The Benefits and Options in a Disability Income Insurance Policy
(a Policy Walk-Through)
Purchasing your own Disability Insurance coverage offers flexibility….and a lot of choices to be made.
You are able to custom-build the Disability Insurance policy to your specifications, needs, and budget.
But there are a lot of options and moving parts to understand and consider! Competing insurance companies call the same benefits by slightly different names. This can be overwhelming.
Below we list and explain simply the benefits and options of Disability Insurance, so you can feel confident in your policy choices.
We always find that using a real-life example helps you visualize the details. So along with explanations we illustrate a Disability Insurance policy we recently put together for a local client. Christian is 32, and is a pediatrician, His current annual earned income is $175,000.
Base Monthly Benefit
This is the amount of money the insurance company will send you each month if you meet the definition of disability specified in your policy. (put simply, you are certified disabled by your physician, and are under the regular care of a doctor).
You are able to choose the benefit amount in your Disability Insurance policy, up to a maximum percentage of your gross monthly income, usually 60, 65, or 70% of your income. Disability Insurers want to be able to replace your “take home pay” (the income you bring home to your family budget after Federal and State taxes are taken out), but not more than that.
Christian’s policy offers a base monthly benefit of $8,750 (60% of his gross monthly pay).
Elimination Period
The “elimination period” is the amount of time between the day your disability stopped you from working and the day the insurer begins sending you base monthly benefits. The most popular choice is 90 days, though many insurers offer 30, 60, 90, 180, 360 days, and even 2 years before monthly benefits begin.
The elimination period is necessary to prevent insurers the time and expense of paying a short claim (example, you were out of work 2 days with the flu). The elimination period is also a powerful tool in helping you choose a more affordable policy. The longer you can delay Disability Insurance benefits, the lower the monthly cost of the policy.
In Christian’s policy we chose 90 days, a good mix between cost consideration and needing those monthly benefits after 3 months of using savings, etc. to fund your family budget while disabled.
Maximum Benefit Period
This is the maximum length of time the base monthly benefit will be paid. In all Disability Insurance policies it is stated that once you can return to work according to the definition in your policy the benefits end (as you are now working and earning your income again). That time period could be as short as one month (the average disability insurance claim is 2 1/2 years).
But what if you are permanently disabled? In choosing the benefit period you are choosing how long the benefits will last in this unfortunate event. There are shorter periods that help keep the premium cost lower, 5 or 10 years. The longer periods, which are the most popular, tie into a traditional retirement age; age 65, age 67 (most popular) or age 70.
In Christian’s Disability Insurance policy we chose “to age 67,” which ties in with his intended retirement age.
One you choose a benefit period you can easily calculate the “potential cumulative benefit” of a Disability Insurance policy. Christian is currently 32, and so if he were permanently disabled now, after 90 days he would begin to receive $8,750 monthly. To age 67 - age 32 = 35 years x 12 months x $8,750 = $3,675,000.
Definition of Disability
When do you receive the benefits stated in the policy to begin replacing your lost income? The answer is “when you meet the definition of disability in the policy.”
The first part of that definition is that your attending physician has certified that you are disabled and cannot currently work. Your doctor does that through a claim form they complete online, on the phone, or on paper, explaining to the insurance company what your current condition is, and why that prevents you from working.
The second part of the definition of disability is that you remain under the regular care of your physician, as the insurance company wants to know how you are doing, and when you can return to work.
The third part of that definition depends on the specific definition of disability you chose in your policy.
Here we will concentrate on the standard definition of disability, usually referred to as “any occupation.” That definition says that if the insured can return to work in an occupation for which they are able to do based on education, training or experience, then the benefits of the policy end. This standard definition may force you to return to work in an occupation different from your pre-disability occupation, and at a reduced income.
There are optional, stronger definitions of disability you can choose as an added benefit (and at a higher premium cost), explained below in the “Optional Benefits” section. Christian did not choose the standard definition of disability insurance since he invested so much time and money in his occupation as a pediatrician (MD).
Features and Benefits Usually Built Into the Policy
When reviewing an illustration of Disability Insurance offered by an insurance company you will find many of the features and added benefits of the policy built into the policy at no extra cost.
These features may have been optional in the past, but insurers have found them to be a standard need, and build into each of their policies to make their offering strong when you compare to other insurers.
