It is important to consider the financial ratings of companies. The main ratings services include AM Best, Moody’s, and Standard and Poors. An overall combined index is the Comdex. We like to recommend companies with a Comdex rating of 90 or more to ensure financial stability.
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Definition of Disability
This is arguably the most important part of a policy because it determines how or if an insurance company will pay you benefits. Here are some of the most common definitions:
- Own Occupation
Own occupation states that a benefit is paid to you if you cannot work in your occupation and/or medical specialty due to a sickness or injury. There is no reduction in benefits if income is earned in another medical specialty or occupation.
- Transitional Occupation
Transitional occupation states that a benefit is paid to you if you cannot work in your occupation and/or medical specialty due to a sickness or injury. There is a reduction in benefits if income earned in another medical specialty or occupation exceeds your pre-disability income.
- Reasonable Occupation
Benefits will be paid as long as you are not working in any occupation deemed reasonable based on education or experience.
- Total Disability
Benefits will be paid if you are totally disabled and not capable of working in any occupation or medical specialty.
Other Policy Provisions
- Non-Cancelable, Guaranteed Renewable
With this clause in your policy, your premiums are guaranteed and can never be raised. Furthermore, the company can never change or modify your contract or add exclusions. Most policies have this clause as part of the contract and not as a separate rider.
- Monthly Benefit Amount
Monthly individual disability benefits are non-taxable as long as premiums are paid with personal, after-tax dollars. If benefits are paid by an employer, they may be taxed at the time of claim.
- Income and Participation Limits
To determine eligibility of benefits, companies will look at your adjusted gross income and any group or individual disability benefits you have in force. All policies are coordinated. Typically you can insure 60-70% of your pre-tax income.
- Elimination Period
This is the amount of time you need to wait until the initial benefit is paid. Typically, 90 day elimination periods are the most cost effective on an individual policy.
- Benefit Period
You may choose how long you would like benefits to be paid. The longer the benefit period, the greater potential benefit and the larger the premium. Your benefit period choices are a 2-year benefit, a 5-year benefit, a 10-year benefit, to age 65 benefits, to age 67 benefits or lifetime benefits.
- Partial Disability / Residual
Residual benefits are paid if you have a partial loss of income. Residual riders typically require a 15 or 20% loss of income and that percentage of benefit is paid. After a 75% or more loss of earnings, most policies will pay the full benefit. This rider is important to cover partial disabilities as well as recovery benefit as you ease back to work.
- Inflation Rider / COLA
Cost of Living Adjustment (COLA) riders keep your policy up with inflation while you are on claim. They typically start after you have been on claim for at least one year. This increases your benefits each year you are on claim. This can have a significant impact for a long term claim.
- Increase Options
Increase options allow you to purchase more benefit in the future without going through the medical underwriting process. Typically you can increase your policy on a policy anniversary or if you lose group benefits and financial underwriting is required. This rider is important for people with a large potential income in the future to protect insurability.
- CAT (Catastrophic)
Catastrophic rider allows benefits to be received if you are unable to perform 2 of 6 (depending on policy) activities of daily living.
Exclusions and Limitations
- Mental or Nervous Limitation
Some contracts have a 2 year mental nervous limitation on the contract. This means that if you have a claim such as depression, anxiety, or addiction, your policy will pay for 24 months.
Some contracts exclude pregnancy. Some contracts will cover complications of pregnancy. If you are pregnant when you apply, you will most likely have the existing pregnancy excluded.
Some policies will not cover travel to some countries deemed dangerous.
- Pre-Existing Conditions
If you currently have a medical condition when you apply for a policy, the company may exclude this condition. Some exclusions are permanent and some may be reviewed at a later date. Common exclusions include backs, necks and knees.