Disability Insurance

If you find yourself struggling with the plethora of disability terms, don’t worry! You’re not alone. The insurance industry is fraught with language that makes the savviest legal eagles take pause. 
You’ll never again have to worry about a scary, hard-to-answer DI question. It’s all here ... simpler than you ever thought possible!

What are the common terms that I need to know?

Three basic plan design terms that you’ll see on applications are EP (Elimination Period), BP (Benefit Period) and Benefit Amount. Here’s what they are:

Elimination Period (EP): Also known as the "waiting period," this is the period of disability that must elapse before benefits commence. For example, if Sam has a policy with a 90 day EP and is disabled on January 1, he will be eligible for benefits 90 days later — roughly April 1. Typical EPs are 60, 90 or 180 days. Choose an EP that is appropriate for you. Ask yourself how long you could realistically sustain your lifestyle without your full income. Or better yet, ask yourself how long of a vacation you could take before having to get back to work to pay your bills. Keep in mind that policies with shorter EPs are more expensive than those with longer EPs.

Benefit Period (BP): The benefit period is the length of time that benefits will continue from the date they begin. Typical BPs are two years, five years, or to age 65. The most desirable BP is at least to age 65. It is also the most expensive.

Benefit Amount: The benefit amount is typically 60 percent of gross pay, up to a limit of $15,000 per month. However, if you require more than 15,000 per month, don’t despair — just call us! We’re usually able to obtain coverage for more than that.

What is a "disabling definition" and why is it important?

The disabling definition is the most important, central part of the DI policy. Make sure that you understand the disabling definition of every policy you consider. Not all definitions are created equal. Here's how they work, in order of desirability:

Most desirable: Own-Occupation Definition (sometimes referenced as True Own-Occ)

Common policy language: "You are unable to perform the substantial and material duties of Your Regular Occupation; and you are under the regular care of a Physician appropriate for your Injury or Sickness."

What it means: The insurance company will consider your occupation to be the occupation you are engaged in at the time you became disabled. It will pay benefits even if you return to work in another occupation.

Example: If surgeon, Dr. Brown, develops a tremor that prevents him from practice as a surgeon, he can collect disability benefits even if he returns to work as a family practice physician. So, for example, as a surgeon he earned $300,000 per year. He had a DI benefit of $180,000 per year. While collecting DI benefits of $180,000 per year, he can earn an income of $150,000 per year (or any other amount) as a family practice physician.

2nd most desirable (and most commonly used): Modified Own-Occ definition

Common policy language: "You are unable to perform the substantial and material duties of Your Regular Occupation; and you are not engaged in any other gainful occupation; and you are under the regular care of a Physician appropriate for Your Injury or Sickness."

Using the same example: Once Dr. Brown returns to work as a family practice physician, he can no longer collect full disability benefits. His disability benefit will be based on a percentage of lost or reduced income. In this case, his annual benefits of $180,000 would be reduced to $90,000 due to having a 50 percent loss of income. Remember, his income is now $150,000 instead of his pre-disability income of $300,000.

Least Desirable: Any Occupation definition (otherwise known as Gainful-Occ)

Common policy definition: "Because of Injury or Sickness you are unable to perform the material and substantial duties of Your Occupation, or Any Occupation for which you are deemed reasonably qualified by education, training or experience."

Using the same example: The insurance company determines what type of work is suitable for Dr. Brown. If Dr. Brown were deemed suitable for other work due to his prior education, training or experience, he would not be eligible for any DI benefit. Would the insurance company expect him to flip burgers? Probably not. But, why take the chance?

What provisions are of most benefit to you?

If you think of the disabling definition as the heart of the policy, then think of provisions as the legs. "Renewal" provisions move forward over the years; while the "what if" provisions keep the policy running when and if you become disabled.

There are four types of "Renewal" provisions:

1. Non-Cancelable and Guaranteed Renewable (most desirable): This provision guarantees that after a policy is placed in-force, there will be no changes to the premium or to the policy benefits through age 65 — regardless of the insured’s working status, health or income level. This is THE iron clad, no-changes policy that you want to have.

2. Guaranteed Renewable: The insurance carrier cannot change the premium or the benefit for an individual, but it can make a change to premium for an entire group of policyholders, categorized by state, underwriting class or policy year. The change would need to be approved by insurance regulators before going into effect.

3. Conditionally Renewable (less desirable): This provision is found in group and association plans. It states that the policy is renewable only if the insured continues to meet certain conditions outlined in the policy. The most common condition for renewal is maintaining full-time employment (group) or membership (association). The carrier may increase the premium at the anniversary date or at prescribed age bands, such as five-year increments.

4. Optionally Renewable and/or Cancelable (least desirable): These provisions allow the insurance carrier to change the terms or cancel the policy, at an individual level. This type of policy should be used only if nothing else is available. It provides immediate protection — but no guarantees.