Below are eight benefits we find built into most current Disability Insurance polices.
Waiver of Premium
If you are disabled, satisfy the elimination period, and are receiving monthly disability benefits the insurer stops charging you the monthly premium cost for the duration of your disability.
Presumptive Total Disability
You are considered disabled and receive benefits if you sustain the total loss of the use of both hands, or the use of both feet, or the use of 1 hand and 1 foot, or completely lose sight in both eyes or the hearing in both ears, or speech.
Rehabilitation Benefit
The insurer will help pay for rehabilitation expenses associated with your disability and returning to work (ex., occupational therapy, counseling, career training, etc.).
Supplemental Health Benefits
Some insurers offer a one-time, lump sum benefit to help with medical expenses (to help cover the medical expenses health insurance asks you to share) if you are disabled by a certain illness (ex., cancer, stroke, etc.).
Survivor Benefit
In the case of the insured’s death while receiving the monthly policy benefits, the insured’s stated beneficiary will receive a benefit equal to 2-6 months of the monthly benefit.
During Unemployment
If unemployed and receiving unemployment benefits you may suspend the policy for a period of up to one year. During the pause no premium costs are due, nor would any benefits be paid.
Recurrent Disability
If your disability (from the same illness or injury) stops and starts again within 365 days, you will not need to satisfy a new elimination period before monthly benefits begin.
During Military Service
Some insurers allow you to suspend the policy and premium payments during your active military service. The policy is essentially “on hold,” until you can resume the policy once your military service ends.
Important Optional Benefits You Can Choose For An Extra Premium Cost
There are3optional benefits you can choose for your Disability Insurance policy. We always recommend all 3, as the benefits strengthen the base policy exponentially. There is an extra premium cost for each. Consider the options carefully, then balance your needs for a strong policy with choosing an affordable premium cost that fits your budget.
“Own Occupation” Definition of Disability
Christian chose the “own occupation” definition of disability in his policy, as he is very passionate about his specialty, pediatrics, and does not want to be forced to work in any other field.
Disability Insurance policies usually start with the standard “any occupation” definition of disability we discussed above, then give you an option of choosing an “own occupation” definition.
This stronger, more specific “own occupation” definition of disability, also called “regular occupation,” states that the insurer will pay the base monthly benefits until the person can return to work, or up to the maximum benefit period, as long as the person cannot work in the exact occupation they were previously working in.
And, this stronger definition goes on to state that if the disabled person cannot perform just one of the main duties of their job, they are considered disabled, and continue to receive benefits, as long as the insured is not working in another occupation.
When people choose the “own occupation” definition the insurer states this occupation specifically in their insurance contract.
Why is this so important to choose? This stronger “own occupation” definition removes the part of the “any occupation” definition that talks about disability insurance benefits ending when you can return to work in any occupation for which you are suited because of education, training or experience.
If you have invested many years in school and / or work experience training for a certain occupation, that occupation usually carries a higher than average income. The “own occupation” definition of disability protects you from having to work in another field…if you cannot work in your own occupation, the policy considers you disabled, and you receive benefits.
An even stronger version of this definition is the “pure own occupation” or “true own occupation “ definition of disability. Did you notice how the above definition stated that the benefits would be paid unless the insured returned to work in another occupation? If someone wanted to go back to work in another field they would forfeit the disability benefits.
The “pure” or “true” own occupation definition removes the language about not working! With this definition in place a disabled person in their stated own occupation would receive the policy’s monthly benefits in addition to their new income in another occupation.
An example: We work with many veterinary ophthalmologists to help them choose Disability Insurance. Their main duties are meeting with patients and diagnosing vision problems, and also surgery to correct those vision abnormalities. What if a veterinary ophthalmologist lost the permanent use of a hand? They could continue to see patients, and diagnose. But could not perform surgery, a part of their job that generates the most income.
-The “own occupation” definition considers them disabled and entitled to monthly benefits as they cannot perform a crucial duty in their workload, as long as they are not working elsewhere.
-The “true own occupation” definition consider them disabled and entitled to monthly benefits, even if they chose to work in another field (maybe they could see and diagnose patients in a day hospital).
Residual Disability Benefit
Disability Insurance benefits being paid to the insured because of their disability are contingent on their not being able to work at all, a “total disability.”
