Base Benefit

The amount of monthly disability benefit available based on income.

Benefit Period

The first thing to go over is to define a benefit period. Try to explain what it is, and even more importantly, what it is not.

A benefit period is the period of time you are eligible to collect benefits while on a disability insurance claim. If a sickness or injury occurs that prevents you from performing the material and substantial duties of your occupation, the elimination period begins. Once the elimination period has been satisfied, monthly benefit checks will begin to come in at the end of the month. The maximum amount of months that these checks can possibly come in is your benefit period. Your benefits stop the when you return to work in your occupation, or depending on the contract to another occupation making the same income.

Possible Benefit Periods

• Lifetime Benefits
• To age 70
• To age 67
• To age 65
• 5 years
• 2 years

The most popular choice for a disability insurance policy is To Age 65. Almost 90% of the policies that I see on a daily basis are put in-force with this benefit period. The bottom line is if you are permanently disabled your last benefit check is on your 65th birthday. Obviously the lifetime benefit period will be more expensive, but often it is not much more expensive than the to age 65 policy. For those of you looking to save premium dollars on your disability insurance, a five year benefit period will cover the average length of disability which is about 3.2 years (1985 CIDTA). I never recommend a two year benefit period unless you already have another policy that has a two year elimination period.

Elimination

The elimination period is a fairly easy choice to make. The elimination period is the period of time between the onset of a disability, and the time you are eligible for benefits. It is best thought of as a deductible period for you policy. For an individual disability insurance policy the industry has made the most attractive offer a 90 day elimination period. They will charge you with an extremely high rate if you choose to go with a shorter elimination period of 30, or 60 days. They will give you a price break if you can go longer than 90 days. Most options past 90 days are 180, 365, and 720 day elimination periods. It is important that you understand once the elimination period has been satisfied, you receive actual benefit checks at the end of the month. In reality a 90 day elimination period means you are four months away from getting any claims dollars on a disability insurance claim.

There is only one thing to watch out for…
There are some policies on the marketplace that require an elimination period be satisfied with a total disability only, or with consecutive days of disability. Never own a contract that does not allow an elimination period to be satisfied with either a residual, or a total disability. Also make sure they have an accumulation period so that you can finish your elimination period in the shortest amount of time.

Limits on mental/nervous/substance Abuse Claims

Some carriers have limits (typically 24-months) for mental/nervous/substance abuse claims.

Occupation Class

A risk classification based on your occupation. The higher the number, the lesser the risk to the carrier. This classification determines maximum benefit period, the quality of the definition of disability allowed, the additional riders allowed, and the premium.

Optional Riders

Cost of Living Adjustment
Often referred to as a COLA rider, this rider only kicks in if you actually go on a disability insurance claim, and then only if the disability lasts for more than one year. Depending on the percentage option you elected when you took out the policy, it will increase your monthly benefit every year while you are on a claim along with the CPI up to the maximum you elected. It is quite often the most expensive rider available on a disability insurance policy. I normally do not recommend this option to people over the age of 42. It is designed to protect you against inflation. After age 42 you are not as much at risk for inflation as you were in your younger years. I would recommend saving your money here unless you are younger, and must have this option because a permanent disability would devastate you.

Future Increase Option
The is an optional rider offered by most carriers to protect your future earnings. Without this rider, or an automatic increase rider, there is no way to protect your future earnings. A disability insurance policy by itself only protects the amount of income that one makes at the time they take out the policy. It does not grow automatically unless you have this, or an automatic increase rider. This rider locks in/guarantees your insurability for a certain period of time (normally to age 55). So as you increase in age, and increase your income level, you can increase your monthly benefit regardless of any health changes. Usually the only thing you need to provide when increasing your monthly benefit is a copy of the most recent tax return to prove your new income level. But the most important thing this rider protects is all the money you may make in the future. The worst thing that could happen to you is to take out a small disability insurance early on in life, with no future increase option. Then ten years down the road there is a change in your health history that prevents you from getting anymore disability insurance. You’d be real upset that you did not get future increase option then.

Automatic Increase Rider
This is a simple rider that serves a simple purpose. It increases your total monthly benefit each year for about five years. Your premium will go up with this rider each year because you are buying more disability insurance coverage. Generally they give you about a 25% increase in coverage over five years. The idea is to have your coverage increase with inflation over time without you having to pay attention to it. In terms of recommending this rider, it is simply a choice for you to make. If you want your coverage to increase, then get it.

