My last article described how to begin to determine the amount of individual disability insurance available. This article is focused on what to look for in a policy and help you decide which riders should be part of your policy.
Noncancellable and Guaranteed Renewable
If you purchase a policy that is both noncancellable and guaranteed renewable, you are ensured that the premium rates and policy provisions will not be changed. This combination provides the greatest degree of consumer protection.
Definition of Total Disability
Whether you are a physician, an executive, a practice or hospital administrator, or working in another capacity, look for a policy that contains a true “own-occupation” definition of total disability. This definition pays benefits if you are disabled and are unable to perform the material and substantial duties of your occupation, even if you are gainfully employed in another occupation.
Residual Disability Rider
Although “own-occupation” is the most liberal definition of disability, it is not the end all. What happens if your physician states that you can still work in your occupation but he or she requires that you work fewer days per week or less hours per day? A residual disability rider protects your income by providing benefits proportionate to your loss of income in the event you are not totally disabled. Generally, to qualify for residual disability benefits, you must experience an income loss of 15% to 20% or more compared with your predisability earnings. In addition, if your loss of earnings were greater than 75% to 80%, then 100% of your monthly disability benefit would be paid.
This rider is also extremely important if you are totally disabled first and then return to your occupation with a limited schedule as you recover, or if you have a continued loss of income, because you were previously disabled, even if you are back to work on a full-time basis.
Finally, it is imperative that you do not purchase a policy that requires that you be totally disabled first to collect benefits under the residual disability rider. Although this is not the case with individual policies, this is very common in group policies offered by medical or other professional associations in which you may be a member.
Cost of Living Adjustment Rider
A Cost of Living Adjustment (COLA) rider is designed to help your benefits keep pace with inflation after your disability has lasted for 12 months. This adjustment can be a fixed percentage or tied to the Consumer Price Index. Ideally, you want a COLA that is adjusted annually on a compound interest basis, with no “cap” on the monthly benefit. Although expensive, this rider can provide significant increases to your monthly benefit if you are disabled young. However, if cutting the cost of coverage is an issue, this may be the first optional rider to consider excluding from your policy. Al ter - natively you may use the additional premium associated with this rider to purchase a larger monthly benefit if you are not already contemplating the purchase of the maximum monthly benefit for which you are eligible, based on your income or any other in-force coverage.
Future Increase Option Rider
This rider is a must for young professionals. As your income rises, this rider provides you with the ability to increase your disability coverage, without providing evidence of good health. This guarantees that any medical conditions that develop after your original policy’s purchase would be fully covered and not subject to new medical underwriting. It is important to know when you can increase your coverage, as well as by what increments, on any given option date. Some companies may allow you to use your entire option in one year as long as your then-current income warrants the increase; others, however, may limit the amount that you can purchase.
Catastrophic Disability
Benefit Rider If you become catastrophically disabled under the terms of the policy and lose the ability to perform 2 or more activities of daily living without assistance, become cognitively im paired, or become presumptively disabled, you would receive a monthly benefit in addition to the base monthly benefit purchased. This additional benefit can be as high as $12,000, depending on the specific insurance carrier from which you purchase the policy. This benefit amount plus the base policy, plus other in-force coverage, if any, generally cannot exceed 100% of your income.
Summary
The next, and final, disability insurance article will offer tips on how to compare one company’s policy to another when shopping for coverage. This will help you ultimately to choose the company and policy that best meet your individual needs and goals.