Disability Insurance Policy Walk-Through
The Benefits and Options in a Disability Income Insurance Policy
When you are considering purchasing Disability Insurance there is good news and bad news. The “good news” is that there are many options, and you can pick and choose. You are able to custom-build the policy to your specifications, needs, and budget. The “bad news” is there are a lot of options and moving parts to understand and consider! Competing insurance companies call the same benefits by slightly different names. People are sometimes overwhelmed and give up on obtaining coverage. Below we list and explain simply those benefits and options.
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. Joshua is 32, a CPA, His current annual income is $74,000.
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.
In Joshua’s policy the base monthly benefit is $4,000 (65% of his gross monthly pay).
Elimination Period
This 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.
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 a cold). 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 Joshua’s policy we chose 90 days, a good mix between cost consideration and needing benefits after 3 months of using savings, etc. to fund one’s family budget.
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). But what if you are permanently disabled? In choosing the benefit period you are choosing how long the benefits can last. 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 or age 70.
In Joshua’s policy we chose to age 67, which ties in with his intended retirement age.
After choosing a benefit period you can easily calculate the “potential cumulative benefit” of a Disability Insurance policy. Joshua is currently 32, and so if he were permanently disabled now, after 90 days he would begin to receive $4,000 monthly. To age 67 - age 32 = 44 years x 12 months x $4k = $2,112,000.00.
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 yes, your doctor, not one the insurance company assigns). And that you remain under the regular care of the physician, as the insurance company wants to know how you are doing, and when you can return to work.
The next part of that definition depends on the insurance company, and what options you chose when you built your policy. There are optional, stronger definitions of disability you can choose as an added benefit, explained below. 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. You can choose this standard definition, or choose a stronger definition of disability as an optional benefit.
Features and Options Usually Built Into the Policy
Waiver of Premium
If you are disabled, satisfy the elimination period, and are receiving benefits the insurance company stops charging you the monthly premium cost.
Presumptive Total Disab.
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 insurance company, upon an approved plan, will help pay for rehabilitation expenses associated with your disability.
Recurrent Disability
If your disability (from the same disabling illness or injury) stops and starts again within 365 days, the two periods of disability will count as one. You will not need to satisfy a new elimination period if already met. to receive benefits.
Survivor Benefit
If in the case of your death while receiving the policy benefits your 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.
Supplemental Health Bene.
Some insurers offer a one-time, lump sum benefit to help with medical expenses if you are disabled by a certain illness (ex., cancer, stroke, etc.).
During Military Service
Some insurers allow you to suspend the policy during your active military service (which is a disability exception in the policy). The policy is essentially “on hold,” and then you can resume the policy once your military service ends.
Optional Benefits You Can Choose For Your Policy with an Extra Cost
Each of these are optional benefits you can choose to add to your Disability Insurance policy. They come at an extra premium cost. Or you can choose not to add them. You can pick and choose which of the options fit your needs.
Own Occupation Definition of Disability
This stronger, more specific 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 max. benefit period, as long as the person cannot work in the exact occupation they were previously working in. And, 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.
The definition goes on to state that the insurance contract will consider your occupation as specific to that policy, and state the occupation in the policy.
This 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. This is so important for people who have invested much in time and money for expert training in a certain field, a field that usually carries a higher than average income.
We work with many veterinary ophthalmologists, a specialist in the veterinary medicine world. Their main duties are meeting with patients and diagnosing vision problems, and also surgery to correct those vision abnormalities. An example, 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 of disability considers them disabled and entitled to monthly benefits as they cannot perform a crucial duty in their workload.
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 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.
In our example of a veterinary ophthalmologist, the disabled insured might want to return to work as a veterinarian in a day hospital, visiting with patients and treating them without surgery only. They would receive the monthly benefits of their DI policy in addition to income from their new animal hospital job.
In Joshua’s policy we chose the “pure own occ rider.”
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 is much lower.
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. At that time 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 Joshua’s policy for 2 reasons; Joshua understood the many scenarios of being partially disabled, and wanted to replace that lost income, and 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 Rider
The base monthly benefit, the amount of money the insurer sends you if you become disabled, is based on trying to replicate your “take home pay,” or the amount of money you earn, after Federal and State taxes are owed , then 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! But what if you suffer a very serious disability and are permanently disabled? 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 to your family budget. 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. You and your family make those decisions.
In the case of Joshua’s policy, he chose the catastrophic rider, which would add $1,242 monthly benefit to the $4,000 base monthly benefit ($5,242 monthly total). This brings the benefit total from 65% of his gross monthly income to 85%.
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. Though one is eligible 6 months after a disability begins, most people find that approval and benefits do not begin for a year or two.
This rider is designed to make up 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.
To save money Joshua did not choose this option, confident the base monthly benefit he chose would fund his family budget.
Cost of Living Adjustment (COLA)
When designing your Disability Insurance policy you choose a base monthly benefit. And you can increase that number over time as your income increases.
