Protecting your most valuable asset — your ability to earn an income — should form the bedrock of your risk management planning, as well as the foundation of your financial plan for life. This means you should obtain the best kind of disability insurance in the marketplace: personal long-term disability coverage through a quality insurance carrier. While group or association long-term disability insurance is okay — and for some people with health conditions, it may be the only kind available — an individual policy of disability insurance usually provides betters terms and conditions though at a higher cost.
If you already have individual disability coverage, or are considering purchasing a policy, here are some tips on the best features and benefits your policy should have:
1. Your policy should be non-cancellable and guaranteed renewable. That means the premiums cannot be increased and the policy cannot be cancelled by the insurance company except for non-payment of premiums.
2. The monthly benefit you choose should be all “base benefit,” meaning there is no offset of benefits for such things as Social Security disability, worker’s compensation, state disability benefits, etc.
3. The definition of disability should be an “own occupation” (referred to as “own occ”) definition, which means you would be considered totally disabled and thus eligible for full benefits from your policy if you cannot perform the substantial and material duties of your occupation (surgeon), even if you can work in another occupation. Some carriers even allow for the definition to be narrowed down even more, such as specialty surgeons.
Kenneth W. Rudzinski
4. Most individual disability carriers price their products to be cost-efficient at a 90-day elimination period (EP). The EP is the period of “self-insurance” before benefits kick in. Choosing a shorter EP raises the cost significantly while extending the EP to, say, 180 days, provides very little extra savings.
5. Most carriers now write policies to provide for benefits to age 67 years old, instead of just to age 65 years old. The commencement of Social Security retirement benefits at later ages is the reason for the additional 2 years. For an extra premium, you can add lifetime benefits that extend beyond ages 65 years old or 67 years old. Generally there is a formula in the policy that states what percentage of the pre-65/67 benefit will continue for life based on the age at which your disability begins. Affordability is the issue here, as lifetime benefits add an extra layer of cost to the policy.
6. Also with regard to cost, most carriers offer policies with only a level premium structure. A few, though, offer a graded premium plan that allows for lower premiums in the early years. Rates increase each year and eventually exceed the level premium. But, but for many younger physicians saddled with loans, mortgages and other family obligations, the lower early premiums make sense.
7. Make sure your policy contains residual benefits or partial disability benefits. Briefly, under a residual definition of disability, you would receive a percentage of your monthly benefit that equals your monthly percentage loss of income. For example, if you suffer a 60% loss of earnings (the terms earnings and loss of earnings are defined in the policy), you would receive 60% of your monthly benefit. Space here does not permit a detailed explanation of residual benefits, but make sure your policy contains this valuable provision.
8. You need to include a cost of living adjustment (COLA) benefit in your policy. This benefit allows your monthly income to increase annually after your disability begins, usually by 3% or 5%, or some other formula. Carriers generally price the 3% COLA efficiently. Affordability is the key that drives what type of COLA you may want to have, but make sure you include some COLA. Otherwise you would be living off a fixed income if you were disabled for a lengthy period of time.
9. The future insurability option (FIO) lets you increase your monthly benefit in the future without any medical requirements. It is not an automatic benefit increase; you must request the increases. This is a valuable benefit to include, especially if your health changes, however it requires financial underwriting approval, i.e., higher income to justify higher benefits.
10. The automatic benefit increase rider (ABIR), for which each company has its own name, is unlike the FIO option. The ABIR raises your monthly benefit automatically, usually by 5% per year for 5 years. No medical questions are asked and there is no requirement that your income increases. Some carriers include this benefit without charge.
11. Catastrophic disability is an optional benefit that increases your monthly benefits if your disability is considered catastrophic, such as severe cognitive impairment or an irrecoverable disability as specified in the policy. It is a form of long-term care coverage and opting for it is mainly an affordability issue.
12. Lastly, some carriers have begun offering a retirement replacement benefit. For an extra premium, the benefit sets aside money into a trust while you are totally disabled to replace lost retirement benefits you cannot accrue in a 401(k), SIMPLE-IRA or other retirement plan. In other words, if you have no income while you are disabled, you cannot contribute to a formal retirement plan. This benefit does that for you.
I hope this information helps you make the best choices when looking to purchase individual/personal disability insurance. I should add that group or association long-term disability plans do not contain many of the best features that personal disability provides, such as the ‘own occ’ definition of disability, COLA increases, guaranteed premiums, FIO or ABIR, quality residual benefits, etc. Their advantage is their cheap rates. You need to determine which type of policy you will want in effect on the day after you become seriously disabled: the cheap one with limited benefits, or the one with solid benefit definitions and policy features.
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- Kenneth W. Rudzinski, CFP, CLU, ChFC, CRPC, CASL, CAP, is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and a registered investment advisor. Member SIPC. Insurance offered through Lincoln affiliates and other fine companies and state variations thereof. Lincoln Financial Advisors does not provide tax or legal advice. CRN-1276022-081715. He can be reached by email at: Kenneth.Rudzinski@LFG.com.