DISABILITY INCOME POLICY FEATURES

 

In researching the right Disability Income policy for you, here are several features you should familiarize yourself with.  While all carriers tend to have their own specific “bells and whistles”, these features are fairly standard in the industry so make sure the carrier you are looking at has these features available.

Noncancellable & Guaranteed Renewable: Once your policy is place the insurance company can not raise your rates or change any benefits.

Definition:  The "definition" of your policy dictates what it takes for you to collect when you file a claim.  There are many definitions in the marketplace today.  Below are a few.  In researching your policy make sure you understand completely the definition that is being offered.  The definition is the cornerstone of your policy

 

"Own Occupation" Definition

This is the “top of the line” definition.  It means that if the insured can not do the important duties of his/her occupation (oftentimes including specialty), then the policy will pay the full monthly benefit amount.  The full benefit is payable whether or not the insured works in another occupation. 

Example

Let’s assume that an individual earns $500,000 per year and purchases a $15,000 per month benefit and he is totally disabled.  The insured will receive the full $15,000 amount, even if the individual decides to work as an educator and earns $100,000.  The individual will continue to receive the tax-free $15,000 benefit in addition to his taxable $100,000 income.

 

“Transitional Own Occupation” Definition

 This definition is relatively new to the industry.  It means that if the insured can not do the important duties of his/her occupation, then the policy will pay the full monthly benefit amount as long as the monthly benefit (and any other disability income coverage) plus earnings from another occupation does not exceed 100% of prior income.

Example

Let’s assume that an individual earns $500,000 per year and purchases a $15,000 per month benefit and he is totally disabled.  The insured will receive the full $15,000 amount, even if the individual decides to work as an educator and earns $100,000.  The individual will continue to receive the tax-free $15,000 benefit in addition to his taxable $100,000 income because the combination of disability payments and earnings does not exceed 100% of prior income.

“Modified Own Occupation” Definition

This is the industry standard base definition.  It means that if the insured can not do the important duties of his/her occupation and is not working in another occupation (his/her election), then the policy will pay the full monthly benefit amount.  If he/she elects to work in another occupation then any benefits would be based on a loss of earning. 

Example

Let’s assume that an individual earns $500,000 per year and purchases a $15,000 per month benefit and he is totally disabled.  The insured will receive the full $15,000 amount if he elects to not work in another occupation.  However, if the individual decides to work as an educator and earns $100,000, the individual would have an 80% loss of earnings and full benefits would still be payable.  If as an educator the earning were $200,000, then there is a loss of income of 60% and a $9,000 benefit would be payable.
You might read that the only policy you should consider is a true "Own-Occupation” definition.  While this is the best definition the industry offers, you simply need to compare the entire contract along with the appropriate rates to make a decision that makes sense for your own situation.

 

  • Residual Benefit: This benefit protects when you are not totally disabled but you suffer an injury or illness and have a loss of income from your current job. It is a way of collecting on your policy when you are working "part time".  If you had a loss of income that carried on for months or even years, that to could cause serious financial loss to your household.  Protect yourself in the event of a "part time" disability.  Residual is a must on all contracts.

  • Purchase Options: This benefit allows you to increase your disability coverage in the future without showing evidence of medically insurability to your insurance company.  During your residency your needs are modest.  As you complete your training and your income rises, so will your standard of living.  What would happen if you had the money to buy as much disability as you needed but suffered a health change the year before?  Buying a new contract might be tough but increasing your current policy through your Purchase Option can be done.  As with Residual, Purchase Options are must for a young Physician.  Make Sure you include some form of Purchase Option when you buy a policy.

  • Waiver of Premium: In the event you become disabled and go out on claim, the company "waives" your payment.  No payment is required when you are out on claim.  When you come back to work you simply start paying your premium again.  No rate or contract change will be made.

  • Benefit Period: This is the timeframe how long a carrier will pay your claim.  Generally you can choose from a 5 year, to age 65, to age 67, or to age 70  benefit period.  Obviously the more exposure you palace on a company the more your premium will be.  Having a benefit period to age 65 or 67 is worth the few extra dollars.  Stretch this period as long as the carrier will allow.

 

  • Elimination/Waiting Period: This is the timeframe you have to be out of work before your benefits will starts accruing.  You might see a 30, 60, 90, or 180 day wait.  Typically the 90 day wait makes the most sense.  Keep in mind your disability contract should be use to prevent you from depleting valuable savings and investments not to start the first day or week of a disability.  The 30 and 60 day wait will cost more so generally the 90 day lowers your premium to a comfortable rate while still having your benefit start fairly quickly.

  • Cost of Living Benefit: This is an additional rider that can be added on a policy that would "inflation proof" your disability policy.  If you went out on claim this year and received a $3,500 monthly benefit, every year that you are on claim, your policy looses "purchasing power" do to inflation.  Generally, every anniversary date of your disability claim, your policy benefit will be indexed up in value to keep up with inflation. 

 

  • Catastrophic Benefit:  This is an additional rider that can be placed on a policy that could pay a monthly benefit in addition to your basic monthly benefit if the insured is unable to perform two or more of activities of daily living without assistance, have a severe cognitive impairment, or are presumptively totally disabled.

 

 
Please note that this site does not endorse or promote any specific insurance company that provides Disability Income policies. The above definitions are meant to be brief and generic and should only be used as a basic understanding to disability protection. If you should purchase a policy, please refer to your actual policy issued by the insurance company for complete explanation on your coverage, benefits, and additional riders you have selected.
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