period can be appeased with a total or residual (i.e., partial) disability.  Some policies stipulate that only a total disability counts toward the elimination period.

Exclusions

These are specific circumstances that are written in a policy under which benefits will be limited or not paid at all.  Common exclusions include:

  • Limitation for Nervous or Mental Disabilities
  • Limitation for Alcohol or Drug Related Disabilities
  • Exclusion for Disabilities Incurred During the Commission of a Crime

Future Increase Option

The is optional coverage that allows the insured individual to increase his/her monthly benefit regardless of changes in health.  Generally, the only required documentation at the time of benefit increase is a copy of the insured’s individual’s most recent tax return to prove the claimed income level.  Without this option, the benefit received from a policy stays the same regardless of income.

Presumptive Disability Coverage

When this type of coverage is a part of a policy, the insured is considered to be totally disabled, even if still at work, if the illness or injury results in the loss of sight in both eyes, loss of hearing in both ears, loss of total speech, or the loss of use in both of  the limbs. The elimination period is waived from the date of loss and total disability benefits are payable during the loss until the end

Recurrent Disability Coverage

This type of disability applies to a recurrent disability, which  is one that was experienced, recovered, and has returned. Disability insurance policies will generally waive the elimination period for recurrent disabilities that occur because of the same or similar cause within a specified time period (6 months or more) of the previous injury.  Recurrent disability coverage simply helps to make sure the insured individual doesn’t have to wait through another elimination period for the same injury in a relatively short period of time.

80% of U.S. workers will exhaust their savings in only two months without the ability to earn an income.
(Commissioner’s Disability Table)

Renewability

There are 3 options that define how and when the insurance company can change your policy:

Non-Cancellable – Guaranteed Renewable: A policy written with this option guarantees there will be no changes to the insured’s individual’s premium schedule or benefits to a specific age, which is usually 65.  The insurance company cannot legally change the policy without your consent.

Why is this a big deal?  Among other considerations, disability insurance benefits are based on a percentage of the individual’s income.  With a NC-GR policy, the benefit stays the same even if earnings go down and if the insured changes jobs.  If income increases, the insured can request a change to the policy to increase benefits accordingly.  This stipulation, by far, is the most flexible form of disability insurance and helps keep the insured in control of his/her coverage.

Guaranteed Renewable:  This type of policy gives the insurer the right to change the premium at any time with state approval.

Conditionally Renewable:  In addition to giving the insurer the power to change premiums, a conditionally renewable policy means the insurer can enforce pre-conditions every year for the insured to keep the policy.  As you might imagine, the requirements get tougher as you age.  This type of policy should never be given consideration.

Residual (i.e., Partial) Disability Coverage

With this type of coverage the insured may be eligible for a residual/partial claim while still actively engaged in his/her occupation if unable to work full time or perform all duties due to illness or injury.  Depending on the policy, a claim for residual disability benefits may also be indicated if the insured is experiencing of loss of income of at least 20%.

This type of coverage is a smart idea because people are most likely to be considered  partially disabled versus totally disabled. Residual coverage is a good idea as people are more often partially versus totally disabled.  For example, a small business owner or doctor will want to get back to work making money as soon as possible, even if it means working only 10, 20, etc., hours per week.  A policy with this kind of  coverage may provide the flexibility to do so.

While others may be available, two common definitions of residual disability are generally used:

Loss of Income:  Under this definition, benefits are paid until the insured individual is able to generate a percentage of his/her income, which is usually 80% – 90%.  This is critical for doctors, dentists, attorneys, and small business owners that may need time to rebuild a client base after being unable to work for an extended period of time.

Time & Duties:  A policy with residual coverage defined as “time & duties” pays benefits until the insured has been at work full time for a pre-determined period of time (usually 60-90 days).  This type of coverage works well for wage earners with hourly or salary income.  It is not suggested for business owners that need to rebuild after a disability.

Total Disability

The way that disability is defined in your policy will specifically determined when the insured individual will be paid their benefits. There are 3 separate definitions that are usually used in the industry:

1.) Income Replacement: Disability is considered when an individual experiences an illness or injury in which they are not able to complete the tasks and duties of his occupation & they are not engaged in any other kind of gainful employment.

With Income Replacement coverage, the insured can only receive benefits if the person is unable to gainfully work at any job for monetary gain. For example, if  a doctor or lawyer is unable to work in their specific job, they will most likely not try to find work in a different industry. Think of a doctor or lawyer.  If they are unable to work as in the primary job, the insured most likely won’t seek to work in a different profession.

2.) Own Occupation:  Disability is recognized when, due to illness or injury, the insured is unable to perform the duties of his/her regular occupation, however, benefits may still be paid in the event he/she is able to work in some other capacity.

It is common for people on disability insurance to seek out other kinds of work while they heal, if only to pass the time until they can return to their occupation.  With an Own Occupation definition, such an insured could be eligible to receive disability benefits even though they chose to work at a different job during the benefit period.

3.) Gainful Occupation:  Disability is recognized when, due to illness or injury, the insured is unable to perform the duties of his/her regular occupation or any occupation for which he/she is considered reasonably qualified based on experience, training, and/or education.

The “considered reasonably qualified” phrase means the insurance company decides when you’re elgible for benefits or whether you just need to do something else at your company.  This is not a smart choice of definition because you are at the will of the insurance company.

Waiver of Elimination Period

This provision states that the insured will not have to endure more than one elimination period for a stated period of time.  This keeps the insured from having to prove that separate disabilities are related (as with a recurrent disability) yet still prevents multiple elimination periods.

Before age 65, if a disability lasts 90 days,
it is expected to last an average of 2-1/2 years.
(Commissioner’s Disability Table)

These are among the most common options available in disability insurance policies.  Your policy may have additional stipulations that govern your premium, benefits, and general flexibility once in-force.

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