A long-term disability insurance policy can provide financial protection for you and your family if you were to become ill, experience an injury that prevented you from working or working in your specialized field. Evaluating your long-term disability insurance policy riders that, for example, keep pace with inflation or increase benefits to pay down student loans, is an essential step for many working professionals.
Learning Points
Overview of Long-Term Disability Insurance
YOU CAN USE A LONG-TERM DISABILITY INSURANCE POLICY TO TRANSFER THE RISK of your unexpected inability to work to an insurance company, rather than you or your family retaining that risk.
A long-term disability insurance policy can provide financial protection for you and your family if you were to become ill, experience an injury that prevented you from working or working in your specialized field. Evaluating your disability insurance coverage is an essential step for many working professionals.
A long-term disability insurance policy only covers you, or whoever is the insured person. It does not provide coverage to other family members. As you consider whether this type of coverage is right for you and your family, personalizing solutions for you and your spouse is possible.
Depending on your personal situation, you might need to evaluate different long-term disability insurance policy riders.
Your disability insurance policy is active for as long as you continue to pay the premiums. When your policy expires, there is no cash value or savings/investment component to a disability insurance policy.
The right long-term disability insurance policy for you can create certainty around how much financial support you and your family will receive when you need it. Your policy should be clear about what circumstances are covered, and when you would not be eligible.
Aside from your daily living expenses, the monthly benefit amount your long-term disability insurance policy can help in the following ways:
- Medical expenses related to the disability, which can be a significant financial burden if you are unable to work.
- Rehabilitation costs and help to maintain the individual’s standard of living.
- Maintain independence and self-sufficiency.
Understanding Long Term Disability Insurance Policy Riders
A long-term disability insurance policy rider is an additional feature that you can add to your base policy. A rider provides an extra benefit or modifies the terms of the base policy’s coverage. Riders typically come at an additional cost.
To quantify a rider’s benefit to you, you can evaluate how much monetary value and/or flexibility a particular rider would provide you.
You would then want to compare this value to an alternative approach like saving, and/or investing, the money you would have spent on the rider.
Thoughtfully evaluating riders allows you to customize your disability insurance to better align with your coverage needs.
While the insurance industry is constantly evolving, here are some common long-term disability insurance riders to be aware of when you’re evaluating different policies:
Non-Cancellable vs. Guaranteed Renewable
Non-Cancellable Rider: The insurer cannot cancel your policy, change any terms, or increase the premiums as long as the policyholder continues to pay the premiums on time.
For example, if you have a non-cancellable disability insurance policy at age 30 with a monthly premium of $200, your premium will remain $200 throughout the life of the policy.
This is beneficial when you value knowing how much your insurance premium will be each year and can afford high initial costs.
| Benefits | Drawbacks |
|---|---|
| Absolute premium stability. Highest level of policyholder protection. | Typically, there are higher initial premiums compared to guaranteed renewable policies. |
| Predictable cost over the life of the policy. |
Guaranteed Renewable Rider: The insurer cannot cancel your policy if you pay the premiums. However, the insurer can increase your premiums but only on a class-wide basis, not individually.
When you need guaranteed coverage and prefer lower initial premiums. You understand and are willing to accept the risk of potential premium increases in the future.
| Benefits | Drawbacks |
|---|---|
| Assures continued coverage without individual cancellation. | Potential for premium increases over time. |
| Typically, lower initial premiums compared to non-cancellable policies. | Less certainty about future costs. |
Cost-of-Living Adjustment (COLA) Rider
This long-term disability insurance policy rider increases your policy’s monthly benefit amount periodically to keep up with inflation. This inflation-related adjustment helps you maintain the purchasing power of your benefits over time.
How is the COLA calculated? Oftentimes the COLA disability insurance policy rider is tied to the Consumer Price Index for All Urban Consumers, or CPI-U. Admittedly, that reads like a lot of jargon. Said more plainly, on an annual basis, this rider should increase your monthly benefit by an adjustment factor based on changes to the cost of living in the United States.
If a policy uses a CPI-U method, it might also have an adjustment factor floor and ceiling. As such, you would know the minimum and maximum monthly benefit increase you can expect each year.
An alternative method to the CPI-U approach is to predetermine the inflation factor at a set percentage (e.g. an 3.0% annual increase).
What potential total lifetime benefits does a COLA rider provide? If you’re evaluating this rider, you can first measure the potential lifetime benefits of adding it to your policy. You’d need to assume some reasonable inflation rate over the life of the policy if the policy you are evaluating takes a CPI-U type of approach.
Next, you could then compare this to the lifetime benefit of an alternative scenario in which you increase your monthly benefit amount using the premium you saved by not adding the COLA rider. Your personal situation and the contemplated terms of your policy options will guide your decision, along with your own comfort with this specific risk.
Who is more likely to benefit from adding a COLA rider? Generally, younger policy holders, with fewer assets and higher future expenses will find more value adding a COLA rider than older policy holders, with more assets and lower future expenses.
Waiver of Premium Rider
Allows you to stop paying premiums while you are receiving your disability benefits, ensuring that your policy remains in force without additional cost.
