Disability - Personal
There are definite advantages of owning an individual disability insurance plan. While you may have group coverage through your employer, this coverage ends when you change jobs or leave your association. An individual plan does not. Because you pay the premiums personally, benefits are received tax-free. Personal plans are more comprehensive and flexible than group plans as they are tailored to your specific needs.
While many people insure their car, home or personal property, they do not insure their greatest asset, their ability to earn an income. Consider this: if you earn $100,000 a year for thirty years, indexed at 5% annually, your total lifetime earnings would be $6,976,078.99 Disability Insurance is often called income replacement insurance. It pays a tax-free monthly benefit based on your annual earned income while you are disabled and unable to meet expenses. Benefits are paid out after satisfying a waiting period of 30-90 days of continuous disability.
Definition of Disability
The most important component of a disability insurance contract is the definition of disability. The more inclusive the definition is, the more expensive the monthly premium will be. Conversely, the more restrictive a definition will result in a cheaper premium. Consumers should carefully examine a product's definition of disability prior to deciding on the plan to meet their specific needs.
There are 3 basic "Definitions of Disability" available. Most contracts will define disability according to one of the following:
Own Occupation: Disability from your own occupation only. Provided you are disabled from doing your job and are under the care of a doctor, you qualify for benefits. Even if you were to work in another occupation, you may still qualify for benefits. Individual contracts may offer an "own occupation" clause to age 65.
Regular Occupation: Disability from your own occupation, provided that you choose not to work in any alternative occupation.
Any Occupation: Disability for any suitable occupation, according to your education, training and/or experience. Most, but not all, group contracts specify an "any occupation" disability after the first 2 years of disability.
There are three types of Disability Insurance:
Noncancellable: The policy cannot be cancelled during the timeframe set in the contract, nor can the premiums be increased. This is also called "noncancellable guaranteed renewable".
Guaranteed Renewable: The insurer must renew the policy but can increase the premiums for everyone in the same employment class. The insurer cannot increase the premiums on an individual basis.
Commercial: On the anniversary of the policy, the insurer can decline to renew the policy or increase premiums to reflect previous claims.
Additional Benefits (Riders)
There are a number of options which can be added to plans including Waiver of Premium. This option means the insurance company will waive the premiums during the time you are receiving benefits.
Another option referred to as Future Earnings Protection Option will guarantee that you can increase coverage, within limits, without evidence of insurability. This option is available on every policy anniversary with the final option date at age 50. The minimum amount of additional coverage is $500 of monthly benefit. Maximums vary according to occupational classification and issue age but usually no more than 1 to 2 times the basic monthly income. The premium for this option is a percentage of the basic policy rate.
Additional riders such as the following are also offered depending on the insurer:
- Accidental Death Benefit
- Cost of Living (compound interest or simple interest)
- Partial Disability Extension
- Return of Premium (at expiration or death)
- Sickness Rider