Social Security rider
Social Security rider: Applicant can choose to integrate part of the monthly disability benefit with social security. In the event the claimant is awarded Social Security disability benefits, the monthly disability benefit will be offset by the amount of the SSI award. However, the amount offset will not exceed the monthly benefit of the SSI rider, even if the SSI benefit awarded does exceed it. This primarily used in lower occupation classes to gain a higher monthly benefit and to lower premiums.

Catastrophic disability rider
If the claimant is totally disabled and unable to perform two or more of the activities of daily living, an additional benefit will be paid on top of the base monthly benefit.

Policy Exclusions

If the policy owner has preexisting medical conditions, the carrier will write an exclusion that will exclude the policy from having to pay a claim for that condition. These may include: mental nervous conditions, muscular-skeletal conditions, headaches, etc…

Presumptive

The definition of presumptive disability varies among contracts. Some contracts do not even have a presumptive disability insurance provision. The basic idea of presumptive disability is to protect against drastic disabilities that occur suddenly. They generally protect you against the loss of hearing, sight, speech, or the use of any two limbs. This provision is built into most contracts. The main differences are in the definition language, specifically in the words; Total, Permanent, Irrecoverable. A total loss of sight, speech, hearing, or the use of any two limbs is a lot different from an irrecoverable or permanent loss. Total losses protect you from temporary loss of site, speech, hearing, and broken limbs. An irrecoverable loss is just that, the disability must be permanent. All contracts that have a presumptive disability provision pay first day benefits for these losses.

Recurrent

A policy provision that defines when an injury or illness will be considered continuous if there has been a period of recovery for a short time (usually 6 months) and then a recurrence of the same or related cause. A condition considered recurrent will not require another satisfaction of the elimination period.

Renewability

Non-Cancellable and Guaranteed Renewable
This is the strongest disability income contract available. The language and terms of the contract and the premium is guaranteed as long as the disability income policy is in force.

Depending on the carrier, the base plan may be guaranteed renewable and non-cancelable. Some carriers make the non-cancelable contract a rider, and it is not part of the base disability income plan.

Professionals, such as physicians, attorneys, executives, etc… generally prefer this contract, especially in conjunction with the “true” own occupation definition of disability.

Guaranteed Renewable
This disability income contract guarantees the language and the terms of the contract for the life of the policy. The premium could increase. However, the carrier must petition the state commissioner of insurance and make a case that it is losing money for the entire occupation class in that state in order to increase premiums on existing plans. Since it is an expensive and time consuming process for the insurance carriers, they rarely increase rates on existing plans. But rather, carriers introduce new plans with higher premiums.

Blue collar occupations, individual older than age 45 and females often prefer a guaranteed renewable contract because premiums are considerably lower, and they are willing to accept the low risk that the premium could increase during the life of the policy.

Conditionally Renewable
This disability income contract guarantees the language, terms and premium for only a year. At the end of the year, the carrier can place a new set of conditions on the policy owner to renew the contract, such as medical insurability, premium increases due to age change, etc. There is little or no stability in this contract and should be avoided if at all possible.

Residual

Residual disability means you are not totally disabled but because of your injury or sickness, but

• Your monthly earning are reduced by 20% or more
• You are under the care of a physician
• You may do some but not all of your material and substantial duties of your regular occupation or you can do all the material and substantial duties of your regular occupation, but not for as long or as productively.

The residual rider is relatively inexpensive, and it offers comprehensive disability coverage for your clients.

Total Disability

Own occupation
Due to sickness or injury you are unable to perform the material and substantial duties of your occupation. Benefits will be paid to claimant even if he/she returns back to work in another occupation.

This is the strongest definition of disability available. It is the definition many physicians and attorneys seek because it protects them in their specialties, yet would allow them to work in the field in another capacity or specialty.

Modified own occupation
Due to sickness or injury you are unable to perform the material and substantial duties of your occupation, and you are not gainfully employed in any other occupation.

This is a quality definition for those not employed in highly specialized fields. It will protect the claimant in his/her occupation, b ut not if working in another occupation.

Transitional own occupation
Own occupation definition that includes a benefit reduction provision in the event claimant is working in another occupation. Disability benefit will be determined based on the ratio of claimant’s monthly earnings prior to claim to the claimant’s earnings at a different occupation and claimant’s monthly disability payments.

Any reasonable occupation
Due to sickness and injury you are unable to perform the material and substantial duties of your occupation and any reasonable occupation based on your training, experience and education.