Policy Riders: A Guide to the Bells and Whistles of Individual Disability Insurance – Part 3
Provisions Appearing As Policy Terms or As Riders (1 of 2)
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 applying for additional disability coverage.
All of the provisions we’ve discussed so far are typically purchased as policy riders, and are rarely included in the basic terms of your policy. In the next two posts, however, we will evaluate provisions that may appear as policy terms or as riders, depending on the insurer. Whether an additional provision is included in your disability insurance policy or must be attached as a rider, additional benefits typically come with a higher premium. Some of these provisions can have a significant effect on your rights and benefits in the event of a disability, and identifying where and how they may fit into your policy is critical to ensuring you are fully protected.
Partial/Residual Disability Benefits
Partial disability benefits, also referred to as residual disability benefits, pay a percentage of the maximum benefit amount in the event that the policyholder’s medical condition prevents him or her from performing some, but not all, of the duties of his or her occupation on a full-time basis. At first, this may appear to be an attractive option for a dentist suffering from a lumbar disc herniation, for example, who wishes to keep working to the degree he is able while receiving a portion of his disability benefits.
The most important benefit of a residual disability claim is that it allows you to preserve your pre-disability occupational definition while collecting a portion of your monthly disability benefits. If you have an own occupation policy, preserving your pre-disability occupational definition is vital to ensuring that any future total disability claim is accepted and fully paid down the road.
However, there are also some drawbacks to partial disability claims. For example, most insurers calculate monthly benefits for a partial disability claim using a formula that takes into account your prior monthly income, your current monthly income, and the maximum benefit amount under your disability insurance policy. However, calculating these figures can be tricky for doctors and dentists who are often paid a percentage of their production. If your insurer measures your prior and current monthly income based on the overall profit of your clinic, your personal drop in production may not be fully taken into account and your partial disability benefits may end up being significantly less than your actual lost income.
Furthermore, the maximum benefit period for a partial disability claim is typically shorter than a total disability claim. As a result, your insurer has an incentive to continue characterizing your medical condition as a partial disability even if you become totally disabled. In doing so, they may run out the clock paying only a percentage of your benefits for 60 months or until age 65 instead of paying full benefits potentially for life. With these incentives, it is unsurprising that insurers approve relatively few total disability claims that begin as partial disability claims – even if the policyholder stops working completely. For more information on how insurers assess potential disability claims, see this article.
Some insurers include a partial/residual disability provision in the terms of their standard disability insurance policy, while others offer it as a policy rider. To determine if residual disability benefits are part of your standard policy, check the “Definitions” section of your policy to see if “Partial Disability” or “Residual Disability” is a defined term. If it is, check the section of your policy titled “Benefits” or “Monthly Income Benefits” – if this section contains provisions describing the payment of residual disability benefits, they are included in the standard terms of your policy.
If residual or partial disability is not defined in your disability insurance policy, the provision is only available as a policy rider. If residual disability benefits are not included in the terms of your policy, consider the pros and cons outlined above before purchasing residual coverage as a policy rider. The advantages of residual disability benefits may not justify the additional cost associated with the rider in your particular case.
Waiver of Premium
This provision allows you to forego paying your policy premiums while you are receiving disability benefits, freeing up a substantial portion of your monthly income you would otherwise be paying back to the insurance company. This provision usually includes a waiting period – typically ninety days – before it kicks in. Once the waiver takes effect, however, it can significantly ease the financial burden created by a disabling condition, saving you hundreds of dollars every month.
A premium waiver is a standard term in most modern-day disability insurance policies. The provision is typically found toward the end of the “Benefits” section of your policy, under the subheading “Waiver of Premium.” If your disability insurance policy does not include this provision, you may consider purchasing it as a rider.
As you read through your policy, look carefully to determine which of the provisions discussed above appear in your disability insurance policy. Not only will this help you fully understand your rights under your disability insurance policy, it will help you determine if additional riders are necessary to fully protect your financial security in the event of a disability. In our next post, we will look at two more provisions that may appear either as riders or as policy terms.
