You may have bought your policy at a time when you didn’t have group long term disability (LTD) at work. If you now have this through your employer, you may find yourself in a situation where you are over-insured. This is OK!
If you bought your individual disability insurance policy before you had any LTD at work, you can (and should) keep both. Individual policies that are purchased before the group LTD at work are in place would pay the full benefit for any qualifying disability. The same is true of your Group LTD. It would also pay full benefits based on the specifications of the policy. Some people are tempted to discontinue their individual disability insurance policy and just go with the free LTD at work. This is a mistake.
Elimination and Benefit Period
This is one area of policy review where you may have an opportunity to save some money. When you applied for your policy, you had to select the elimination and benefit period. The elimination period is the time that one has to be disabled before benefits are payable. The benefit period is then the length of time that benefits are payable for. Typically, a long-term disability insurance policy has an elimination period of 90 days and a benefit period to age 65.
As your career and financial situation changes, it might be appropriate to change the elimination and/or benefit period of your policy. Although you won’t be able to go shorter on the elimination period, or longer on the benefit period without having the policy re-underwritten and reissued, you can lengthen the elimination period or shorten the benefit period. The insurance company will always take less risk.
You may want to lengthen the elimination period from 90 to 180 days if you now have more cash reserves that you could access in the event of a sickness or accident. Additionally, if you are closer to retirement age you may consider reducing the benefit period from “to age 65” to 10 or 5 years. Making these changes would reduce the cost of your coverage.
Graded vs. Level Premiums
A level premium is one that is the same each year that you own your policy. It will be the same when you are 60 as it was when you bought it at 25. A graded premium, on the other hand, is one that starts out lower but increases a bit each year. It will eventually get to be more expensive than the level premium. Over the life of a policy, the least expensive way to purchase disability coverage is to lock in the level premium at as young an age as possible.
Cash flow limitations often make the graded premiums more attractive for new professionals, or medical residents and students. Getting a policy with the graded premium structure means they can start to protect their income, lock in their insurability through the use of the future increase options, and often take advantage of any discounts that their medical school may provide.
While buying a disability insurance policy under the graded premium structure can be beneficial, leaving it this way is not. Eventually, graded premiums become more than level premiums, and continue to increase over the life of the policy. During any review of coverage, it’s important that you assess what premium structure you have, and the options available to convert a graded premium to a level one.
How are you paying for your disability insurance policy? Unless you’re paying your premium annually you may be throwing money away. Companies charge a bit more to pay a premium on any mode other than annual. The most common way to pay is via the automated monthly bank draft. This is usually the best since it is easiest on cash flow, and the extra charge for this mode is not very high.
The most expensive way pay is on a quarterly mode. It also requires you to write four checks a year. That is four times that the bill can get lost in the mail. It is four times a year that you may be on vacation when the premium is due and forget to pay for it. Because of this, people who pay on quarterly mode lapse their policy unintentionally more than anyone else. Avoid the quarterly payment whenever possible. You will save money and hassle in the process.
Optional Riders on the Policy
You probably purchased some optional riders on your policy, the most popular riders purchased include:
• Partial Disability Rider
• Cost of Living Adjustment (COLA)
• Future Increase Option Rider (FIO)
• Student Loan Protection Rider
While these may have provided value when you bought your policy, they may not be necessary today.
If you’re close to the end of your benefit period (usually age 65), the cost of living adjustment rider may no longer be as beneficial as it was when you bought the policy in your 20’s. Similarly, if you have maxed out your income and don’t’ foresee the need to buy additional coverage in the future, or have paid off your student loans, there’s no reason to continue to pay for the future increase option or student loan rider.
When you bought your disability insurance policy, the insurance company based the pricing on a number of factors. Among the most important was your occupation and what their claims experience was with that occupation. They issued your policy with an occupation class-- usually on a scale from 1 to 6, with 6 being the better/less expensive classification.
Over time, things change. The claims experience a company has with the occupation may change. Your occupation itself may also change. You may have bought the policy when you were in a sales position, but then you went back to school and became an attorney. The insurance company may also be having better claims experience now than they did when you applied. If you never reviewed your coverage, you’d never know, and you could be overpaying for the policy.
While a policy that is “non-cancellable and guaranteed renewable” cannot be increased in cost by the carrier, it can be decreased in cost if the occupation class is now better than when originally issued.
Medical Exclusions and Ratings
One of the biggest reasons to review a policy is to possibly improve the original offer. Since disability insurance is medically underwritten, pre-existing conditions are usually not covered. When someone has a pre-existing condition, this is often excluded from the coverage, or an extra premium called a “rating” is applied. This is called an adverse action.
No one likes to spend money on something that they don’t have, and when an exclusion is placed on a policy, the insured almost always focuses on that particular condition that isn’t covered as the one thing that will disable them. It almost never happens this way, but it’s normal to focus on what you don’t have rather than on all the value the policy still provides. Medical exclusions and ratings are not always permanent, however, and should be a major part of any review.
At the time the policy is approved, the underwriter will usually let the agent know why the exclusion or rating was necessary and if it is reviewable in the future. Sometimes, a condition that necessitates the exclusion or rating is temporary and expected to clear up over time. If this is the case, the policy can be reviewed, and the adverse action changed or removed.
Disability insurance is not like any other type of policy. Because it is so valuable, it requires a fair amount of effort to obtain a policy. It also requires a little effort to maintain the policy so that it’s still protecting your income in the best way possible. Be sure to review your coverage every year, or upon major career or life changes.
Ask yourself and your agent these questions:
- Has my income changed from when I bought the policy?
- Can I wait longer, or get paid for a shorter period of time, now versus when I bought the policy?
- What optional riders did I buy on my policy, and do I still need all of them?
- Am I still doing the same job as when I bought my policy or has my career changed?
- Did I have a pre-existing condition when I applied that was excluded, or receive a rating on the coverage, and can this be reviewed now for reconsideration?
William Olmsted is a Registered Representative of Park Avenue Securities LLC (PAS). Securities products offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Financial Balance Group, LLC is not an affiliate or subsidiary of PAS or Guardian.
This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.