Policy Riders: A Guide to the Bells and Whistles of Individual Disability Insurance – Part 5
New and Unique Policy Riders
In this series of posts we are discussing policy riders, the add-ons to your basic disability insurance policy that provide additional terms or benefits in exchange for higher premiums. In part one, we walked through the basics of policy riders and evaluated the commonly-purchased COLA rider. In part two, we analyzed two benefit-based riders that enable you to increase your monthly benefits without the hassle of going through the hassle of the full underwriting process. In the parts three and four, we looked at important provisions that sometimes appear as policy terms and sometimes appear as riders, depending on the insurer.
In this final post, we’re going to take a look at some of the more recent and unique riders appearing in modern individual disability insurance policies.
Return of Premium Rider
This rider entitles you to receive a refund of all monthly premiums in the event you do not become disabled before the expiration of the policy term. For example, assume you purchased an individual disability insurance policy right of out dental school at age 28 with this rider and an annual premium of $5,500.00 per year. At age 65, if you have not become disabled under the terms of your policy, the insurer has to cut you a check for $203,500.00 (37 years x $5,500.00).
Initially this may seem like a very attractive option. At first glance, it appears that your disability insurance is essentially free if you don’t become disabled. However, the right to recover your premiums has significant costs.
First, this rider usually comes with a hefty premium increase, and the opportunity cost of using those additional funds on a rider with no guaranteed return may be difficult to justify. Sticking with the example above, if the rider costs an additional $1,000.00 per year and you chose to instead put that money in an investment portfolio with an 8% return, at age 65 your portfolio would be worth $203,070.32 – and that money is yours whether you become disabled or not.
Second, return-of-premium riders are often an all-or-nothing proposition: either you become disabled and collect benefits, or you get your premiums back. If you become disabled, you essentially overpaid for the same benefits you would have received without the rider – the extra money paid each month for the rider simply vanishes. Considering the fact that a majority of dentists will suffer from a musculoskeletal condition at some point in their career, this is not a small risk.
Some insurance companies offer return-of-premium riders that will still pay back part of your premiums even if you received disability benefits. However, the terms are typically even less favorable. With this version of the rider, any disability benefits paid to you during the term of your policy will be deducted from your premium return. Additionally, you will typically only receive a percentage of remaining balance (between 50% and 80%) rather than the full amount. Under these terms, if you receive disability benefits for any significant amount of time it will likely diminish most of the value of the rider.
Though the return of premium rider may initially seem enticing, its benefits are often far outweighed by its costs. Before purchasing this rider, consider meeting with a financial professional to determine if there is a more productive use of your money.
Student Loan Coverage Rider
Student loan debt in the United States has exploded over the last decade. Americans now owe approximately $1.3 trillion in student loan debt. Medical students and dental students are graduating with hundreds of thousands of dollars in debt, and in the event of a disability, the only debtors entitled to discharge of their federal student loans are those who meet the Social Security Administration’s stringent standard of “total and permanent disability.” To make matters worse, student loans cannot be discharged in bankruptcy.
Some disability insurance companies are creating policy riders specifically to address this growing crisis. For example, Guardian’s Student Loan Protection Rider allows an individual to insure their student loans for up to $2,000.00 per month on top of his or her disability benefits. With this rider, you can choose between a 10- and 15-year term, and no loan documentation is required until a disability claim is filed. As with your disability benefits, your insurance company must determine that you are totally disabled in order to be eligible for the benefits of this rider.
Doctors, dentists, and other professionals graduating with six-figure student loan debt should consider purchasing a rider of this nature to ensure that in the event of a disability their monthly benefits are not significantly eroded by their ongoing obligation to repay student debt.
Disfigurement Rider
Public figures, celebrities, models, and spokespeople occupy a unique place in the workforce: they are the only individuals in the economy for whom their likeness is the source of their livelihood. Disability insurance companies that insure high-income celebrities and entertainers often offer a disfigurement rider that will pay benefits to the insured if they are disfigured, even if they are not disabled. For many public figures disfigurement may completely deprive them of their ability to secure work, and have the same practical effect as total disability in many other fields.
Loss of Value Rider
Professional athletes also have a very unique place in the economy. Like most employees, their value is typically directly related to their performance. However, the demands on their bodies are so high that even a small decrease in performance brought on by an injury (or following recovery from an injury) can have a significant impact on their earning potential. Professional athletes often purchase this rider as a safety net to protect themselves from the loss of value they could potentially face due to a major but non-career-ending injury right before the expiration of a contract and free agency. More recently, elite college prospects are purchasing this rider to protect their value in an upcoming professional draft. If a major injury causes a college prospect to be drafted in a later round for less money, the rider is designed to fill the salary gap between their projected draft position and their actual draft position.
In recent years, the number of policy riders available for purchase with individual disability insurance policies has risen substantially as insurers create products to fit the unique needs of policyholders. Some riders are more beneficial than others, and some are simply not suited for certain individuals. Before you purchase any rider, look carefully at the fine print and make sure that it fits your financial needs.
