Individual Disability Insurance
For most individuals, disability insurance can seem like a complicated process that can be overwhelming. Regardless of what spurred your action to pursue disability insurance coverage, whether you just had a close friend become disabled or you recently found out your plan at work is not what you believed it to be.
Below is a list of 20 questions you should be armed with when contacting a disability insurance specialist. There is no particular order to the list. I would recommend you ask, at some point, some or all of the questions below.
I also added some easy to find Easter eggs to add some fun to a long article. Enjoy.
1. What percentage of my income is available for replacement? Does this include all my sources of income, such as bonus or commissions?
The typical rule of thumb most people associate with is 60% of your income. However, that is not always the case. The more you make, the less percentage is available. Each carrier has their own Issue and Participation Limits (I&P). If you are making $100,000 or less, you should see 60% or more in available benefits. The higher up the financial scale you go, the lower the percentage goes. When you apply for an individual plan, usually bonus and commissions can be used toward your annual income.
Bonus income can be a little tricky. Some questions need to be answered, is this considered a one-time bonus? Is the bonus a part of your compensation and if so, how often is this bonus paid? Is it guaranteed? This will give the underwriter an opportunity to make the best offer possible.
2. Is the premium guaranteed to stay the same?
There are different types of coverage available. There are two types of polices an individual can buy, a “Guaranteed Renewable” (GR) contract and a “Non-Cancellable and Guaranteed Renewable” contract.
A “GR” contract is one in which the premiums are not guaranteed. This means the insurance company cannot cancel your policy, as long as premiums are paid on time, but the rates can be changed. That does not mean the insurance company can pick on a specific individual and raise the rates of that policy. There are rules in place that make sure an insurance company must follow in order to raise rates on a specific contract. If rates were to change, they would have to change with everyone in a specific state, occupation class, and or age.
A “Non-Cancellable and Guaranteed Renewable” contract is one in which the rates are locked into a specific age. Once you are in a policy like this, your rates are locked in. The only time your rate would increase is if you changed your policy. This could mean you increased your monthly benefit or benefit period; you added a rider that was not on the original policy, etc. If the policy stays the same from day one, your premium stays the same. Make sure you understand what you are buying and discuss this with your agent.
3. How long is the benefit period per disability?
Insurance carriers offer all different benefit periods. They can be as short as a 2 Year Benefit Period (BP), 5 year BP, 10 year (BP), to age 65/67, to age 70 with some carriers and even some form of a lifetime benefit. When discussing the lifetime benefits with your agent make sure you understand how that benefit period works. Berkshire Life Insurance Company of America for instance offers a graded lifetime benefit period. The language associated with this rider option issues 100% of the monthly benefit amount for life if the insured becomes continuously totally disabled before the age of 45. If continuous total disability begins after the age of 45, you will receive your full monthly benefit to age 65/67. Thereafter the monthly indemnity you would receive would depend upon your age when continuous total disability began. For every year after age 45, the monthly benefit after age 65/67 is reduced by 50%. For example, if you were to suffer a disability at the age of 55 and you were to remain disabled until death, you would receive the full amount until 65/67, after the benefit period your lifetime benefits would be reduced to 50% of your monthly benefit for the rest of your life.
There are a lot of benefit period options available. Work with your agent to insure you get the right benefit period for you.
4. Are my benefits taxable?
You should discuss this with your CPA. Usually, individual plans are paid with after tax dollars. If this is the case your monthly benefit is tax-free. If you are planning on paying the premiums through a business or any other way make sure you consult your CPA.
5. Who decides if I am disabled?
Your policy will outline all of the terms and conditions you must satisfy in order to collect disability benefits. Be sure to read your policy carefully as contract provisions regarding claims and proof of loss vary from carrier to carrier. Generally, most disability contracts require that you are under the care of a physician, and the care provided must be appropriate according to prevailing medical standards. In addition to providing medical proof of loss, you may also be required to provide employment records, financial records, occupational information, or any other information necessary for the carrier to evaluate your claim.
6. Can I cancel my policy at any point? Can the insurance company choose to cancel my policy?
You as a policy holder can cancel your policy at any point without penalty. You may also be able to make some changes to your policy without additional underwriting subject to underwriting rules. Actions that generally do not require additional underwriting are actions like reducing your monthly indemnity, reducing your benefit period, or removing riders.”
If you have a non-cancellable guaranteed-renewable contract and/or a guaranteed renewable contract and you have paid your premiums on time, the insurance company cannot cancel your policy. That is the strength of a good individual plan. By purchasing an individual policy, you own that policy as long as you continue to make premium payments. The insurance company cannot decide to cancel your policy.
