Disability Policy Provisions
A good disability policy will typically contain the following provisions, either built into the body of the policy or added as rider. When comparing policies from different companies, review the wording of these provisions, as they all do not provide the same benefits:
A risk classification based on your occupation. The higher the number, the lesser the risk to the insurance company and, therefore, the lower the premium. Insurance companies quite often offer richer policy provisions to higher occupation classes. Note: each company has own classification numbers. There is no industry standard.
Base Benefit (Monthly Indemnity)
The amount of coverage available based on earned income, typically between 50% and 60% of your gross income.
The length of time you will be covered in the event of a disability. Options are typically 2 years, 5 years, 10 years, to age 65 and to age 67. A few policies offer a lifetime benefit period. Most policies are written with a “to age 65” benefit period.
The period of time a claimant must wait prior to accruing benefits. Most policies offer elimination periods of 30, 60, 90, 180 and 360 days. Some offer a 720 day elimination period. This is the period of time in which you are basically self-insured. A majority of policies are written with a 90-day elimination because it is the most cost-effective for most people.
One of the most important aspects of a disability insurance policy is the renewability provision. How long can you expect coverage to continue, assuming premiums are paid as due? Look for coverage that contains the following renewability provisions:
A guaranteed renewable policy cannot be canceled by the insurance company even if a change in your circumstances would make you a greater risk. Furthermore, the insurance company cannot make any changes to the provisions of the policy, or add any restrictions.
However, with a guaranteed renewable policy, the company does not guarantee that the premium will remain the same. The company still reserves the right to raise premiums for all policies in a given class. So, even though premium increases must be justified by statistics and approved by state regulators, the owner of a policy which is only guaranteed renewable doesn’t really know how high his or premiums might go.
There is a type of individual disability insurance available which offers an insured a guaranteed future premium. This is known as noncancelable (or just noncan for short).
The best policies on the market are both noncancellable and guaranteed renewable, meaning that the company agrees to:
1. Continue to renew the policy;
2. In the form it was issued;
3. Without increasing the premium;
4. At least until the insured reaches age 65
Total Disability Definition
Residual and Recovery Benefits
Cost of Living Adjustment (COLA)
With this rider, in a period of disability, your benefit increases every year to keep up with inflation. Most policies offer COLA of 3% and 6%.
Waiver of Premium
A waiver of premium provision relieves you of having to make premium payments after you have been disabled for at least 90 days or the length of the elimination period, if shorter. In effect, it frees up money for other expenses when disability has caused a drop in income.
The best disability insurance policies continue to waive the premium during the six months following a recovery from disability. This allows you additional time to get adjusted before assuming the full burden of your pre-disability financial commitments.
Capital Sum Benefit
Some individual disability insurance policies pay a lump sum benefit for certain specified losses, e.g., the sight of one eye with no possibility of recovery or a hand or foot is severed through or above the wrist or ankle. This benefit (12 times the monthly benefit) is paid in addition to any other benefit that you may qualify for under the policy.
Option to Purchase Additional Benefits
This rider allows the insured person to increase the monthly benefit on an annual basis (some policies are every three years), if there is an increase in income. Financial documentation will be required (tax forms, etc,), but no medical underwriting is required.
Exclusions and Limitations
Every company excludes certain causes of disability from disability insurance coverage. These exclusions are stated in the policy. A universal exclusion is the “pre-existing condition”: an ailment that had manifested itself before the policy was purchased. Pre-exisiting conditions can be permanently or temporarily excluded, depending on the severity of the condition. Other common exclusions are disabilities resulting from acts of war, commission of a crime or suspension of a professional license. Some policies limit benefits (typically to 24 months) for mental/nervous or substance abuse disorders.