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When you are deciding what disability insurance policy is right for you, there are many considerations. Be sure to read the fine print and ask a lot of questions. Policies can vary greatly and you want to make sure you are getting the most suitable policy for you.
Here is a list of policy provisions you should be familiar with. For more information, check the Glossary.
Policies vary. Some pay benefits if you are unable to perform the duties of your customary occupation, others only if you can engage in no gainful employment at all. It is very important to read the fine print and make sure you are getting the most suitable definition for your situation. If you don't have a good definition of disability, your policy may not pay you a benefit when you need it.
The most liberal definition is "own-occupation" which states that the policy will pay you a benefit if you can't perform the material and substantial duties of your occupation – even if you are working in another occupation or capacity.
Here's an example of how an own-occupation definition can make a difference. If you are a physician or dentist, your occupation is considered your medical specialty. With own-occupation coverage, if a surgeon hurts his index finger and can't perform surgery, he/she will receive a benefit under the own-occupation definition even if he/she decides to do research or teach medicine. Any income derived from teaching or research would not offset the definition.
Other definitions are "regular occupation" or "modified own- occupation." These policies will pay you if you can't work in your occupation but the benefit will be offset if you earn money in a different occupation or capacity.
Some policies have an "any occupation" definition. This policy requires you to be disabled not only from your current occupation, but not be able to be gainfully employed in any occupation suitable by education, training and experience. These are the most restrictive types of policies and should be avoided if possible.
Sometimes, policies have a limited period of own-occupation, say two years, and then switch to an any-occupation definition. Be sure to read the policy closely and be vigilant!
Disability insurance comes three ways:
- Non-cancelable policies give you the right to continue a policy by timely payment of premiums. The insurance company cannot change the premiums and benefits shown in the policy.
- Guaranteed renewable policies will be automatically renewed, with the same benefits, but the premium may be increased if it is changed for an entire class of policyholders.
- Optionally renewable or conditionally renewable policies are extended at each anniversary or premium due date if the insurance company decides to do so. (Some policies are renewable to age 65 if you are still employed full time.)
The best type of policy to purchase is one that is both noncancelable and guaranteed renewable. This protects your from the insurance company being able to cancel or change your benefits or increase your premiums in the future.
If you are able to work but your income is reduced because you cannot fulfill all of your job responsibilities, residual benefits can help to make up the difference in your income. A standard feature in some policies (added with a rider to others), a residual benefit allows partial payment based on your loss of income without prior total disability. Usually the company requires at least a 20 percent or more loss of earnings and you would receive a proportionate benefit. For example, if you were injured and only able to work 50 percent of the time and as a result had a 50 percent reduction in income, you could file a claim and receive half of your benefit.
Even if you can still perform some or all of your regular job duties, you are presumed fully disabled and are entitled to full benefits under specified conditions. Those conditions typically include loss of sight, speech, hearing, or use of limbs.
Monthly benefits are calculated in terms of stable, earned income at the time of purchase. Most insurers, not wanting to provide benefits so sizable that they would encourage workers to remain at home, limit benefits from all sources to no more than 70 to 80 percent of pre-tax monthly income. Lower-paid workers can expect to receive a greater percentage of their pre-disability incomes while higher-paid workers generally receive a lesser percentage.
Some policies offer the opportunity to buy additional disability coverage to keep pace with a rising income, without having to pass a medical examination or submit further medical evidence of insurability. All that is usually required to purchase more benefit with this option is financial evidence that your income qualifies you for more benefit. This rider is added onto the policy when you originally purchase your policy. There is usually no penalty if you don't exercise your option. These options can vary by policy. Some policies allow you to increase substantial amounts while others restrict how much you can exercise your option or how often. Some even limit you to using them within the first two years of the policy.
Today's policies allow you to decide when benefit payments begin. You can choose a waiting period at the time of application; these range anywhere from the first day to six months or more after the onset of the disability. Depending on how much money you have saved, and your other resources, you can reduce your premiums by electing to wait 60 days, 90 days, six months, or even 12 months before you start to receive benefit payments. Remember, though, that the first check is usually not paid until 30 days after the waiting period.
By choosing a benefit term, you will elect benefits that are payable for two years, five years, to age 65, or for a lifetime. Electing shorter benefit periods can save premium dollars, but bear in mind that if you need this insurance at all, you probably need it most to cover a disability that permanently removes you from the workforce. A lengthy disability threatens your financial security much more than a short-term disability.
For an additional premium, you can add a cost-of-living adjustment rider (COLA) to basic disability income coverage. This provision increases benefit payouts by a specified percentage, generally three to six percent, after each year of disability and can be important particularly during a lengthy period of total disability. Some policies offer COLA with simple interest increases while other offer compound increases. It is important to find out which increase is on your policy as it can have a profound impact if you are on claim for a long period of time.
Most policies include a waiver of premium provision, so that you don't have to pay any more premiums after you're disabled for a specified waiting period.
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