There are seven types of "what if" provisions. Almost all non-cancelable and guaranteed renewable policies issued today will automatically include these provisions.

1. The Presumptive Clause: What if there’s permanent loss? This provision says that the policy will waive the elimination period and begin paying benefits from the first day of Presumptive Total Disability. The insured is presumed to be totally disabled if he/she suffers the permanent loss of (a) the sight of both eyes; (b) the use of both hands; both feet or one hand and one foot; (c) speech; or (d) hearing in both ears.

2. The Recurrent Disability Clause: What if there’s a recurrence? This clause defines how the carrier will respond to recurrent bouts with the same disabling illness or injury. For example, if Joe Smith claims disability for cancer, gets treatment and then returns to work, and then seven months later suffers a disabling cancer relapse, how will the waiting period and benefit period be handled? Many policies state that if the same disability recurs within six months following cessation of benefits, the recurrence will be treated as a continuation, and the elimination period and benefit period do not start over. Some policies allow for a waiver of the elimination period in the event that any disability occurs within one year of the first. Make sure you fully understand how your policy handles this issue.

3. The Concurrent Disability Clause: What if there are multiple causes of disability? This provision says that benefits will be paid for one disabling condition at a time. Even if there are multiple causes of disability, the policy will treat the culmination of causes as one disabling claim.

4. Waiver of Premium Clause: What if the insured can’t afford to pay the premium while disabled? This clause waives any premium due after 90 days of disability. Some companies refund the premium paid within the first 90 days. So, when Joe Smith is disabled by cancer on January 1, he should continue to pay his premium that is due by the first of each month. Once Smith’s disability exceeds 90 days, the insurance carrier will refund any premium paid during the EP. However, if Smith’s premium was paid on an annual, semi-annual or quarterly schedule and was not due during the first 90 days, he would not be eligible for a refund. He also would not have to pay his premium if it came due after the first 90 days, assuming that he remained disabled.

5. Rehabilitation Benefit: What if the insured needs occupational or physical rehabilitation? Many policies now contain a very valuable rehab benefit that helps workers return to suitable occupations as soon as possible. This may include retraining, counseling and physical rehabilitation. The benefit is paid in addition to monthly disability benefits.

6. Transplant / Cosmetic Surgery Benefit: What if the insured suffers disability resulting from complications with an organ transplant or cosmetic surgery? This clause pays regular sickness benefits in the event of organ transplant or cosmetic surgery related disabilities.

7. Survivor Benefit: What if an insured dies while collecting disability benefits? This provision pays the benefit to a named survivor in the event of the insured’s death. Survivor benefits are typically payable for a period of three months after the insured’s death — only if the insured received total disability benefits under the policy.

The bells and whistles: How can I "dress" my policies for success?

Here are seven of my favorites ...

1. Own-Occupation Definition: Same as the Own-Occupation disabling definition discussed earlier, this rider pays benefits even if the insured is gainfully employed in another occupation. This rider is often only available for middle management through executive classes as well as traditional professionals. 
   
   
2. Residual Benefits: This rider is essential because in many cases, insureds can work part time, but not full time. The Residual Benefits rider pays a percentage of monthly earnings if the insured suffers a loss of income of 20 percent or more. This eliminates the "all or nothing" benefit structure and can help facilitate a friendlier, more gradual return-to-work experience. 
   For example, if Shirley Smith was making $250,000 annually, was disabled and then returned to work part-time, earning $125,000, she would have a 50 percent loss of earnings and would continue to receive a 50 percent disability benefit. 
   
   
3. Future Purchase Option / Future Increase Option: This option (otherwise known as guaranteed insurability) allows insureds to purchase additional coverage, regardless of health —without the need for a medical exam or blood tests. 
   
   
4. Cost of Living Adjustment (COLA): This option applies to those who are disabled for more than one year. It automatically increases the amount of coverage each year to keep up with inflation. Some policies increase by a fixed amount each year while others are indexed to inflation. COLA is of particular importance to young clients with longer life expectancies. For example, a COLA is much more important to Ryan Stevens who was permanently disabled at age 26 than it is to Mel Walker who was disabled at age 56. 
   
   
5. Automatic Increase Rider (AIR): This rider increases the monthly benefit for the first five years to keep pace with inflation. The AIR will only increase the benefit while not on claim where the COLA rider requires the client to be on claim in order for the benefits to increase. 
   
   
6. CATastrophic: This rider pays an additional benefit if the insured is receiving total disability benefits and is unable to perform at least two activities of daily living (ADLs); has a severe cognitive impairments; or is presumptively totally disabled. 
   
   
7. Non-disabling Injuries: If the client suffers injuries requiring medical treatment prescribed by a physician or dentist, the carrier will pay the expense of such treatment up to one half of the monthly benefit amount (or stated benefit amount). No EP is required.