The Disability Income Insurance Decision

Disability income protection should occupy a key position in every family physician's risk management plan. When properly selected and installed, the "DI component" is positioned to provide a reasonable amount of replacement income during a prolonged disability.

Members should be aware, however, that selecting the most appropriate disability policy can be a challenge. While there are numerous disability insurance plans available, many are designed to meet specific needs within narrow market segments. Coverage that is on target for members of one industry or economic group may be inappropriate for another. For the family physician, a program that closely mirrors a member's income, situation and needs will provide the best-value protection for the amount of premium dollars spent. Most of all, seemingly minor decisions made today about benefits and policy provisions could dramatically affect the income of a member's entire family should a disability occur.

The disability income decision requires care and an awareness of the many options and variables. The purpose of this monograph is to make Academy members aware of key factors that need to be considered when selecting disability coverage, and to provide guidelines for making an informed decision.

Disability: The Forgotten Risk

Many people are unaware of the danger that they may become disabled, or of the resulting loss of income they may suffer due to a prolonged disability. As a result, disability is sometimes referred to as the "forgotten risk." The facts, however, speak for themselves, and reveal that the disability risk should not be ignored:

• Nearly one-in-four men and women under age 40 will become disabled for 90 days or longer prior to normal retirement.
  
  
• Each year, one in 13 workers suffers a disabling injury or illness. (Source Book of Health Insurance Data, Health Insurance Association of America)
  
  
• The probability of a disability occurring during one's working years is two to three times greater than the risk of death. (Journal of the American Society of Chartered Life Underwriters, The American College)

Source: Journal of the American Society of Chartered Life Underwriters.

Disability means possible medical pain and suffering. It also means risk of serious financial loss. By definition, a disability stops income. It prevents the individual from working, from earning a living. That is why disability income insurance is crucial - to help replace a portion of lost income during the insured's period of disability.

Key Decisions About Disability Income Coverage

The risks associated with disability are real. Disability insurance is a tool to help manage that risk. Which coverage is best for you? The final choice should be based on a series of decisions involving such factors as need, cost and insurability. Stated another way, your decision should answer the question: "How much risk am I willing and able to assume?"

Benefit Amount: This is generally the first decision you should make about your coverage. Within plan limits, the benefit amount should reflect your earned income and be adequate to meet your ongoing household expenses should you become disabled. Benefit amount is generally based on two factors:

1. Income: In general, you will be able to insure up to (but no more than) 60 percent of your gross monthly earned income. This limit has been established by insurers to maintain a cost effective balance that, on one hand, provides a reasonable level of replacement income during disability and, on the other, promotes a return to work as soon as the insured is medically able. So, if your income is $12,000 per month, your maximum benefit will be $7,200.
   
   
2. Plan limits: All plans have a maximum monthly benefit amount. Some are as low as $2,000 or $3,000 a month. Professional or executive plans, on the other hand, have higher limits. Be sure to select a plan with a benefit amount that truly does protect your income.

Definition of Disability: If the benefit amount is the first factor you need to consider, the definition of disability is by far the most important. The definition of disability within a policy is a precisely worded legal term that determines when you are "totally disabled" and entitled to benefits. Regardless of actual physical condition or ability to work, you are not "disabled" unless and until you meet the requirements for disability stated in the policy. There are several types of definitions of disability. Two of the most common are:

1. Nonoccupation: (ANY OCCUPATION) Under some plans, including Social Security, you are classified as disabled only when you are unable to perform ANY work, regardless of education and training. You are disabled (and eligible to receive benefits) only if you are unable to engage in any substantial, gainful activity.
   
   
2. Regular occupation: (YOUR OCCUPATION) Under this definition, you would be eligible to receive benefits if you were unable to perform the normal duties and responsibilities of your stated occupation or profession.

Many plans contain a "Your Occupation" definition for an initial period, such as two years, after which an "Any Occupation" definition applies. The definition of disability directly affects premium rate. All other factors being equal, you will pay a higher premium for a plan with a "Your Occ" definition of disability. However, it provides greater protection in terms of eligibility for benefits.

Finally, some plans feature a "presumptive disability" provision. In these policies, you would be presumed to be totally disabled if yo suffered a specified loss, such as the loss of sight, hearing, speech or two limbs. With some plans, benefits become payable upon the diagnosis of a stated illness. Regardless of your ability to earn income, you would automatically receive benefits.

(Maximum) Benefit Period: Benefits stop either when disability ends or when the plan's benefit period ends, whichever comes first. Depending on the plan, typical benefit period choices range from one to ten years or to age 65, which is considered normal retirement. Some plans pay benefits for life.

The choice of benefit period is determined by a combination of cost considerations and the amount of risk you are willing to assume. The longer and more comprehensive the benefit period, the greater the cost of coverage.

Waiting Period: Also known as the elimination period, this is the time between the onset of disability and when benefits start. Typical waiting periods are 30, 90, 180 and 365 days. Selection of the waiting period is generally based on personal assets (How long could you reasonably continue to meet household expenses if you became disabled?) and cost considerations (How much are you willing to spend in premiums?), since the shorter the waiting period, the higher the premium.

Renewability: This crucial factor is often ignored when purchasing coverage. It involves the insurer's right to cancel coverage and/or raise premiums in the future. The three most common renewability choices (from least to most expensive) are:

1. Optionally renewable: The insurer can terminate coverage at any policy anniversary or renew at a higher premium rate.
   
   
2. Guaranteed renewable: As long as premiums are paid, the policy cannot be canceled. Premiums can be increased at the time of renewal, but only for an entire class of insureds, not on an individual basis.
   
   
3. Noncancellable & guaranteed renewable: As long as premiums are paid, the policy cannot be canceled, nor can premiums ever be increased.

Social Security Offset: Some plans contain a Social Security Offset provision, the purpose of which is to prevent overinsurance if Social Security benefits are paid. Some policies contain a rider that adjusts the amount of benefits at the time of a claim based on whether or not Social Security benefits are received. Others simply offset the benefit by reducing the amount of insurance that can be purchased at the time the policy is purchased.

Benefit Increase Options: Some plans allow you to increase benefit levels in the future. These options are more than an inflation-hedging convenience. They protect your insurability with the right to increase protection at specified times during years of increased family responsibilities. The two most common benefit increase options are:

1. Guaranteed Future Purchase Option: You can increase benefits at specific ages (such as age 31, 34, 37, 40, etc.) without medical proof of insurability.
   
   
2. Automatic Benefit Increase Option: You can increase benefits without medical proof of insurability or financial proof of eligibility based on income.

Partial, Residual & Rehabilitation Benefits: While these provisions are not synonymous, each is designed to enable you to earn some income without losing all disability income benefits. Some plans pay benefits if you become partially disabled; others continue to pay reduced benefits if you are able to resume work on a part-time basis or during a period of rehabilitation.

Cost of Living Rider: Once you are disabled, this provision increases benefits according to an outside factor (such as the Consumer Price Index) to help benefits keep pace with inflation. Once you recover from your disability, your benefit reverts back to the basic indemnity amount under most policies.

Conclusion

Adequate disability income coverage is crucial for financial security. Your Academy encourages you to take the time to carefully review the provisions and terms of any plan you are considering before purchasing.

We have briefly examined several important decisions you should make when selecting disability income protection. Remember, DI coverage is a risk management tool. It enables you to transfer a portion of the financial risk associated with disability to the insurance company. Your Academy recommends that you protect a full 60 percent of your income. Decisions about other features to incorporate into your plan should be based on a risk/cost tradeoff that reflects your income and current assets. Most of all, be sure the coverage you select has been designed to meet your unique needs and situation as a family physician.