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Understanding
Disability Policy Differences
Although many disability policies have similar benefits, there are major differences in how
they are defined. Understanding these differences can be the difference between receiving all of your benefits, some of your benefits or none of your benefits. This is not a product where you simply shop for the cheapest rate. My goal is to save you money in the long run by highlighting important differences in how these benefits are defined.
Guaranteed
Renewable
Of the three types of Renewability policies
offered today, the most important one is:
Non-Cancelable and Guaranteed Renewable
It guarantees that you may renew your policy at the end of each term until age 65. During that time the company cannot change the premium or cancel the policy. While there are no guarantees your income will remain the same while working, under a Non-Cancelable policy, if your income goes down sometime in the future, and later you become totally disabled, the company will pay you the total disability benefit you originally purchased (as long as all requirements have been met). Under a Non-Cancelable policy even if you changed occupations the company cannot change, alter or reduce your benefits.
Definition of Total Disability
Pay special attention to the definition of disability. They are not all the same. The definitions range from comprehensive to ambiguous and can be the difference between being paid and not being paid.
Own-Occupation Disability
Own-Occupation is the most comprehensive definition of total disability available today. This benefit is defined as:"Because of sickness or injury you are not able to perform the major duties of your occupation. Your occupation means the regular occupation (or occupations, if more than one) in which you are engaged in at the time you become disabled."
An own-occupation disability policy is the only plan that does not penalize you for working while on claim. Under this definition, you are considered totally disabled even if you are at work in some other capacity so long as you are not able to work in your specific occupation.
The best example is a surgeon who suffers a permanent hand injury and can no longer perform surgery, but would like to teach at medical school. Under this definition of disability, the Doctor would receive full disability benefits and be able to earn an income from teaching.
Income
Replacement
"Income Replacement" has become the more common definition of total disability in policies today. Most insurance carriers have stopped offering "own-occupation" policies in favor of the "income replacement" policy. You will find the first part of the definition is very similar to an own-occupation definition, but it is the second part where the major change occurs. A typical income replacement definition will look something like this:
Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, and are not engaged in any other occupation.
As you can see there is a major difference between an "Income Replacement" and "own-occupation" definition of total disability. The "income
replacement" definition will penalize you if you cannot work in your original occupation, but are able to work. Most people, given the opportunity, would go back to some work if possible. Under this plan if you return to work in a different capacity, the insurance company may offset your monthly benefit check.
Gainful
Occupation
This definition of "Gainful Occupation" is very common in an employer-sponsored group disability policy, most often offered by property and casualty companies. It is quite simply the most ambiguous and ill-defined definitions of disability offered today and should be avoided. This definition basically leaves the determination of whether or not you are disabled up to the insurance company. A typical definition will look like this:
Because of sickness or injury you are unable to perform the material and substantial duties or your occupation, or any occupation for which you are deemed reasonable qualified by education, training, and experience.
Could somebody be forced to flip burgers at McDonald's under this definition of total disability? Probably not, but it does leave the definition open to interpretation and possible litigation. What is important, is a policy with a clear and concise definition of what you can expect if an injury or illness renders you unable to earn a living.
Residual Disability
Approximately 35% of all disability insurance claims either begin or end in a residual claim. The basis of a residual claim is that a person is still actively engaged in their occupation, but because of a sickness or injury:
Suffers a loss of time and duties or
Suffers a loss of income of at least 20%
As you can see, "residual disability" can be defined as either a loss of income or a loss of time and duties. Under a "loss of time and duties," if you are back to work after an illness or injury, even if your income is less than your pre-disability earnings, you will no longer be considered disabled.
A few carriers offer a recovery benefit under a "Time and Duties" benefit that will continue your benefits for a specified minimum period of time.
Under the "loss of income" definition, Residual disability means that you are at work but not totally disabled under the terms of the policy but because of sickness or injury your loss of income is at least 20% of your prior income. Total disability or a loss of time and duties is not required.
As is often the case, people can spend more time residually disabled than totally disabled. In the beginning it can take a long time for an illness to manifest. After recovery, it can take a great deal of time and effort to rebuild a business, legal, medical, dental or accounting practice after a long period of total disability. Unfortunately I have experienced Residual disability myself. After three years of total disability and two years working part time, it still took additional time to get back to my pre-disability income.
Recurrent Disability
A recurrent disability is exactly as it sounds. You are disabled once, recover, then relapse or have a second unrelated injury or accident. You will find that most policies have a recurrent disability benefit. Generally, "Recurrent Disability" is defined as: A
disability that reoccurs within six months of returning to work, from the same or related cause, the insurance company will waive the elimination period.
Most companies offer either a six month or one year Recurrent Disability benefit. There is one company that will waive your elimination period if you relapse from the same or related cause or become disabled by an unrelated cause within five years.