7. What is the definition of “total disability”? Does it allow me to work in another occupation?
This all depends on the definition of total disability in your policy. There are different definitions available on the market. Here is a quick breakdown of the different options available.
True Own-Occupation- a policy with a true “own-occupation” definition of total disability deems you disabled if you are unable to perform the material and substantial duties of your occupation. If you decide to work in another occupation, your benefits will continue to be paid, as long as you remain disabled under the policy definition. This means you can work in another occupation, earn the same income or more, and still collect benefits. If you are a physician, some policies offer medical specialty language that protects your specialty. This means you may still be able to work in the medical field and still collect benefits, if your disability prevents you from working in your previous specialty.
Modified “Own-Occupation”- similar to the language above, a modified own-occupation policy would consider an individual disabled if they were unable to perform the material and substantial duties of their occupation. Many modified own-occupation contracts state that if you do work in another occupation you are not totally disabled but may qualify for residual disability benefits (if available) if you choose to work in another occupation, and your monthly benefits may be reduced by income received in your new occupation. This definition is not as strong as a “true own-occupation” policy.
Any gainful occupation- this definition means that you will be considered disabled if you are unable to work in your occupation as well as not be able to work in any other occupation in which you are reasonable trained for. This means that you may not be eligible for benefits even though you can no longer work in your occupation.
Make sure you understand the language in your policy when it comes to the definition of total disability.
8. Does this policy offset for any Social Security benefits?
In most individual policies there is an option to lower your premiums by accepting a rider that would off set for any social security benefits you are eligible for. Each carrier may label the rider differently. In most cases, if you do not see a Social Security substitute rider, your monthly benefit would be above what social security pays.
Again, make sure you talk with your agent and see if there is a rider attached to your individual plan to reduce benefits in the case of SS.
9. If I have a pre-existing condition can I still apply for coverage?
I would recommend you talk to your agent about any medical issues or concerns you may have. The short answer is yes, you can still apply if you have a pre-existing medical condition. There are many cases in which a carrier can make an offer even though you may have a medical condition. The company can deal with the condition in multiple ways. They can exclude the medical condition, if there is an exclusion available for the underwriter to put on the policy. You may see a reduction in benefits and/or benefit period. They may not do anything with it. It truly depends on the condition. Some medical conditions are automatic declines. This is when working with an experienced agent can help navigate the underwriting with you.
10. What financial information is needed to apply?
Each carrier has their own financial documentation requirements. Most times it depends on your occupation and if you are an employee or a business owner.
If you are a W2 employee, usually your most recent W2 and/or a recent pay stub with a Year to Date is enough proof for an underwriter to make a decision.
If you are a business owner, the underwriter may require your 2 most recent tax returns with all schedules.
Most carriers now offer young professionals, those who are just starting their careers, guaranteed benefit amounts. There are programs for residents and fellows, as well as first year physicians, in which there is no financial proof needed. The insurance company will give you a set amount just based off of their program. Most residents are eligible for $5000 per month and depending on your medical specialty, first year physicians can get anywhere from $6000 per month to $7500 regardless of income. The program also does not off set for any group insurance you may be eligible for at your new employers.
11. When do my benefits begin? Do I have to be out of work for a specific number of days?
This depends on your Elimination Period. This is the amount of time you need to be disabled before you can qualify for benefits. This period is determined based on the elimination period you select. The frame can be as short as 30 Days and as long as 360. The majority of long-term disability policies I have written have a 90 Day elimination period. Premiums do go up or down based on the elimination period. Rule of thumb, the shorter the period, the more expensive the premium. I would recommend you talk with your agent and determine what the best elimination period is for you. In some instances, you may have a short-term disability policy in place and could extend the elimination period to 180 Days. I have had clients do a great job of saving and they were comfortable going 360 days before the policy would begin. I do know that anything less than 90 days is going to be significantly more expensive.
12. If I leave or change jobs, am I able to keep this policy in-force?
When you purchase an individual disability plan you own that policy. This means that if you leave your place of employment and work somewhere else, the policy goes with you. It stays with you as long as you continue to pay the premiums.
13. If my income grows, can I receive a higher monthly benefit? Do I have to go through medical underwriting again? What am I required to do?
Most of the policies available today offer riders or are built into the policy the ability to increase your monthly benefit without further medical underwriting. This is determined based on your health, at the time you initially apply, and the rider selected. There are some limitations to the amount available to increase and your age can be a factor. Some of the policies available offer this “guaranteed insurability” in the form of a rider, while other policies have rules built into the policy of how and when you can increase your coverage without medical underwriting. You will have to complete an application and go through some form of financial underwriting, similar to what we answered earlier. If this is important to you, and it should be for those that income has the potential to grow, make sure you know what your options are.
