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Disability Insurance Basics

Here are some explanations of some common terms used with disability insurance. These definitions vary (sometimes slightly, sometimes more than slightly) from company to company. We will help you sort through the differences. Keep in mind that when looking at disability insurance price should not be a primary concern. A cheaper policy may not be paying a claim where a more expensive policy might. We're not saying to buy the more expensive policy every time, but let us explain the differences to you so you can make a decision on what aspects are important to you.

Benefit Period:
Over time we've heard that the average length of disability is about 3 years and your options for a disability policy are a 2 year, 5 year, to age 65, age 67 or lifetime benefit period. The shorter the benefit period is the less expensive your policy becomes. While a five year benefit period does cover the average length of a disability, most people would hate to become permanently disabled at age 40 and know that their last monthly benefit check comes at age 45. You will find that the difference in premium between a 5 year benefit and an age 65 benefit is greater at younger ages.
The most common benefit period is to age 65…

Cost of Living Rider (COLA):
A COLA rider is one of the more expensive riders available. We feel that it is more important to younger people who are more at risk of the impact of inflation. A scenario will clearly explain what COLA does.
You purchase a disability insurance plan at age 35 for $4,000 a month benefit. The next day you become permanently disabled due to an accident. If your plan does not have COLA, you will receive $4,000 a month for as long as your benefit period allows. With a COLA rider your monthly benefit will increase every year with inflation.
You have different choices depending on the insurance company, but 3% COLA is the most popular in our experience. If you're trying to save money on premium and you have a 30-year fixed mortgage and are NOT the sole bread-winner you could consider forgoing this benefit (your mortgage payment won't change).

Elimination Period:
Also known as a deductible period, this is the period of time at the beginning of a disability where you don't receive disability benefits. The longer your elimination period is, the less expensive your policy premium becomes. Your choices are a 30, 60, 90, 180, 365, or 720 day elimination period with most companies. The majority of the policies we sell have a 90 day elimination period because of the additional cost involved to purchase a 30 or 60 day deductible. Sometimes though the shorter deductible is the only choice for people as they do not have the savings to last through 3 or 4 months without an income. (Keep in mind the benefit begins to accrue after the elimination period, but you're usually paid at the end of the month)
The most common elimination period is 90 days.

Future Increase Option (FIO):
This optional rider is designed to protect your future income. Should your income (and bills) rise in the future you can use this option to get additional coverage without medical underwriting. You could be diagnosed with cancer, and as long as you have more income to protect, we may issue you more coverage. (*This option is a little different with each company – read the policy to understand how yours works if purchased)

It's generally pretty inexpensive, so we recommend this option.

Monthly Benefit:
Usually you can qualify for about 50-65% (in our experience) of your income as a monthly benefit. Most people will get the most that they can qualify for or what they want to afford. Remember if you're paying for this benefit with after tax dollars your benefit is tax-free. While it's hard to know for sure how much income you'll need since you don't know what additional medical bills you may have, you'll want to do what you can.

Residual Disability Rider:
While this is an optional rider, we sell it with most plans that we sell(unless it is not available). It is the most important rider available in our opinion.

Residual disability accounts for a large portion of the insurance companies' claims, and this is the reason why it should be on your policy. Should your income drop, due to a sickness or injury, below a certain level of your previous income, the insurance company will begin to make payments to you to replace this lost income. If because of a disability you aren't able to earn your pre-disability income, the insurance company may pay you a proportional amount to make up a portion of the lost amount. Some companies may even pay you up to your full benefit to bring you up to 100% of your previous income as a back to work benefit.

Own-Occupation Definition of Total Disability:
Total disability means that, because of sickness or injury, you are not able to perform the major duties of your occupation. Your occupation means the occupation you are engaged in at the time you become disabled. You will be considered totally disabled even if you are at work in some other capacity so long as you are not able to work in your occupation with some policies. Others may make it contingent on you not working in another profession. Sometimes this can be very important, other times not so important depending on the other benefits the policy may offer.

Loss Of Earnings Contract:
This type of contract will pay a proportional amount of benefit compared to your loss of earnings should you have to take a new job that doesn't pay as much as the one you can no longer perform. In other words if you can't perform you job but can perform another job that's suitable and you earn half as much, the policy will pay half of the benefit. This is a popular policy due to it's sometimes lower cost.

Continuation of Coverage:
Some policies won't just end when you reach age 65. They'll actually convert to a long-term care policy without any medical underwriting. Most policies that do this also carry the long-term care definitions in the policy which can help at claim time earn up to 50% more benefit. This benefit isn't common and is not available in every state.

 

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