This amount can include a refund of the monthly pro rata portion of your premiums after the day your continuous disability started.
Future Increase Option Rider
Ability to increase your coverage amount in the future without undergoing additional medical underwriting, or evidence of good health. This often subject to your insurance company’s review of your financial insurability. Of note, your
This long-term disability insurance policy rider can be beneficial if you expect your income to grow and want to ensure your coverage keeps pace with your increased financial needs.
Of note, this rider can be designed to only allow you to increase your monthly benefit amount up to a specific figure. For example, if your maximum option amount was $250.00, the maximum additional increase the rider would allow is an additional $250.00 per month of disability on top of your base monthly benefit.
This rider can also be beneficial for professionals with adequate group disability coverage and who also purchased a portable supplemental disability insurance policy.
- An alternative to this rider is to wait and purchase a large individual policy later. The math on this rider might not pencil if you anticipate your income to significantly increase in the short term.
- For example, this long-term disability insurance policy rider can act as a bridging solution if you plan to leave your current employer. You could also consider this rider if you are transitioning from medical residency, dental school, or law school inside of a near term time horizon (e.g. within five years).
- This rider is sometimes paired with an Automatic Increase Benefit rider, discussed directly below.
Automatic Increase Benefit (AIB) Rider
Automatically increase your policy’s benefit amount using a predetermined frequency and percentage amount.
As the name might suggest, this automatic increase is mandatory, and your premiums will reflect this increased coverage amount.
This long-term disability insurance policy rider can provide a structured way to ensure that your disability benefits keep up with income growth or inflation, without requiring you to take action.
Your policy should clarify how many times this rider can apply while you are receiving disability benefits, if at all.
Catastrophic Disability Rider
Provides additional benefits if you become catastrophically disabled. This could mean you are unable to perform two or more activities of daily living (ADLs), such as bathing, dressing, or eating. It could also be due to an injury or sickness in which you are cognitively impaired or presumptively disabled.
You’ll want to understand your policy’s specific definitions of these terms.
Adding this long-term disability insurance policy rider can offer you higher benefits in case of severe disabilities that require significant care and assistance.
Student Loan Rider
Helps cover the monthly cost of your student loan payments while you are disabled. This benefit is in addition to any other disability benefits you may receive. It is worth evaluating the cost of this rider if you have private student loans or have refinanced you student loans, especially if you have significant monthly payments. Be sure to review the benefit period for this rider, and evaluate how well it covers your student loan student repayments.
This disability insurance policy rider is less effective if you have an income-driven repayment (IDR) plan.
In which case, your student loan payments would scale with your disability income.
Additional Key Terms
Here are key terms to know as you are evaluating your disability insurance policy riders and policies:
- Binder: A temporary agreement issued by the insurance company that provides proof of insurance coverage until a permanent policy is issued. It shows that the insurance policy is in force from the date of application until your policy is formally issued or declined.
- Benefit Period: The maximum length of time that the disability benefits will be paid. For most long-term disability insurance policies this period can range from a few years to up to age 65-70. It is rare for a new LTDI policy to have a lifetime benefit period. Keep in mind that the benefit period of each rider can be different than the benefit period of the base policy.
- Contract Date: The effective date on which your insurance policy begins.
- Coordination of Benefits: The process by which the policies benefits are adjusted to account for your other income sources, such as sick leave, workers’ compensation, or Social Security Disability Insurance (SSDI), to prevent over-insurance.
- Elimination Period: Time period between the start of your disability and when you start receiving benefit payments.
- Long-term: this period is typically either 90 or 180 days. While most new individual policies have a 90-day elimination period, employer-sponsored policies are more likely to have a 180-day elimination period than individual policies.
- Partial Disability: A condition in which you can perform some, but not all, of your job duties.
- Pre-Existing Condition: Any medical condition that existed before the start date of the disability insurance policy. A policy may have exclusions or waiting periods for pre-existing conditions.
- Recurrent Disability: A provision that allows for the continuation of benefits if your disability recurs within a certain period after the initial disability benefits period ends, without requiring a new elimination period.
- Rehabilitation Benefits: Services or programs included in some long-term policies to help you return to work. These can include vocational training, physical therapy, or job placement services.
- Replacement Limit: The highest monthly disability benefit that an insurer will issue to you based on your earned income.
- Residual Disability: A condition in which you can perform some, but not all, of your job duties or can work part-time. Your policy may provide partial benefits based on the loss of income.
The Next Step
When you know who and what are truly important, you can create incredible clarity about your spending and saving.
Clarity to confidently spend on things that matter. Clarity to avoid spending your hard-earned resources on things that aren’t aligned with what you want in life.
As your financial planner in Saint Louis, we can help you plan for the future and enjoy the present moment.
Your long-term disability insurance policy should address how you sustain a stable stream of income for your family if you are unable to work due to illness or injury until you reach retirement age.
Start feeling more confident that you are making progress toward your savings priorities and prepared for the unexpected bumps in your life.
Proactive and open collaboration with your financial, tax, and estate planning professionals can help you work towards your financial goals. Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.
If you’re unsure about your next step, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.