DI Policy Features
Disability Insurance Policy Walk-Through
One stumbling block to choosing disability insurance is that there are so many benefits and features to choose from! Below we explain in “plain speak” the most often utilized benefits.
We’ll use a recent customer as an example to help illustrate. Our client, William, is a small animal veterinarian in Durham (with an annual income of $90k).
Monthly Disability Benefit
This is the main benefit all disability insurance policies offer at the core of the policy. If you are disabled and cannot work because of accident or sickness, and meet the elimination period, the insurance company begins to send you a “monthly benefit,” an actual cash amount you can use as you see fit.
The insurer continues to send you the monthly benefit each month until you can return to work, or until your benefit period ends.
The monthly benefit can be received via a mailed monthly check or deposited directly into your checking account, just like a paycheck.
Amount of Monthly Benefit:
Disability insurance companies base your monthly benefit on a percentage of your gross pay, usually 60-75% of that amount. The idea is to align the monthly benefit you would receive if disabled with your actual “take home pay” (gross income - taxes).
William’s policy with Principal features a $4,750 monthly benefit, which is 63% of his gross monthly pay. Since he pays the premium cost of his policy, any monthly benefit received would be tax free.
Duration of Monthly Benefit:
Each disability insurance policy outlines an “elimination period” and “benefit period.” You choose from a list of options of these when building your policy.
The “elimination period” is the time from when your disability begins that you do not receive benefits. The most popular is 90 days…the monthly benefit would begin 90 days after William’s disability began.
The “benefit period” begins once the elimination period is met, and continues a) until you can return to work, or b) until a set number of years or specific age. We chose “age 67 for William as this corresponds closely with his Social Security retirement age.
Other Built-In and Optional Benefits of a Disability Insurance Policy
Built-In Benefits You Should Look For and Confirm in Any DI Policy You Choose
1) “Non-Cancelable and Guaranteed Renewable”: The best disability insurance policies include these guarantees, that the insurer cannot change the details of your policy, nor cancel your policy for any reason (with the one exception being your non-payment of premium costs). And, the insurer cannot change the premium cost of the policy you purchased (the rate is locked in for the future). The insurer makes these guarantees regardless of changes in your life like aging, your health, or change in your occupation.
2) “Waiver of Premium”: If you are disabled and begin to receive benefits under the policy, the insurer stops charging you the monthly premium cost while you are receiving benefits. This is important, as you do not want that premium cost eating into your benefits.
3) “Rehabilitation Benefit”: Many insurers offer this benefit, offering to help pay for the costs of rehabilitation towards moving past your disability (examples; exercise, therapies, home modifications). The rehabilitation plan and accompanying costs must be agreed to in advance between you and the insurer.
Optional Benefits You Can Add To Your Disability Insurance Policy
Cost of Living (COLA) Adjustment
This optional benefit increases your monthly benefit each year while you are disabled and receiving benefits.
The most popular amount is 3%, to help keep pace with inflation (as determined by the Consumer Price Index). Other amounts are available.
If William was disabled and receiving benefits his $4,750 monthly benefit would increase to $4,893 in year two, $5,040 in year three, etc.
Residual Disability Benefits
Disability insurance benefits are paid when you are experiencing a “total disability,” a condition or sickness that prevents you from working at all.
But in many cases your attending physician, after a period of total disability, clears you for work on a part-time basis, maybe 2 days weekly instead of your previous 5.
Working 2 days weekly would end your receiving a monthly benefit. By adding the optional residual disability rider you could work a schedule approved by your physician and receive benefits for the time you were not working.
Future Benefit Increase
Your income increases over the years, because of promotions, new workplaces, and other changes.
This optional benefit “pre-underwrites” you for more monthly benefit when you initially purchase DI coverage. You only need to show proof of higher income to request and add more monthly benefit.
Ex., William is invited to become a partner in the animal hospital, raising his income by 25%. The future benefit increase helps his DI policy benefit keep pace.
Mental Health / SA Unlimited Benefits
Disability Insurance providers pay the monthly benefit for as long as you are disabled, up to the length of your policy’s benefit period, regardless of the diagnosis (with one exception). Most insurance companies limit benefits for mental disorder / substance abuse (MD / SA) diagnosis to just 2 years.
Disability Insurance claims examiners find that fully 15% of disability insurance claims are from a diagnosis of either mental health or substance abuse.
You can accept the 2 year limitation, or many insurance companies will waive the 2 year limit as an optional rider or benefit, for an extra monthly cost.
Catastrophic Disability Benefit
The average monthly benefit is 60-75% of your gross pay, to replicate take home pay. But what if you suffer a very serious disability? (adding medical bills, physical therapy, extra expenses for care giving, etc.)
The optional catastrophic benefit rider is designed to add to your monthly benefit to help pay for those added expenses.
William’s policy adds an additional $2,750 if incurs a catastrophic disability, a total benefit of $7,500 monthly.
Retirement Savings Benefits
When you are disabled you not only lose the income you use to fund your family budget, you also lose your ability to save for retirement! And the lower earnings you have while disabled can result in lower Social Security benefits later in life.
This optional benefit allows for a set, separate benefit to be set aside for your retirement years, in one of 2 forms:
-A monthly benefit routed to your retirement plan (IRA, etc.) as a monthly contribution while you are disabled.
-A lump sum given to the insured at retirement age (when the policy ends) to be used for retirement income.
There are other optional benefits to choose from, and each insurer offers its own specific set of optional features. Optional benefits usually contain an extra premium cost.
Michael Sizemore’s Disability Insurance Story
“My disability insurance has been key. I wouldn’t be where I am without it.”
At the young age of 26, Michael Sizemore was living two of his dreams. Ever the athlete, he was training to participate in his first marathon. And, after earning his masters degree in public administration, he felt prepared to start his life’s mission of helping others. Michael had just started a new position advocating for the unemployed and disadvantaged in his community through a nonprofit organization.
Those dreams came crashing down around him one night while he was out with friends. As they were walking across the street, a drunk driver ran a red light at high speed and hit Michael. His injuries were so severe, including major head trauma, that doctors were unsure if he would survive. There were countless surgeries to treat his head injuries, repair his shattered legs and address a multitude of other injuries.
Through strength, determination and a lot of rehabilitation, Michael is improving every day, including being able to walk again. But during the three years of rehabilitation, he has been unable to return to work.
Michael has relied on the disability insurance he had in place, which replaces a percentage of his salary. With it, he’s been able to pay his rent and utilities, and afford to keep his truck. Michael is hopeful that he’ll be able to work again soon. And he credits his disability insurance with helping him work toward that goal. “I’m still rebuilding my life and myself,” he says. “My disability insurance has been key. I wouldn’t be where I am without it.”
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