Disability Insurance: How to Review Your Policy
Your disability insurance policy is not something that should be filed away and never seen again. Buying your disability insurance policy was probably a bit of a chore. You have to answer a lot of medical questions, have a blood test done, submit your tax returns, and then wait a month or more to finally get approved. It is one of the most difficult types of insurance to obtain. It’s also one of the most necessary. Disability insurance is the only type of insurance that protects your most valuable asset – your income. It’s also one of the most important to maintain at a proper level and that requires regular reviews of coverage.
Many people buy their policy and then file it away for years at a time. Throughout that time, their income changes, but their disability insurance policy does not. The policy that was appropriate for them 5 or 10 years ago when they made half of what they make today is now not sufficient to cover their living expenses. Maybe some riders that they bought are not as relevant to their situation and should be discontinued. Reviewing your disability insurance policy on a regular basis with your agent will ensure that you have the right amount of coverage for your income and lifestyle and aren’t overpaying for riders that were once useful, but are now not needed. These are the areas you should assess when reviewing an individual disability insurance policy.
This may seem like an obvious area to review, but many people don’t realize that their monthly benefit does not increase over time unless they take action. It’s a common misconception that the cost of living adjustment (COLA) rider they purchased on their policy increases the monthly benefit each year. This is only true if there is a disability claim being paid. When someone is healthy and not disabled, the monthly benefit of the policy does not change over time. This makes sense when you consider how people qualify for a certain amount of coverage during underwriting.
If you buy a policy when your income is $100,000, you’d qualify for a monthly benefit of about $5,000. Fast forward 10 years…if your income is still $100,000, you wouldn’t qualify for any additional coverage. Even though inflation may have had an effect on the purchasing power of your benefit, if your income hasn’t’ changed, you would still have the correct amount of coverage.
On the other hand, if your income during that period had increased from $100,000 to $150,000, you would be eligible for a higher monthly benefit than your original $5,000 per month. If you hadn’t increased your coverage prior to the disability claim, however, you’d only be paid at the original $5,000 per month.
When reviewing your policy, be sure to ask your agent how much coverage you can buy now based on your current income. If you had included a future increase option (FIO) rider on your original policy, you may be able to increase your policy without any medical questions or blood test. In any case, making sure that your policy is at the correct amount based on your current income is a critical thing to do before you file any claim.
You may have bought your policy at a time when you didn’t have group long term disability (LTD) insurance at work. If you now have this type insurance through your employer, you may find yourself in a situation where you’re over insured. This is OK!
If you bought your individual 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 is 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.
Individual disability insurance policies offer benefits that are usually not found in group LTD. Among these benefits are a better definition of what it means to be disabled (own occupation), partial disability benefits, and the ability to take your policy with you if you leave the employer. Since many individual policies provide own occupation coverage, and many group LTD policies do not, it’s possible that you could get paid under the individual plan, but not under the group plan. Even if you did get paid by both, it would only serve to get you closer to 100% of your pre-disability income – something no one who was ever disabled had an objection to!
When reviewing your coverage, be sure to consider keeping your policy even if you have coverage at work now and it may seem like you don’t need both.
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 without putting you back through medical underwriting.
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’re closer to retirement now, 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.
When reviewing your elimination and benefit period, be sure to take into account financial changes that may impact the need to protect your income. This is one are where doing a review could save you some money.
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’re 60 as it was when you bought it at 25. A graded premium, on the other hand, is one that starts out lower than a level premium, 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. Many times, graded premiums can be converted to a level premium, thereby locking in a rate at the insureds current age. This is often the approach young professionals take. They purchase the policy under the graded premiums when cash flow is tight and then convert it to level a few years into their careers when income is higher.
Be sure to review your premium structure to ensure its still the most economical one for you at this time. Converting a policy from graded to level can save you thousands of dollars over the life of the policy.
How are you paying for your disability insurance policy? Unless you’re paying your premium on an annual mode, you may be throwing money away. Insurance companies charge a bit more to pay a premium on any mode other than annual. The most common way to pay a premium is via the automated monthly draft from a checking account. This is usually the best for most people since it’s easiest on cash flow and the extra charge for this mode is not very great.
The most expensive way to buy insurance is on a quarterly mode. It also requires you to write four checks a year. That’s four times that the bill can get lost in the mail. It’s four times a year that you may be on vacation when the premium is due and forget to pay 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’ll save money and hassle in the process.
When reviewing your coverage, be sure to ask your agent what modes are available to pay the policy and assess which one is the least expensive and most convenient for you as this could have changed since you bought the policy.
Optional Riders on your Policy
You probably purchased some optional riders on your policy when you bought it originally. The most popular riders purchased on a policy include:
- Partial or residual disability rider
- Cost of living adjustment (COLA)
- Future increase option rider (FIO)
- Student loan 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’ve maxed out income in your career 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. Eliminating these options will save you some money.
When you bought your disability insurance policy, the insurance company based the pricing on a number of factors. Among the most important was what your occupation was and what their claims experience was with that occupation. From that, 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 an insurance 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 with your occupation than they did when you applied, and they could be issuing policies with a better classification. 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. This would require your agent to review your occupation and duties with an underwriter and apply for an occupation class upgrade if appropriate. This is another way that reviewing your policy on a regular basis can make sure your coverage is up to date and possible save money.
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 if 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.
Having a routine review of your coverage with your agent will help identify these types of adverse actions that might be able to be improved over time.
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?
- Do I have any other disability insurance now, and how does this work with my policy?
- Can I wait longer, or get paid for a shorter period of time, now versus when I bought the policy?
- Is my premium increasing each year, and do I want to level this off?
- How am I paying for my coverage and is there a less expensive way to do this?
- 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?
If you review these questions periodically with your agent, you can be sure that should you ever need to call on the policy to provide for you and your family, it will do so.
The views and opinions expressed are solely those of the author and may not necessarily represent those of Guardian, its affiliates or subsidiaries.
2019-75250 Exp 02/2021.