In my own experience and with some of my clients, disability was not a one-time occurrence. I tried going back to work several times, but my body wasn't ready. Unfortunately some people get well, and then are disabled again by an unrelated injury or illness. Can you imagine recovering from a heart attack going back to work and
three years later breaking your pelvis in an auto accident!
Elimination
Period
The elimination period is similar to a deductible in a health insurance policy. It is the amount of time you have to wait from the onset of disability before you are eligible for benefits. Companies offer a wide range of elimination periods from 30 days to 2 years. The most common is the 90-day elimination period. Obviously the longer the elimination period is, the less expensive the policy will be. However keep in mind that the longer the elimination period is, the more money you have to put out of your own pocket before the policy begins to pay benefits.
Read the
Fine Print!
Some policies require the elimination period to be satisfied by either a period of consecutive days (i.e. 90 days) of disability, total disability or both. In real life, you may suffer an income loss if you are residually disabled and working a few hours a day. I have a friend and client with throat cancer. In between tests, chemotherapy, and daily doctor visits he was able to work. Because there were no restrictions in his policy, he began receiving benefits
after his 90-day elimination period was satisfied. He received his benefits even though he was residually disabled first and was not disabled for consecutive days.
Benefit Period
A benefit period is the period of time you are eligible to collect benefits while on claim. Once you have satisfied your elimination period and are eligible for benefits, you will receive your benefits for the period of time described in your policy. Your benefits will continue for the duration of that period as long as you are
on claim.
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Optional Benefit Periods
Lifetime Benefits
To age 65
5 years
2 years |
No one ever knows if or how long they will be disabled. My disability lasted five years; an old high school friend of mine at age thirty-five became disabled for life with MS. Christopher Reeves is paralyzed for life. The longer you can receive benefits the better. Today many people are also buying Long-Term Care insurance to fill the gap between replacing their lost income and paying for the additional cost of care while incapacitated. Long-term care goes beyond medical care and nursing care to include all the assistance you might need if you ever have a chronic illness or injury that leaves you unable to take care of yourself.
Presumptive
Disability
The definition of presumptive disability varies from policy to policy and is
not offered by all companies. Under this benefit you may be considered totally
disabled, even if you are at work, if sickness or injury results in a loss of
sight in both eyes; loss of hearing in both ears; loss of speech; loss of the
use of two arms, two legs, one arm and one leg, in their entirety. Again,
read the fine print! The definition of "Presumptive" disability varies
from "Total Temporary disability to Permanent and Irrecoverable" disability.
There is a big difference between a "Total Temporary" loss and a "Permanent
Irrecoverable" loss.
I know a trial attorney who temporarily lost his voice and could not go to
court. Not all the losses of sight, hearing, speech or limbs are permanent.
You may temporarily lose total use of your legs if they were both broken in
an auto accident. A total temporary loss of sight, speech, hearing, or the use
of any two limbs is a lot different than an irrecoverable or permanent loss.
Also make sure the elimination period is waived and benefits are paid from the
first day of a "Presumptive" disability.
Optional
Riders
There are three important riders that could have a significant impact on your
future income replacement benefit. The names of these riders may vary among
companies.
Cost
of Living Adjustment
Often referred to as COLA, this rider will adjust your benefits to keep pace with inflation
while on claim. It will increase your monthly benefit equal to the rise in the
CPI (consumer price index) to a maximum of usually 6%. Most adjustments are
made after 12 months of a continuous claim. Some policies allow you to retain
the increase after your recovery at no charge until age 65, in the event you
are disabled again in the future.
Future
Increase Option
The Future Increase Option also known as FIO, is offered by most carriers to
protect your future earnings. It provides you the opportunity to purchase additional
monthly benefits in the future to keep pace with your rise in earnings. While
you will need evidence of your increased earnings you do not need additional
medical evidence of insurability. When comparing policies, look to see if
the rider can be exercised while on claim.
Automatic
Increase Rider
The Automatic Increase Rider, sometimes known as AIR, helps protect your benefits
from rising inflation. It is different from the COLA rider, because your benefits
increase prior to a disability. Each year for up to 5 years you will
be offered up to a 4% compound increase in your disability income, despite any
change in your health, income or occupation. Your premium will increase for
any AIR you accept based on your age at the time you exercise the option.
Policy Exclusions
The exclusions in a Disability policy can sometimes be as important as the
benefits themselves. At the very least you don't want any surprises at claim time. Read
your policy carefully.
2-Year Max for Mental & Nervous
Although this is a common exclusion in many disability policies, there are a
couple of policies that treat emotional issues as any other illness.
1-Year Maximum Benefit for Alcohol & Drug Claims
Most addictions at claim time are not from heroine, cocaine, or marijuana, but
from addiction to prescription drug medication following an injury or illness.
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