14. If I am a physician looking for disability insurance, is my medical specialty considered my “own-occupation”?
Your “own-occupation” for a physician can also have medical specialty language in the policy. This would mean that if you have limited Your Occupation to the performance of the material and substantial duties of a single medical specialty, an insurance company will deem that specialty Your Occupation.
You need to discuss this with your agent and make sure that the policy you have has this language in it.
15. If I were to qualify for a disability benefit, does my monthly benefit increase while on claim to offset inflation?
I may not use the words offset for inflation but there is a rider available on almost all individual plans called the Cost-of-Living Adjustment rider or “COLA” for short. This rider, when added to your policy, does increase your monthly benefit a certain percentage, each year you remain on claim. The amount can vary and depends on what the policy language says.
You will usually see two options on how the rider works; there is a simple COLA and a compounding COLA. A simple COLA would increase your monthly benefit a set amount after year 1. However, whatever that said amount was for the original benefit amount that is the increase you would see each year moving forward. So, if you had a $10,000 month benefit, after year one with a 3% guarantee simple COLA, your benefit for year 2 is $10,300, year 3 is $10,600, etc.
If you have a policy that has a guarantee 3% COLA that will compound, same scenario above, $10,000 per month in year 2 is $10,300 but the next year the $10,300 goes up 3% and moving forward the new benefit amount increases at 3%, not just the original 3% increase.
If a disability lasted 20 years, there would be a significant difference in monthly benefit between the two polices.
There are some policies that offer a maximum COLA of 3% but are Consumer Price Index (CPI) tied. This means your monthly benefit may increase up to a maximum of 3%, but if the CPI is 2% that is the increase. If it happens to be 4%, you will get 3%.
16. If I move from one state to another, can I keep my policy?
Yes, an individual plan can move from state to state.
17. If I plan on living and working in another country, can I keep this policy? What if I am on claim at the time, do my benefits continue?
This all depends on the policy. There are some carriers that would continue to pay claims even if you are no longer in the US. There are a lot of carriers that require the policy owner live and be treated in the US in order to receive benefits.
If you believe there is a good chance you will reside outside the US at some point or if you were to become disabled you would leave the US, make sure you tell your agent this. It is important that he knows what your intentions may be. This will make sure that any policy purchased is right for you. There are options, but you will be limited to which carrier you should work with if you plan on leaving the US.
18. How does my policy treat mental/nervous disabilities? Are there limitations?
Assuming you went through underwriting and you did not have a pre-existing condition related to mental/nervous issues there are policies available that do not have limitations for mental/nervous claims.
There are many carriers that offer policies with this limitation, usually a 2-year limitation. Some of the carriers will offer a discount for a 2-year limitation on mental/nervous claims. However, if you want a policy without a 2-year limitation and you are healthy, we can find a policy that fits your needs.
Again, there are options, and you need to make sure you know what the policy being presented to you has in terms of language and limitations.
19. How long have you been helping clients with disability insurance?
I have made my career in insurance selling health, life, and individual disability insurance since 2011.
20. If I have group coverage, can I still qualify for an individual policy?
If you have a group plan at work there is a very good chance you could still qualify for a supplemental individual disability policy. Most people don’t know what their group plans cover and once we start talking about it they find out there are some limitations. Most group disability benefits are taxable. There is usually a maximum monthly benefit and depending on the policy language it may only cover salary not bonuses.
The point is most group plans do leave room for additional coverage. I strongly believe in exploring all options and making an educated decision. I have seen clients go through the process and realize that only 30-40% of their income was protected. You may not qualify financially for additional coverage but you may find out you can and you should.
I strongly encourage everyone interested in pursuing this important coverage, to take the time and ask these questions to your agent. Make sure you are buying exactly what you need. Make sure your agent can answer these fairly generic questions. You do not want to find yourself in a claims situation in which you are not in a good spot because you did not ask the right questions when you applied. I recommend you work with an agent that knows this insurance and can help insure you are getting exactly what you need should you ever find yourself in the unfortunate position of being disabled.
1. A twenty-four month mental and/or substance-related disorders limitation is included on all policies issued to anesthesiologists/anesthetists (MD, DO), emergency room physicians, pain management physicians, and nurse anesthetists. Limitation also applies to all new policies issued in the states of California and Florida; however, the limitation does not apply to policies issued as a result of a future increase option or future purchase option where the policy from which the option is exercised does not contain such a limitation. The limitation does not apply to any policies issued in the state of Vermont, regardless of occupation.
If you have additional questions reach out and contact Daniel Tuchmann, the Disability Income expert at A.C. Thomas & Associates;
Daniel Tuchmann, Insurance Broker at Thomas & Associates LLC Health