But what if your doctor thought you were well enough to begin working part-time? Maybe 2 days a week instead of 5? Your income would be much lower than if you were back to a full 5 days.
That is where Residual Disability Benefits step in, sending you a percentage of the base monthly benefit equal to the percentage of income you have lost working a smaller amount of time. Here are some real-life examples we have seen:
-An IT consultant was involved in a car crash that kept him out of work totally for 9 months. He received the full disability benefit during that time. After 9 months his attending physician wanted him to return to work, just a few hours a day, a few days a week, to help him heal and strengthen and move. He was able to work again, but only for about 40% of his prior “normal.”
-An attorney in his early 50’s was diagnosed with Parkinson’s Disease. He continued to work, but some days could work part-time, other days not at all. But he was needed for his expertise in the firm. His work constituted about 50% of normal for a few years before he became totally disabled.
Residual disability benefits would help both these workers, replacing part of that lost percentage of income with a percentage of the base monthly benefit paid to the insured each month.
With many insurers the minimum percentage is 50% of the base monthly benefit. And, if the percentage of lost time do to the disability is 75% or more, then the insurance company pays the full (100%) base monthly benefit to you.
We chose residual disability benefits in Christian’s policy for 2 reasons. First, Christian wanted to replace any lost income due to disability, whatever that percentage was.
Second, most Disability Income Insurers require you to choose the residual disability benefit option if you choose an “own occ” definition of disability. They pair these benefits.
Catastrophic Benefits Rider
The base monthly benefit the insurer sends you if you become disabled, is based on trying to replicate your “take home pay” (the amount of money you, after taxes are deducted, bring home to fund your family budget). This percentage varies from 50-75%, with the average being 60%.
And that benefit continues to fund your family budget while disabled!
But what if you suffer a very serious disability and are permanently disabled? In addition to needing money to fund your family budget, you may have continuous medical bills, physical therapy, extra expenses for care giving, etc.
The catastrophic benefit rider is designed to add more monthly benefit to your policy to help pay for those added expenses. You and your family, not the insurer, make those decisions.
If your disability meets the definition of “catastrophically disabled” (you cannot perform without assistance 2 or more of the “Activities of Daily Living” (ADLs), or have suffered severe cognitive impairment), then an added benefit is sent to you each month along with the base monthly benefit, to help fund whatever added expenses arise.
In the case of Christian’s policy, he chose the catastrophic rider, which would add $5,250 monthly benefit to the $8,750 base monthly benefit ($14k monthly total benefit). This brings the benefit total from 60% of his gross monthly income to 95%.
Four Other Optional Benefits
Social Insurance Supplement
Social Security does offer a benefit to disabled people in the U.S. The average benefit is $1,234 monthly, not an amount to fund one’s family budget! And the benefit takes a long time to qualify for. Most people find that approval and benefits do not begin for a year or two after their disability.
This rider is designed to fill the gap for that slow process. This Social Insurance Supplement (abbreviated “SIS”) rider will pay an extra benefit amount, beginning after the elimination period, and continuing until the Social Security Disability Income (SSDI) payments begin.
Christian did not choose this, confident the base monthly benefit he chose would fund his family budget.
Cost of Living Adjustment (COLA)
When choosing a Disability Insurance policy you choose a base monthly benefit. And you can request an increase in that benefit amount over time as your income increases.
But if you are disabled and your policy’s benefits begin, that base monthly benefit is locked in for the remainder of the benefit duration.
Costs rise each year, and the Disability Insurance policy’s benefits that fund your family budget may not keep up as time goes by and the costs of goods rise.
The Cost of Living Adjustment (COLA) option states that while you are disabled and receiving benefits, your base monthly benefits will be increased once each year, on the anniversary of when your disability occurred. Most insurers offer 3% and 6% simple interest and compound interest options.
In Christian’s policy we declined this, a choice made to keep the premium cost affordable.
Guarantee of Physical Insurability
Disability Insurance plans are underwritten, meaning that the insurer asks you lots of health questions and may even ask for doctor’s notes to get an idea of your health before offering you DI coverage.
This Guarantee of Physical Insurability Rider guarantees your right to purchase more monthly benefit for your policy in the future, without the insurer asking any health questions or underwriting.
Future benefit is purchased on your good health today!
Christian, early in his career and knowing his income will rise over time, chose this option.