But what about if you are disabled? That base monthly benefit is now what your monthly income will be. Costs rise each year, and our Federal government even tracks that and let’s us all know in the “Consumer Price Index.” Each year you collect the benefits of the Disability Insurance policy to fund your family budget the monies are going to feel like slightly less as time goes by and the costs of goods rise.
The Cost of Living Adjustment (COLA) option helps keep check with rising prices. The rider 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. These increase percentages vary with the different insurers. One very popular choice is 3% per year simple interest. There are also compound interest options.
In Joshua’s policy we declined this, choosing the Guarantee of Physical Insurability rider instead as a way of increasing the base monthly benefit over time.
Guarantee of Physical Insurability
Though you pay for Disability Insurance each month with money, the premium cost, insurance underwriters like to think you qualify to begin a Disability Insurance plan with your good health. Disability Income Insurance plans are underwritten, meaning that the insurer asks you lots of health questions and may even ask for doctor’s notes and / or a paramedical exam to get an idea of your health before offering coverage.
This Guarantee of Physical Insurability Rider guarantees your right to purchase more monthly benefit for your policy, without the insurer asking any health questions or underwriting. You just have to show proof of a higher income when requesting more Disability Insurance Benefit. Future benefit is purchased on your good health today!
Joshua, early in his career and knowing his income will rise over time chose this option.
Unlimited Benefit for MD / SA
Most Disability Insurance providers limit the benefit duration of one diagnosis that results in many disabilities where DI benefits are paid; the diagnosis they define as “mental disorder (or mental health) and substance abuse. So instead of monthly benefits being paid until the insured can return to work, or the maximum benefit period of say, age 67 for 99% of the disability diagnoses….this one diagnoses, the insurance company states that the benefits for 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, or many insurance companies will waive the 2 year limit as an optional rider or benefit, for an extra monthly cost.
In Joshua’s policy this was chosen to cover any disability for the maximum benefit period.
Two Recent Benefit Innovations
Two more recent innovations in Disability Insurance benefit options are ways for the policy to help with student loan payments, and continuing retirement savings.
Student Loan Repayment Rider
A large monthly bill in many people’s family budget is a student loan payment, paying off student loans from their university or specialized training. Disability Insurance base monthly benefits are paid to the insured without instruction or mandate on how to spend them, so an insured can utilize part 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 while the insured is disabled and receiving monthly benefits as income replacement. Just a separate payment to the student loan.
In Joshua’s case he did have a student loan with a monthly payment of $350, and a repayment schedule with 5 years remaining. So we chose this benefit option with just those parameters in place. If Joshua suffered a disability just after the policy began…after the elimination period was met, a payment of $350 would go to the student loan holder each month, until Joshua 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, but they also lose their ability to save for retirement! And if they were disabled for a long time, their Social Security retirement benefits could be lower, as they missed many chances at increasing the amount of money made in their “top 40 quarters” of earning income in their lifetime.
This benefit option allows for a set, separate benefit amount to be set aside for the disabled insured’s retirement years (Most Disability Insurance policies end at a set age, age 65, age 67 or age 70….what income will you use then? Retirement savings!). There are two main types of this benefit rider that are emerging from insurers:
-A monthly benefit routed to the retirement savings plan you use: You may have a personal IRA or other type retirement savings plan. The set benefit amount as part of the retirement savings benefit rider, if the insured was disabled and receiving monthly base monthly benefits is sent to the retirement plan as a monthly contribution.
-A lump sum retirement benefit option. A number, usually a percentage, of the total Disability Insurance benefits received by the disabled insured, is given in a lump sum to the insured at retirement age (when the policy ends) to be used for retirement income.
In Joshua’s policy the insurer we chose offers the second type, the lump sum retirement rider. The insurer assigns the percentage of 25% to the benefit option. Joshua chose this, and for example, if he 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 payment of $100,000 (25% of $400k) to use as part of his retirement income.
And a Detail You Must Make Sure Is Part of Your Disability Insurance Policy….
This is not an option to choose separately, but a detail built into the strongest individual Disability Insurance policy contracts, the detail that your DI policy is Non-Cancellable and Guaranteed Renewable. What does that mean?
With a policy that is non-cancellable and guaranteed renewable the insurance company promises that it cannot change or cancel your policy, except for your nonpayment of premiums. Nor can the insurance company increase the premium costs before you reach the age your plan benefits end (usually age 65, 67 or 70). They cannot make these changes for ANY reason; including changes in your income, your occupation or your health history.
In short, the policy is just as written for 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.
So there are no surprises. No surprises in cost of the coverage, it is always the same. No surprises in benefits, as they cannot change for any reason except non-payment of premium. You can add coverage to the policy for an added fee over time, but the insurance company can never take away the benefits they have already promised!
Note, the association disability insurance plans that are offered to many workers in specific occupations such as veterinarians, optometrists, accountants, etc….these disability insurance plans masquerade as something similar to an individual Disability Insurance policy that is non-cancellable and guaranteed renewable, but they are not. They are group DI plans like an employer would offer its employees. For a premium cost that may be less, there are a lot fewer promises made by the insurer. Rates can change, the policy benefits can change, or the policy can be cancelled at any time!