MD Preferred Blog

*The views expressed by the authors below do not represent the views or opinions of MD Preferred Services.

Disability Insurance Riders – What are they and do I need them?

Monday, July 02, 2018

By: Gary Fegan, DisabilityQuotes.com

Disability insurance policies are made up of a base policy and various policy riders. A rider is additional coverage that can be added to a policy. Additional riders are used to add supplemental coverage and make it part of a policy. There are some riders that can be essential for your situation and worth adding to the policy. There are other riders that would quite frankly be a waste of your premium dollars.

All disability carriers offer different riders. Some features are included in some policies but are riders on others- so it is important to look closely at the base policy and any and all riders considered. The riders allow you the flexibility to customize the policy to fit your specific situation and needs. Optional riders on an individual disability insurance (IDI) policy can help make sure that the coverage is for your specific occupation and keeps pace with inflation; guard against partial disabilities; and, even allow one the opportunity to purchase additional coverage without any further medical questions in the future.

The following five features are most commonly selected by our clients:

Non-cancellable: To avoid the possibility of losing your coverage just when you need it most, choose a policy that is non-cancellable and guaranteed renewable to age 65. With group or association group coverage, you run the risk of being dropped and left unprotected at a time in your life when, due to your age or to a change in your medical condition, it would be very difficult to qualify for coverage from another provider. A good disability policy would be non-cancellable and guaranteed renewable to age 65 or 67, so you are assured that premium rates and policy provisions will not be changed as long as premiums are paid on a timely basis.

True Own-Occupation: As a highly skilled professional who has invested so much in education and training, you want to make sure you have true own-occupation coverage. You want to make sure that even if you can teach or do any other job, for example, you are still eligible for benefits. Group coverage is rarely true own-occupation coverage.

The Partial Disability Benefit Rider: Most all of the people who purchase disability insurance choose a Partial Disability Benefit Rider. In some policies the partial disability benefit is not a rider, but it is part of their policy. Without the partial disability benefit rider, you would only be eligible for benefits if you are totally disabled. A good disability policy has a recovery provision built into the residual rider to help assist with your financial recovery following a disability. The partial disability benefit can even assist you in recovering from a total disability when you have returned to work full time, but still suffer a loss of income.

Almost all of our clients chose the Partial or Enhanced Partial Disability Benefit Rider. In our opinion, this is one of the most important features of any disability insurance policy. Without this rider, you would only be eligible for benefits if you are totally disabled. By adding this to your policy, your policy can protect you from an illness or injury that doesn’t cause a total disability but does limit your ability to work, which results in decreased income or it can even assist you in recovering from a total disability when you have returned to work full time, but still suffer a loss of income.

The Cost of Living Adjustment Rider - COLA: The best way to guard against inflation is by adding a cost of living adjustment rider to your disability policy when you secure the coverage. A COLA rider is designed to annually adjust your monthly benefit when you are disabled to help keep pace with inflation. Most companies offer a fixed 3% COLA rider, and some offer a 6% maximum. Other carriers tie the annual increase to the Consumer Price Index for Urban Consumers (CPI- U), and allow it to fluctuate annually from 1%-6% based on the annual fluctuations of the CPI-U.

As a rule of thumb, the younger one is, the more important this feature. For example, if one is under age 45, it is almost imperative to have the Cost of Living Adjustment Rider. It is recommended for those between the ages of 45 and 55. It is not as necessary for those over age 55, as they are closer to retirement, and the effect of inflation is diminished by the lesser number of years to retirement.

COLA is included in just about 60% of all policies sold by our firm. The cost of living adjustment rider adjusts your policy’s monthly benefit annually, whether you’re totally or residual disabled, and includes a minimum benefit adjustment of 3%, calculated on a compounded basis.. This helps people who have a long term disability from having a decline of purchasing power over time due to inflation. Guardian offers three versions of this rider, giving clients a choice as to how they want to protect against the rising cost of living. The most popular COLA rider is the 3% Compound option which starts increasing benefits, after 12 months of total disability, each year by 3%. The 4 year delayed COLA rider is a less expensive option, as it doesn’t begin increasing the monthly benefit by 3% annually until after 4 years of disability. Finally, the 6% Maximum COLA is the most expensive option, but also provides the opportunity for the highest increase possible, allowing for a 6% increase based on the changes in the Consumer Price Index for Urban Consumers (CPI-U).

Imagine if you are 40 years old and you owned an individual disability insurance policy with a $5,000 monthly benefit. If you became disabled, this amount may be sufficient to meet your needs at first, but as inflation factors in as the years go by, your benefit provides less and less. The following illustrates an example of two people. One added the cost of living rider, and one did not. They each started with a $5,000 monthly benefit and became disabled at age 40.