Unlimited Benefit for Mental Disorder / Substance Abuse
Disability Insurance policies pay monthly benefits until the insured can return to work, or up to the maximum benefit period of say, age 67. And this is true for injuries and 99.9% of illness diagnoses.
There is one exception, one diagnosis…most insurers state that the benefits for a mental disorder / substance abuse (MD / SA) diagnosis end after just 2 years of monthly benefits.
And why is this a big deal? Disability Insurance claims examiners find that fully 15% of disability insurance claims are from a diagnosis of either mental health or substance abuse.
You can accept the 2 year limitation when designing your policy. Or many insurance companies will waive the 2 year limit as an optional rider or benefit, for an extra monthly cost.
We chose this option for Christian, to cover any disability for the maximum benefit period.
Two Optional Benefits Insurers are Starting to Offer
Two more recent innovations in DI benefit options are ways for the policy to help with student loan payments, and continuing retirement savings while you are disabled.
Student Loan Repayment Rider
A large monthly bill in many family budgets are student loan payments, paying off student loans from their university or specialized training.
Disability Insurance base monthly benefits are paid to the insured without mandate on how to spend them, so an insured can utilize part of the benefit to make student loan payments.
This benefit option allows those with student loans to make provision to have the loan paid back each month separately from the base monthly benefit while the insured is disabled and receiving monthly benefits as income replacement. A separate payment to the student loan.
In Christian’s case he did have a student loan with a monthly payment of $450, and a repayment schedule with 5 years remaining. We chose this benefit option with those parameters
If Christian suffers a disability…after the elimination period is met, a payment of $450 would go to the student loan holder each month, until Christian could return to work, or for the 5 year term.
Retirement Savings Benefit Rider
When someone suffers a disability they not only lose their ability to earn an income and fund their monthly family budget. They also lose their ability to save for retirement!
And their Social Security benefits could be lower (their “top 40 quarters” of income would be in lower earning years).
This benefit option allows for a separate (from the base monthly benefit) benefit amount to be set aside for the disabled insured’s retirement years. The benefits are offered in one of two ways:
-A monthly benefit contributed to the insured’s existing retirement plan while they are disabled and receiving the base monthly benefit.
-A lump sum retirement benefit given to the insured at retirement age (when the policy ends) to be used for retirement income.
Christian’s policy contains the lump sum retirement rider. The benefit is 25% of base monthly benefit received. For example, if Christian were disabled and received $400,000 in base monthly benefits over the course of his disability…at retirement age he would receive a lump sum retirement payment of $100,000 (25% of the $400k).
And a Detail You Must Make Sure Is Part of Your Disability Insurance Policy….
Built into the strongest individual Disability Insurance contracts is the statement that the policy is Non-Cancellable and Guaranteed Renewable. What does that mean?
A policy that is non-cancellable and guaranteed renewable promises that the insurer can’t change or cancel your policy for any reason, except for your nonpayment of premiums.
Non-cancellable and guaranteed renewable policies also promise the insurer cannot increase the premium costs before you reach the age your plan benefits end (usually age 65, 67 or 70).
The insurer cannot make any benefit or cost changes for ANY reason; including changes to your income, your occupation or your health history.
In short, the policy remains the same as long as you own it, and all you have to do to ensure your part of that promise is to pay the monthly premium costs.
Note: Association disability insurance plans offered to many workers in specific occupations such as veterinarians, optometrists, CPAs, etc. masquerade as something similar to an individual DI policy that is non-cancellable and guaranteed renewable, but they are not.
Association disability insurance plans are group DI plans like an employer would offer its employees. The premium cost may be less, but there are fewer promises made by the insurer. Rates can change, the policy benefits can change, or the policy can be cancelled at any time!
Request a Free Disability Insurance Illustration with Built-In and Optional Benefits:
Complete the form and Chip will send you an email with recommended quotes of disability insurance (tailored to your occupation, income and other details). All in a conversational, easy to understand explanation of the details Chip is known for. You can review the information, then follow up with your questions via email, phone call, text, Zoom / Google Meet or an in person meeting.
Privacy is something we take seriously. The minimum of information is shared with an insurance company to put together a detailed free quote and illustration for you.
Note: Chip only helps North Carolina residents choose and enroll in Disability Insurance.