Optional riders can enhance a disability income insurance policy by offering additional benefits such as increasing coverage over time, waiving premiums during a disability, supplementing or coordinating with Social Security benefits, protecting against inflation, and providing lump-sum payments for rehabilitation, accidental injuries, or medical expenses. These additions help tailor the policy to the insured’s evolving financial needs and risk exposure.
Guaranteed Insurability Rider
The guaranteed insurability rider allows the insured to increase coverage, without providing evidence of insurability, at predetermined points in time and for predetermined amounts (the insurer will require the policy owner meet an earnings test).
Waiver of Premium Rider
When a disability does occur, the policy owner must keep the policy in force. The waiver of premium rider exempts the policy owner from having to make premium payments while he or she is disabled. Without this rider in effect, if the insured ceased making premium payments while disabled, he or she would receive benefit payments while disabled, but the policy would terminate when the disability ended. This rider specifies that premiums will be waived retroactively to the beginning of the disability if the disability lasts more than 6 consecutive months.
Social Security Rider
While it is difficult to meet the Social Security Administration’s definition of disabled, anyone who does will want to know which Social Security rider they have on their policy. This rider has two very different variations:
Offset Rider
Pays the difference between what Social Security pays and the insured’s policy benefit.
All or Nothing Rider
Only pays benefits if Social Security denies the claim. If Social Security pays anything, the policy pays nothing.
Inflation Protection Rider/Cost of Living Adjustment
Due to inflation, the purchasing power of fixed disability income benefits may be diminished over time. If this rider is added, the insured’s monthly benefit will be automatically increased during inflationary periods. Increases are usually tied to the Consumer Price Index (CPI).
Accidental Death and Dismemberment (AD&D) Rider
AD&D covers accidents only. Sickness is not covered. This coverage is often written as a rider on a life insurance policy. The policy will pay a specific sum if death is the result of an accident or if the insured becomes dismembered.
Rehabilitation Benefit
Pays a lump sum benefit for necessary vocational training to help the insured prepare for a new career.
Medical Reimbursement Benefit Rider
Pays a lump sum to cover medical expenses associated with a disability. A non-disabling injury rider will cover medical expenses incurred from an injury that does not result in total disability.
Refund Provisions
If a return of premium rider is added to a disability income policy, the premiums paid will be refunded to the policy owner if no claims are filed for a specified period. This usually occurs every 10 years, at age 65, or death.
Business Uses of Disability Income Insurance
The most common type of business use policy is the business overhead expense policy. This policy pays normal rent, utilities, employee salaries, and other business expenses incurred while the business is closed or operating at a lessened capacity due to the disability of the owner.
A disability buy-out policy, similar to a life insurance buy/sell agreement, is used to assist partners in buying out the interest of a disabled partner. These policies are usually written with a long elimination period. Rarely will a disabled owner want to be bought out until it is clear that he/she will not be returning to work.
A key person disability income policy provides a company with funds to offset lost income while a key employee is disabled.
Credit disability policies protect debtors and creditors alike, by paying to the creditor an amount equal to the loan payment while the debtor is disabled. The maximum benefit a credit disability policy will pay is the amount of the outstanding debt, and the maximum term a credit disability policy will be issued for is term of the outstanding debt.
A creditor must have a minimum of 100 new debtors per year before they qualify for group credit insurance.
Like most other types of health insurance, disability income policies may be cancellable, non-cancellable, or guaranteed renewable and certain conditions (and the resulting disabilities) are excluded from coverage. Disabilities resulting from war or military service, or injuries that are self-inflicted or sustained while committing a crime or while piloting a personal aircraft are generally excluded from coverage.
Lesson Summary
Optional policy riders can enhance the coverage of disability income insurance:
Guaranteed Insurability Rider
Waiver of Premium Rider
Social Security Rider (Offset or All or Nothing)
Inflation Protection Rider
Accidental Death and Dismemberment (AD&D) Rider
Rehabilitation Benefit Rider
Medical Reimbursement Benefit Rider, etc.
Business Uses of Disability Income Insurance include:
Business Overhead Expense Policy
Disability Buy-Out Policy
Key Person Disability Income Policy
Credit Disability Policies
Certain exclusions may apply to disability income insurance policies, such as disabilities resulting from war, self-inflicted injuries, crimes, or certain activities like piloting a personal aircraft.
Chapter Vocabulary
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