Managing Long-Term Disability Risk: Part Two
By Greer Gibson Bacon, CFP®
Since Social Security and worker’s compensation may not provide sufficient benefits if you are disabled. You may not have a total and permanent disability, as required by the former, or occupational disability, as required by the later. For this reason, most workers need the added coverage provided by group or individual policies. That said; not all coverage is equal. So, it’s important to understand the key concepts that will allow you to compare policies and maximize coverage.
- The “definition of disability” specifies the conditions under which you will be deemed totally disabled in terms of your occupation or loss of income.
An “own occupation” definition defines total disability as your inability to perform the principal duties of your own occupation. Most policies using this definition are offered to professional, technical and managerial workers who meet certain income and experience requirements. Some companies offer policies or riders that define disability in terms of specialties within an occupation. This is the most liberal definition of disability.
An “any occupation” definition defines total disability as your inability to perform the principal duties of any occupation. Most policies using this definition are offered to blue collar workers. This is a strict definition of disability.
A “modified any occupation” definition defines total disability as your inability to perform the principal duties of any occupation for which you are reasonably suited by education, training and experience. These policies are a compromise between own occupation and any occupation policies.
A “loss of income” definition defines disability as the difference between your pre- and post-disability earnings. Uniquely, these policies pay progressive benefits if you experience a progressive illness. Also, they pay benefits if you return to work regardless of your occupation.
- The “elimination period” specifies the time period after you are disabled but before your income benefits begin. The most common are 30, 60, 90, 180 and 365 days.
- The “probation period” is the time period that a policy must be in force before you are covered for pre-existing conditions. Although an insurer may discount or decline to cover some pre-existing conditions, you will not be covered for any pre-existing condition during the probation period if you fail to disclose it. Most probation periods are two years.
- All policies define “maximum benefits” in terms of time and money.
The “maximum benefit period” is the time period during which income benefits are paid. It begins when your elimination period ends and should continue to your age 65 or full retirement age, as defined by Social Security.
The “maximum monthly benefit” is specified as a dollar amount for individual policies and it will never exceed this amount barring a rider or permission of the insurance company to raise it. Group policies specify the maximum monthly benefit as a percent of your earnings.
Most policies have provisions that reduce benefits under certain conditions. A “coordination of benefits clause” may reduce benefits by amounts received from Social Security or worker’s compensation. Or, a “relation to earnings clause” may reduce them if your income fell dramatically after you took out the policy but before you became disabled.
- Your policy should be “guaranteed renewable and non-cancellable”. This gives you the right to renew it for as long as you pay the premium and it prevents the insurer from raising your premium unless it does so for your entire class of insureds.
- “Partial and residual benefits”allow you to return to work with reduced duties and/or hours without losing all of your benefits.
- Most insurers offer a “waiver of future premiums” if you’re disabled.
- “Inflation protection”is important especially if you’re a young professional. Some insurers offer “automatic increase rider” simply adds coverage on an annual basis. Others offer future increase options, allowing you to add coverage from time-to-time without proof of insurability.
To be continued …
This is Part Two of a multi-part series, discussing the important topic of long-term disability and your primary sources of coverage. Look for Part Three in the next issue of The Message.