Disability insurance comes with a multitude of different riders to enhance the contract. Today we'll dive into what those riders do for you. Additionally, we'll also touch on some contract features that may not be riders, but do vary from company to company and are a good thing to keep in the back of your mind when comparing policies.
The first and arguably most important rider is known as the residual benefit rider. You can think of the residual rider as a partial benefit rider. This is how you'll receive benefits if you are sick or hurt and unable to work in the full capacity that you were prior to the injury or illness.
The residual benefit rider typically has an income trigger, but sometimes can come with a loss of time and duties trigger. The income trigger simply looks at a loss of income (based on some amount earned in the past–usually an average over a few years) starting a certain percentage (20% is most common).
So, if you lost say 50% of your prior income due to illness or injury, you'd receive 50% of your monthly benefit amount under your disability insurance policy. Traditionally, if you get up to 75% loss of income, the company will consider you totally disabled and pay the entire monthly benefit amount.
Time and duties means you need a loss of the amount of time you work and/or the material and substantial duties of your occupation. This is usually looked at as a little less coveted a stipulation on the residual especially for business owners or those with variable compensation that is not directly tied to number of hours worked.
The COLA rider increases the benefit amount once you are on claim. This is how you'd expect to remain even keel with inflation if you were out on claim for a long time. COLA comes under a lot of different options from a specific fixed amount (say 3%) to a CPI tied amount up to a certain maximum (e.g. CPI-U tied up to a maximum of 6%). If you recover, a lot of COLA increases can be purchased so the increased benefit remains your monthly benefit if you should go out on claim again, but this is not the case with everyone so be sure to pay attention to this rider.
This rider allows you to increase your coverage without being subject to medical underwriting. As long as you can prove that you qualify financially for an increased monthly benefit and you're willing to pay for the additional coverage, you can exercise the increase and augment your coverage. The rider typically has option dates, meaning you can't increase your coverage at just any time, but rather will have specific periods (e.g. once a year, once every two years, once every X number of years, etc.) where you can increase your coverage. The rider will allow you to choose, how much you want to be able to increase coverage (usually maxed out at 2 to 3 times your base coverage at issue).
The CAT rider is commonly looked at as a Long-term care-ish benefit attached to the disability insurance policy. It pays a benefit if the insured is seriously disabled. The exact definition (or trigger) varies a bit, but usually includes a loss of activities of daily living. The CAT rider is commonly found on policies due to its rather low cost.
The SIS rider is a benefit coordinated with Social Security Disability benefits. The SIS rider pays a benefit as long as the insured is not receiving benefits from Social Security Disability (SSDI). If the insured receives benefits from SSDI then the SIS rider benefit is reduced dollar-for-dollar for benefits received under SSDI. This rider is sometimes used to decrease the overall cost of a disability insurance policy, but it's also commonly required for certain higher risk occupation classes.
This is a rather rare rider, but it allows the insured to receive benefits from their disability insurance policy for as long as they live. Alternatively benefits would stop when the insured reaches his or her ending age benefit age, which is chosen at issue. These typical benefit ending periods are: 2 years, 5 years, 10 years, age 65, age 67, and age 70). Instead of ending the lifetime benefit rider lasts indefinitely and only stops paying benefits if the insured recovers, or dies.
Sometimes policies come with base any-occupation definitions of disability and can be changed by rider. You can see more about what these definitions mean here. The exact stipulation between own-occ and modified own-occ depends on the particular company, so prudence about what own-occ means under the rider is advisable.
The next group of items aren't riders, but generally contract features. Some of these are extensions of riders.
All disability policies have an elimination period, this is the time that must pass between the start of the disability and when benefits begin to be paid. The average elimination period on individual disability insurance policies is 90 days. The elimination period can typically be chosen by the insured and can be reduced all the way down to 30 days, and can be extended usually up to 365 days. The price of the policy will go up with a shorter elimination period and go down with a longer elimination period.
Unlike life insurance, disability insurance policies typically come with a built in waiver of premium benefit (makes sense since is would be odd to be expected to continue to make disability insurance premium payments if you were on claim). The provisions aren't usually too much out of the ordinary. Typically they require 6 months of premiums be paid after the onset of the disability, but some will kick in once the Elimination Period has been satisfied. The benefit usually refunds all of the premiums paid during this 6 month period and then continue to waive premiums until recovery.
The waiver of elimination period means the elimination period must not be completed in order to begin receiving benefits. This usually comes into a play for a presumptive (and in some cases) recurrent disabilities.
This benefit mean the insurance company will pay to rehabilitate or make workplace modifications to the insured's place of work so they can return to work. The obvious motivation to the insurance company is that it's cheaper to front the bill to get the insured back to work, rather than continue to pay monthly benefits to the insured. The contract will not have a stipulated amount but rather this is a negotiated benefit that is determined on a case-by-base circumstance.
This is usually an extension of the Residual Disability Benefit rider. It allows the insured to return to work, and continue to receive benefits if they are not earning 100% of what they earned prior to sickness or injury that put them on claim. This benefit can have a specified period of time, or can be unlimited.
Some disability insurance policy have a lump sum benefit. The provisions vary widely. Sometimes it's an electable rider, and other times it is paid if a presumptive disability occurs (i.e. you experience irreversible loss of sight, hearing, or use of at least two limbs).
The benefit period is the length of time benefits will be paid traditionally these periods are: 2 years, 5 years, 10 years, to age 65, to age 67, and (somewhat more new) to age 70. To make an important distinction, the benefit period is not the amount of time the policy can be renewed to. It should also be noted that to age 65, 67, and 70 benefits can technically go beyond these ages if the disability starts within a couple of years of attaining that age. There is also the possibility of a lifetime benefit rider (mentioned above) that would pay benefits until the insured's death.
That's a quick look at the most common riders and major features of disability insurance contracts. There are finer details that sometimes come up, we'll address some of these topics throughout the month. If there is something you're wondering about, you can always contact us for more assistance with disability insurance planning.
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Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.