Unlike built-in benefits of disability insurance policies, which are provided at no extra cost, riders are optional features that can be added onto a an insurance policy for a price. We’ve talked about some common life insurance and critical illness insurance riders before. Here we want to address some common disability insurance riders, and whether or not you should add them to your policies.
The own occupation rider improves the definition of disability from regular occupation to own occupation for the duration of the disability. It allows the insured to work in another occupation while still completely disabled in his/her original occupation and continue to receive benefits.
Many professionals and executives, who have invested a significant amount of time in training and experience in their occupation, will find this rider useful. With it, they will be able to find alternative work and not worry about having their benefits end. For the majority of insureds, the own occupation rider can be treated as a bonus, and not a necessity for the policy.
Regular occupation extender
If the policy comes with a basic regular occupation period of two years, it can be extended with this rider to equal the benefit period (usually five years or to age 65). This is important because without it, benefits may be denied after two years of disability if the insured would be able to work in another occupation based on his/her education, training and experience. Having the rider ensures that as long as the insured is completely disabled in his/her own occupation, benefits will continue until the end of the benefit period.
Cost of living adjustments
Disabilities can sometime last for many years, resulting in an extended claim period where the effects of inflation will erode the purchasing power of the original benefit amount. With the cost of living adjustment rider, benefits will be indexed to the Consumer Price Index, an indicator that tracks inflation. There is a maximum percentage that the benefits can increase by and that depends on the insurance company and the option chosen, but usually ranges from 3-10%.
It is imperative to add this rider to a disability insurance policy. With an inflation rate of 3%, the monthly benefit will only have half of its original purchasing power by year 24, so a long-term claim will be financially disastrous.
Future insurance option
The benefit amount you can purchase is based on your income at the time of application. Income often rises over a person’s working years, accompanied by poor health. The combination will leave the applicant underinsured without the possibility of increasing the benefit amount. Having the future insurance option remedies this by allowing you to increase your coverage in the future without medical evidence of insurability. However, you will still have to provide financial evidence to qualify for the increase.
While older individuals who are near or have reached their peak earnings in their career won’t need this rider, younger applicants will want to make sure they have this in place to protect their future earnings, especially for professionals, business owners and executives who will experience a massive increase in income.
Residual or partial disability
The benefits provided by this rider can contribute to the insured’s financial security by helping to close the gap between what the insured was earning before becoming disabled and what he/she is able to earn while either partially or residually disabled.
There are times when an injury or illness does not completely inhibit your ability to perform your occupation, so benefits for total disability won’t be paid. For these situations, you should be able to qualify for partial benefits, which are based on loss of income or time.
Refund of premium
This rider returns to you half of your premium in the event you don’t end up making a claim. The date you can apply for the refund is at least seven years after issue date or since the last refund, and varies between the different insurance companies.
Considering the inflated cost of the rider and the probability of not receiving a refund due to being on claim, we suggest you pass on this rider. After all, if you purchased the rider and become disabled, you receive the same benefit amount as someone who passed on it and paid much less for their policy.
If a healthcare professional were to become infected with HIV, hepatitis B or hepatitis C, it could have major career implications. Although the healthcare professional may be fully functional, legislation or regulations may prohibit him/her from performing the substantial duties of his/her occupation. In such a case, it is possible that disability benefits may not be payable, as the insured may not be physically disabled at the time. The healthcare profession rider helps remove this doubt by paying a benefit in these special cases.
At the time of writing, there is no extra premium charged for this rider, although insurance companies reserve the right to charge a premium in the future. Take the rider now and decide in the future whether or not to keep it if the insurance company starts to charge a premium.
Chances are, if you become disabled, your retirement plans will be adversely affected. The disability insurance benefit will likely be used to pay for more immediate and pressing expenses, while retirement funding falls by the wayside. The retirement protector rider remedies this by paying an extra monthly benefit directly into a retirement account, which is locked-in until retirement or the policy is cancelled.
While the effects of a disability on retirement can be financially devastating, you have other options for retirement funding. You can use the basic monthly benefit of the disability insurance policy to continue your retirement funding, which gives more freedom than the rider since benefits from the rider must be deposited into a retirement account. By using your basic benefit, you can vary the amount and timing of the contributions into a retirement account, providing you with more flexibility.
These are just some of the more common riders available on disability insurance products. Different insurance companies have different interpretations regarding how they are applied and the features that are offered. Some are only available when the policy is first issued, while others may be added at a later time. Speak to a licensed insurance advisor if you would like more information about disability insurance riders.
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