Monthly Benefit* at age 40 45 50 55 60 65
With 6% COLA $5,000 $6,991 $8,954 $11,983 $16,036 $21,459
Without COLA $5,000 $5,000 $5,000 $5,000 $5,000 $5,000

* Comparison of potential maximum monthly benefit $5,000, to Age 65 Benefit Period with 6% Cost of Living Adjustment Rider and one without. The 6% COLA calculations assumes 6% increase in the CPI-U each year throughout entire period of disability.

The Future Increase Option Rider: Most companies offer the ability to add coverage to your policy in the future- Sometimes this feature is referred to as The Future Increase Option (FIO) rider. This feature allows you the opportunity to purchase additional disability insurance coverage to keep pace with rising income without having to provide further evidence of good health. You can do this even if you are disabled at the time of your option. Your additional coverage, if purchased while disabled would then apply to any new and separate disability. An FIO rider offers you the opportunity to purchase additional coverage each year on the policy's anniversary, up to a certain age, like age 55. You must demonstrate that your income has risen sufficiently enough to warrant the additional coverage, that you continue to be employed full time and you must disclose any other disability insurance you may have in force. Even if you have experienced a change in health, which many do, you will have the peace of mind in knowing it will not impact your ability to obtain additional disability insurance coverage in the future, provided your original disability contract contained an FIO rider.

The Future Increase Option (FIO) rider is the third most popular option clients chose on their disability policies. For example, a client who purchases $5000 of monthly benefit today with $5000 of FIO, has guaranteed their potential to exercise the increase option for a total of $10,000 per month of coverage regardless of changes in health. They have to document an income that qualifies them for this increased benefit, but they no longer have to worry about changes in health preventing them from increasing their disability protection.

Buying an IDI policy is an important aspect of financial planning. It’s important to not only get the right amount of coverage, but also to get the right optional riders that add value to the policy, and that meet your needs today and tomorrow.

Catastrophic Disability Benefit Rider: The Catastrophic rider is offered by many carriers and is a great feature for many insureds. This rider would pay a benefit in addition to the monthly indemnity amount in the event of one of the following:

  • A cognitive impairment that requires substantial supervision
  • The loss of two or more Activities of Daily Living (ADL)- bathing, continence, dressing, eating/feeding, toileting and transferring
  • A total, complete and irrevocable loss of sight in both eyes, hearing in both ears, speech, or the entire use of both hands, both feet or one hand and one foot.

Since catastrophic disabilities are often permanent- or at least long term-you want to make sure that your policy is designed such that the Catastrophic Disability Benefit Rider will include an automatic annual compound 3% increase adjustment to help benefits grow faster and provide greater income protection. When this is combined with the base policy benefit and other disability coverage, the Catastrophic Disability Benefit Rider may provide up to 100% income replacement. This is a great way to add additional benefit to your individual disability coverage at a rather low additional premium.

Our agency has been focusing on the sale of individual disability insurance for over a decade. In that time, we’ve been able to help tens of thousands of clients protect their income. One question that comes up frequently when advising a client on how to design their coverage is – What optional riders should I purchase?

Optional riders on an individual disability insurance (IDI) policy can add further value to an already valuable product. They can help make sure that the coverage keeps pace with inflation; protects against partial disabilities; and, even allows one the opportunity to purchase additional coverage without any further medical questions in the future. Almost all of our clients chose to include certain optional riders on their policies.

1 Optional riders are available for an additional premium
4 This benefit is not necessarily protection against increases in the cost of living.
5 Restrictions and limitations apply. While medical information is not required when exercising a future increase option, applications to exercise an increase option will be financially underwritten, taking into consideration both the applicant's then current income, as well as all disability insurance which is then in force, or for which the insured has applied or is eligible to receive.

Individual disability insurance policy Forms 18ID, 18UD, 18GI, 1400, 1500, and 1600 underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. In New York: These policies provide disability insurance only. They do not provide basic hospital, basic medical or major medical insurance as defined by the New York State Insurance Department. For policy forms 18ID, 1400, 1500, and 1600 the expected benefit ratio is 50%. For policy forms 18UD, 18GI, 18UD-F, and 18GI-F, the expected benefit ratio is 60%. The expected benefit ratio is the portion of future premiums that the company expects to return as benefits, when averaged over all people with these policy forms.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 1355 Piccard Drive #380 Rockville, Maryland 20850. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor, (240) 683-9700. James Fegan, Financial Representative. The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian.

Financial Balance Group is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member FINRA, SIPC.

2018-61707 Exp 06/2020

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