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The Top 10 Things To Look For In A Disability Insurance Policy
The best type of disability policy is one that is non-cancellable and guaranteed renewable. This means that you have the guaranteed right by contract to renew the coverage as long as you pay the premiums on a timely basis and the premiums for the coverage cannot be increased. If a policy is only guaranteed renewable, the premiums could increase.
There are many different ways a policy can define if someone is totally disabled and entitled to benefits. They range from paying benefits based on a loss of earnings to having an inability to perform certain duties. Some policies will require that one must be unable to perform the duties of his/her occupation for the first 2 years, then benefits only continue if the insured is if unable to perform the duties of any occupation. Some will add a restriction that says the insured cannot be working in any other occupation in order to receive benefits or that their current income and disability benefit cannot exceed their income prior to the start of disability (transitional own-occ).
Confusing? Absolutely! One of the best definitions of total disability will be one that defines total disability due to injury or sickness, the inability to perform the material and substantial duties of his/her occupation. Period. If the insured meets this definition then total disability benefits will be paid even if the insured is working elsewhere or could work elsewhere. As long as due to injury or sickness the insured cannot perform the material and substantial duties of THEIR occupation, the insured is eligible for benefits.
For those in a medical or dental field, one of the best definitions of total disability is one that will pay if due to an injury or sickness the insured has an inability to perform the material and substantial duties of his/her occupation and goes on to say that if you have limited your professional practice to a single medical or dental specialty, then the insured is eligible for benefits if unable to perform the material and substantial duties of your SPECIALTY. A policy with specialty language is a must in the medical and dental marketplace.
Most policies have a choice in benefit periods that include 2 years, 5 years, 10 years, to age 65 or to age 67. But most do not offer benefits that are payable for life.
A graded lifetime benefit period makes sense for many disability purchasers, especially for younger professionals. Many advisors believe that if benefits are paid to age 65 or to age 67, then the retirement plan or Social Security will kick in. But, if someone has been disabled since age 35, 40 or 45, they haven’t been able to put money away for retirement. So when they reach the magical age of 65 or 67, their benefits from the individual disability policy stops and they are totally dependant on Social Security and their limited retirement plans. For those higher income earners who were making $20,000 or more per month, that $2,500 per month Social Security benefit at age 65 or 67 will not likely be enough to sustain them. As one gets closer to retirement age, in theory they have had more years working and more of an opportunity to fund their retirement plans. The graded lifetime benefit will reduce the life time portion of the disability payment by 5% for every year after age 45 the disability begins. Graded lifetime benefits help to replace lost retirement benefits due to disability and help to maintain ones standard of living!
Under many company’s residual rider, residual benefits are paid when someone is not totally disabled but back to work and suffering a loss of income. Be careful to select a policy that has no other restrictions to the definition of residual benefits. Many policies add a limitation that one must suffer a loss of income, but must also have either an inability to perform one of more important duties of their job or be unable to spend as much time as they did prior to the disability. Some policies will have a return to work benefit. A return to work benefit will eliminate the time and duties restriction for a short period of time, but typically not to the end of the benefit period.
The residual benefit for some policies will require a loss of income of 20%, some require a 15% loss of income. Obviously, ones that require a 15% loss of earnings provides a more generous benefit. Some policies will offer residual benefits that will pay the actual loss of earnings for the first 12 months of the claim not exceeding the total monthly benefit, instead of a proportionate benefit. That could provide higher benefits in the first year.
When selecting the best Cost of Living benefits for your policy, choose one that increases the monthly benefit on a compounding basis. Depending on the length of the claim, a cost of living rider which uses compound interest will provide a much higher benefit over the term of the claim. After recovery from a long term claim, most policies will allow the insured to purchase the benefit amount that the policy has increased over the term of the claim. As an example, if someone had a policy with a monthly benefit of $5,000 per month and were totally disabled for 10 years, with the cost of living rider the monthly benefit might have grown to $6,500 per month. At recovery, most policies will allow the purchase of the increase ($1,500) that will apply to all future disabilities. But a higher quality Cost of Living provision will provide the increased benefit for future claims for the total of $6,500 per month with no increase in premium. In essence, the Cost of Living increases were permanent!
Many policies have provisions that will waive the elimination period on a second disability that is from the same cause within 12 months of recovery from the first disability. But a higher quality policy will have provisions that deal with a person who becomes chronically ill, disabled, recovers, and is disabled again and so on. For many individuals, after being disabled they may recover and become disabled again from a different cause. It becomes a financial burden when a second disability strikes. It is best to find a policy that has a waiver of elimination period provision. That provision will waive the elimination period for any disability that is within 5 years of a prior disability that lasted at least 6 months or longer and for which benefits were paid. The new disability can be from either the same or different causes.
Catastrophic Disability benefits are typically a rider that is added to a base policy. It provides an additional monthly benefit if the insured in unable to do 2 of the 6 activities of daily living: bathing, continence, dressing, eating/feeding, toileting, or transferring. Look for a policy that also triggers this benefit with a cognitive impairment or irrecoverable loss of sight in the both eyes, hearing in both ears, or the entire use of both hands, both feet or 1 hand and 1 foot. Look for a policy that builds in an automatic benefit compound increase of 3%. This optional rider offers you extra protection from the financial impact of the most severe disabilities.
Presumptive is a disability policy provision that waives the elimination period and presumes the insured to be totally disabled if they lose complete sight in both eyes, hearing in both ears, speech, or the use of both hands, both feet or 1 hand and 1 foot. Look for a policy that has a presumptive provision that does not require a permanent or irrecoverable loss.
Look for a policy that waives premiums during disability that apply to the period of disability and one that waives premiums for 6 months following recovery. Most policies only waive premiums that fall due during a disability and most provide for no waiver benefits after recovery.
If you expect your income to go up over time, it is important to have the right to increase the monthly benefit of your policy without regard to your health. A quality Future Increase Option rider will allow for the insured to purchase additional coverage each year on the policy’s anniversary, subject to financial underwriting.. Be careful as many policies will limit the amount of additional coverage that can be exercised each year. The better policies are ones that will also allow increased coverage to be exercised when group coverage is lost, even if it is not on a policy anniversary.
Content courtesy of Disability Insurance Plans