When a disability arises and prevents a person from working, it's quite likely that - sooner or later - household finances will be severely impaired. Unfortunately, though income may cease, the costs of day-to-day living do not. Disability insurance is designed to replace a portion of an insured person's normal earnings in the event of a debilitating illness or injury. The scope of coverage can be tailored to meet individual and familial needs with a number of optional benefit and rider choices, the more common of which are listed here:
A disability may prevent an individual from returning to his or her normal occupation but not from working at some other type of job. The Rehabilitation Benefit facilitates vocational training to prepare the insured for a new activity. This benefit applies when the insured is totally disabled and receiving benefit payments. If the insured chooses to participate in a vocational rehabilitation program approved by the insurer, then total disability benefits will continue as long as the insured actively participates in the training program and remains totally disabled.
Future Increase Option
Also known as the Guaranteed Insurability Option or Guaranteed Purchase Option, this selection allows the insured to purchase additional disability income protection, regardless of his or her insurability, at specified future dates. The rate for this additional coverage is determined by the insured's attained age at the time of purchase, not the age when the policy was originally issued.The insured will only be able to purchase a specified predetermined amount of disability income insurance at each option date. To guard against overinsurance, the insurer will usually limit the amount of additional coverage to perhaps $500 or less on each option date. Also, the number of option dates on which the insured may purchase additional coverage is limited. Usually, the option dates will be every two or three years from ages 25 to 40, or possibly to age 50. These dates may be arbitrarily selected by the insurer or they may coincide with the insured's birthday, marriage, or birth of children.
Cost of Living Benefit
The purchasing power of fixed disability benefits can be eroded due to inflation and increases in the cost of living. To protect against such situations, most insurers offer an optional Cost of Living Benefit. Under the provisions of this option, the insured's monthly disability benefit will be automatically increased once the insured is on claim (receiving disability income benefits). Typically, this increase occurs after the insured is on claim for twelve months, with subsequent increases each twelve-month period thereafter as long as the insured continues to receive benefits.
The Lifetime Benefits option extends the insured's benefit period from age 65 to lifetime. This extension may apply to accident-only benefits or to accident and sickness benefits. Normally, if the total disability is due to an accident which occurs prior to age 65, benefits will be paid for the lifetime of the insured, provided that he or she remains totally disabled.
Most insurance companies place some form of time limitation on the lifetime sickness benefit. Typically, the disabling sickness must begin prior to a specified age - such as 50, 55 or 60. A policy providing lifetime sickness benefits usually also stipulates that if the sickness begins at age 55 or earlier, 100% of the total disability benefit will be provided for the lifetime of the insured. However, if the disability begins after age 55 but before age 65, a reduced benefit will be paid for life. Here's an example of how such a policy might typically be structured:
"If total disability, due to sickness, begins at age 55 or earlier, total disability benefits will be paid for the lifetime of the insured. If total disability benefits begin at age:
- 56 - Total benefits are paid to age 65; then 90% of the benefit for the lifetime of the insured.
- 57 - Total benefits are paid to age 65; then 80% of the benefit for the lifetime of the insured."
and so on.
The progression of benefits would continue in this manner until age 65. If the total disability began at age 65 (normally the policy is not renewed past that age), then the payment of total disability benefits would be limited to one or two years.
Social Security Rider
The Social Security Administration (SSA) defines total disability as "the inability to perform one's previous work and the inability to adjust to any other work due to the disability." In addition, any such disability must be expected to last at least twelve months or end in death. Needless to say, this is a very rigid definition of total disability. As a result, many disabled people do not qualify for Social Security disability benefits. In fact, the SSA denies about two-thirds of all disability claims. Even when Social Security benefits are approved, a five-month waiting period must be endured and benefits don't begin until the sixth month of disability. With a Social Security rider included in the insured's disability income policy, an additional monthly benefit is payable during the waiting period. The rider may or may not continue in effect after Social Security benefits begin.
Social Insurance Supplement
This option is designed to fill gaps in coverage left by various government benefit programs. Similar to the Social Security rider, this coverage also works in conjunction with workers compensation benefits and benefits provided by state disability funds. These supplemental benefits may be included as part of the disability policy itself or may be added as a rider. The benefits are usually payable during any waiting periods for social insurance benefits or if social insurance benefits are denied. Benefits are paid monthly until the government benefits begin. If, for any reason, the government benefits cease, the insurer will begin the monthly payments again. However, the benefits are only payable during the benefit period specified in the disability contract and only while the insured remains disabled.
Additional Monthly Benefit (AMB) Rider
Most insurers offer short term riders to provide additional benefits during the first six- to twelve months of a disability claim (sometimes called Social Security Riders, as listed above, although the rider itself may mention nothing of Social Security benefits). More commonly, they're known as Additional Monthly Benefit Riders. The additional benefits during the early months of disability might be used to supplement government benefits or short-term disability benefits provided by an employer, or they may be used to help pay other expenses that might be incurred when an insured is first disabled.
Hospital Confinement Rider
The payment of any disability benefits usually requires satisfaction of an elimination period (or "time deductible"). This optional benefit results in the waiver of the elimination period when the insured is hospitalized as an inpatient. It pays the regular total disability benefit during the elimination period when the insured is hospitalized.
When an applicant for insurance has an existing medical problem or chronic condition, the insurance company may attach an Impairment Rider to the standard policy. This rider excludes coverage for a specific ailment or condition that would otherwise be covered. Since the condition currently exists, the insurance company would be unlikely to accept the risk, thereby normally refusing the coverage. However, using the Impairment Rider to exclude the specific condition, the applicant is benefited by being able to obtain coverage that might otherwise not be available for him- or herself, while the insurance company is able to protect itself from undue risk yet still provide health coverage.
Impairment riders are written on an individual basis for a specific person's medical condition, such as heart disease, cancer or diabetes. Therefore, the exclusion in the rider applies only to the person with the impairment and not to any other insureds, such as family members covered by the same policy.
Non-Disabling Injury Rider
This rider doesn't pay disability benefits, but rather provides for the payment of medical expenses incurred from an injury not resulting in total disability.
Waiver of Premium
The Waiver of Premium Rider specifies that in the event of disability, premiums will be waived retroactively to the beginning of the disability. The disability usually must be "permanent and total." However, some insurance companies choose to evaluate the extent of the disability in terms of the insured's continued capacity to perform his or her occupation.
Accidental Death and Dismemberment (AD&D)
Accidental Death policies or riders supply for a benefit that's payable in the event of death resulting from accidental bodily injury. A companion coverage (Dismemberment) is also provided for loss of limbs or sight. A schedule is added to the policy which lists various forms or extents of dismemberment and loss of sight for which a specified sum will be paid to the insured. In policies that provide weekly disability income benefits, the amount payable is usually expressed as a multiple of the weekly indemnity. In policies that do not pay weekly, the sum payable is usually expressed as a percentage of the death benefit limit or a percentage of the policy's capital sum (which is typically identical to the death benefit).