What To Look For In A Disability Insurance Policy
Definitions Matter The Most
by William Olmsted

There are many types of disability insurance policies available to consumers. These fall into two basic categories – short term policies, and long term policies. Short term disability policies are typically provided through one’s employer at little to no cost. These usually cover a percentage of your income, and pay you starting after 7 or 14 days of being out of work, up to 3 months. Short term disability plans are not widely available to individuals outside of their employers. Long term disability coverage is also often offered at work as part of a group disability insurance plan, but can be readily purchased by individuals who want to supplement this employer sponsored coverage, or who don’t have coverage at work. There are a number of factors to consider when evaluating individual individual long term disability insurance.

Non-cancelable and Guaranteed Renewable

Non-cancelable policies are those where the insurance company can’t increase the rates, or change the policy provisions, on you for any reason provided premiums are paid on time. If a policy isn’t non-cancelable, it can still be “guaranteed renewable”. This means that although the insured must guarantee that they will renew your coverage every year, they don’t guarantee the rate. In a guaranteed renewable only policy, the rates can change based on a number of factors. They can increase rates for everyone in a particular state; for everyone who purchased a policy in a given year; or for anyone in a particular occupation class. They can’t single you out and increase your rate, but they can increase them based on these classifications.

In general, it’s best to have a policy where the insurance company is locked into charging you what you agreed to at the time of the application. Be sure to look for something that is both non-cancelable and guaranteed renewable.

Definition of Disability

This is really what you’re buying! A policy that says you’re disabled if you can’t do the duties of any occupation certainly will cost less than a policy that says you’re disabled if you can’t do the duties of your own occupation.

There are currently three major different definitions available to consumers.

1. Any occupation – This policy will pay you if you can’t do the duties of any occupation. This is similar to the definition that is used when Social Security determines whether or not someone is disabled. It is the least protective of all disability definitions.
2. Modified own occupation – This policy will generally pay you if you can’t do the duties of your own occupation, and you’re not performing some other occupation. In this policy, the insurance company leaves it up to you as to whether or not you work again. If you do, they will reduce what they pay you based on your new income. Some policies include a modified own occupation for a limited period of time, followed by an any occupation definition thereafter. This definition is usually found in second tier policies and in many group LTD plans that employers offer. In the employer sponsored LTD plans, they will almost always revert back the “any occupation” definition after 2 years of being on claim. Thus, it’s always good to supplement your group LTD with an individual policy.
3. Own occupation – This is the best definition of disability available, and is found on the top tier policies. It states that you will be considered disabled if you cannot perform the material and substantial duties of your occupation, even if you’re engaged in another occupation. In effect, you’re buying a policy that will pay you if you can’t do your specific job, even if you chose to go back to work in another job.

Although there are different choices for disability plans, the cost difference may not be substantial between the modified own occupation plan and the better own occupation plan. Consider both, but when push comes to shove, be sure to get the best definition that you can, since it may be the deciding factor as to whether or not you get paid!

Residual Disability Riders

A comprehensive disability policy will pay you for a total or a partial disability. To do this, a plan must have a residual disability rider attached to it. This rider ensures that in the event you’re partially disabled and working some, albeit for a lower income, you’ll continue to be eligible for a monthly benefit. These riders usually pay based on the percentage of lost income. This is a must have option!

Cost of Living Adjustments (COLA)

A cost of living adjustment rider will increase your monthly disability benefit once you’re disabled and receiving benefits. That last part is important, as many people mistakenly think that their monthly benefits will increase while they’re healthy.

Presume, someone age 35 buys a policy that will pay them $5,000 per month, and has a benefit period to age 65 (that’s how long they’d be paid in the event of a continous total disability). At age 40, should they become disabled and entitled to benefits, they are going to get paid that same $5,000 per month. Now, if they purchased the COLA rider when they bought their policy, that $5,000 per month will start to increase every year to help keep pace with inflation. The increases start after the insured is disabled.

People in their 30’s and 40’s should definitely consider this rider, as there can be significant effects of inflation on your purchasing power over long periods. People in their 50’s may want to consider this option, but should consult with their advisor to make sure it’s a wise investment.

Future Increase Options

The last major part to a quality disability insurance policy is assessing the need for future income options (FIO). An FIO rider provides the insured with the ability to purchase additional coverage in the future with no further medical underwriting. The insured still has to show that they qualify for the coverage financially*, but there are no more medical questions or required labs that could stand in the way of them getting a higher monthly benefit.

Future income options are great for people who anticipate growth in their incomes, and want to lock in their good health at a young age. A resident physician is a great example. Although most residents make approximately $40,000 while in school, they know that their income potential is much higher. Once they complete their residency, many will make over $200,000.

To secure this future income, one would purchase a disability insurance policy while in residency that contained a future increase option rider. This would mean that as their income increased, they can apply to add additional disability insurance coverage. If you think your income may increase, be sure to consider adding the right amount of FIO to your policy.

There are several other aspects to a good disability plan, but if you’ve addressed the four issues discussed here, you’re well on your way to protecting your most valuable asset – your ability to earn an income – with quality coverage that you can count on.

*Restrictions and limitations apply. A Future Increase Option exercised while disabled will not increase the claimant’s benefit while continuously disabled from the same, original cause. Other in-force disability insurance may reduce the amount of Future Increase Option available for exercise. Please refer to the language of the Future Increase Option rider for further details.

These are just some details of the product features and riders which are typically available today. Since policy language varies from insurer to insurer, please contact your agent or broker for complete details, terms and conditions which apply.