Contrary to what your insurance agent might tell you, not all disability insurance riders are for everybody. Here are some of the more popular ones (the industry's names, not ours) and what you should know about them.
1. Residual Disability
Most basic policies provide you with some income if a disability keeps you from doing any reasonable job for which you're qualified. But what if you eventually can go back to work, only at a lower-paying or part-time job? Well, you'll lose your income-replacement coverage. That's when residual disability kicks in. It's there to make up the difference between what you're earning on your new job and what you would be getting from straight income-replacement insurance.
Many insurers now include a "loss of earnings" definition of disability in their basic policies that promises to make up the shortfall between what you earned before you were disabled and after, so as not to penalize policyholders for continuing to work. If your policy doesn't have residual disability built in or include a "loss of earnings" definition of disability, pay the extra 25% or so and have residual disability added as a rider.
2. Own Occupation
This is an add-on favored by many professionals, but currently out of favor with insurers. It assures that your policy will continue to pay off in full when you can't go back to the job for which you trained -- a surgeon who lost a finger and can no longer operate, for instance.
This rider generally adds 10% to the cost of a policy, though not all professions get the same rates. As an example, dentists pay more than accountants because they have made a higher number of claims lately.
Unfortunately, it's becoming harder to find this coverage since the number of claims filed under this provision has been higher than many underwriters bargained for. You may find insurers either don't offer "own occupation" coverage, charge more, or provide it only for a limited period (perhaps 24 months). If you can't find it, look for a policy with a "loss of earnings" definition of disability. Similar to the "residual disability" rider, which it replaces, it provides income replacement if you lose some of your earnings due to disability, but can still keep your job.
3. Elimination Period
This is the number of days from when you become disabled to when the first benefit check appears in your mailbox. Years ago, the industry average was a reasonable seven days, then it jumped to 30, and now the industry standard is 90 days.
If you can't wait three months for your first benefit check you'll have to pay extra -- around 25% to 30% more to cut the elimination period to 60 days, and up to 50% more to bring it down to 30 days. You can opt to save a little on your premium by extending the elimination period, but probably not enough to make it worthwhile. Raising it to six months will only save you 10%.
4. Guaranteed-Increase Option
All first-time disability buyers have to pass medical muster. Though increases in your income may make you want additional coverage in the future, you probably won't want to undergo a second physical -- especially if you've acquired an ulcer or a bad back since you bought your policy. A guaranteed-increase option, sometimes called a "guarantee of insurability rider" or "future-increase option," will help you avoid this hassle.
These riders prohibit the insurer from demanding additional medical information when you increase your coverage. Some insurers offer the guaranteed-increase option as part of their standard policy. Other insurers tack on 7% to 10% to the policy's price for the rider. Make sure to ask.
5. Cost-of-Living Adjustment
Disability policies adjust for inflation in two ways. The first is a sort of mini-adjustment, which many underwriters build into their policies and allow policyholders to either take or forgo. Takers will find that both their premium and benefits automatically go up each year by the change in the consumer price index. Typically, insurers will continue this automatic adjustment for five years before making you prove that you're making more money. The second option is a cost-of-living rider, which kicks in with additional benefits after a full year of disability. You can choose to increase your benefit check either by a set percentage or a flat rate. Approach this one carefully, because it can be very expensive. Adding a cost-of-living rider to a policy can increase premiums by up to 40%.
6. Return of Premium
Watch out for this one, too. These riders, among the most controversial disability products going, are basically a ploy to make disability more like cash-value life insurance. Some states even prohibit insurers from offering them. The idea is that you get back some of the premiums you put into the policy. For example, you might set it up so that 10 years after purchasing your policy, you get 80% of your premium back, including the cost of the rider minus any claims. For the privilege, you'll pay another 50% or so on top of your premium. Some insurance company brochures advertise an annual return on your premium of 12%. But that's only if you have no disability claims. If you have a claim, it shoots your whole investment.
7. Lifetime Benefit
Here's a way to guarantee that your disability payments will continue beyond age 65, when most policies cease payment and Social Security takes over. In your 20's, it will cost you an additional 2% to 3% a year. But when you get to be 40 and older, expect to pay around 25% more. Basically, you want to be sure you'll have enough money to retire on -- whether you're disabled or not. Unless you lock into this kind of policy while it's cheap, you're better off stashing the money in your retirement account and letting it grow. That way, you'll be certain to make use of it.
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