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Disability Insurance Policy Options and Riders

What are Options and Riders?

Options and riders are policy add-ons that enable you to customize an individual disability policy to fit your needs. Although the two terms are often used interchangeably, they are actually somewhat different. While an option is incorporated in the text of the policy itself, a rider is actually a separate piece of paper attached to the policy (it "rides" with the policy).

Occasionally, some provisions that are usually offered as options or riders will be included as base coverage. More often, they must be purchased separately and will substantially increase the cost of the policy. You must purchase riders when you buy the policy; they generally can't be added on to the contract after the policy is issued. Following are details on some (but not all) of the optional benefits and riders that can be added on to a disability insurance policy.

Elimination Period

The elimination period is the length of time you have to be out of work before you are entitled to collect disability benefits. You can choose the length of your elimination period when you set up your disability insurance policy. Like a deductible on auto insurance, the longer the elimination period on a disability policy, the lower the premium. For example, a policy with an elimination period of 60 days will cost more than a policy with an elimination period of 180 days. You can typically choose an elimination period anywhere between 30 days and two years. Keep in mind, however, that in most cases you won't receive an insurance payment until you are owed a month's benefit. For example, a 90-day elimination period means that you will probably be out of work for 120 days before you receive any money.

Future Increase Option

This is one of the most common options, and one that is particularly important to younger policyholders (typically, those under 40). A future increase option protects your future insurability by guaranteeing you the right to purchase additional amounts of disability insurance at specified dates in the future. The premium for any additional coverage purchased in the future will be based on your age at the time of purchase. Future purchases are generally limited to half the original amount, and you will be required to prove that your earned income warrants additional coverage. This rider generally cannot be added after you reach age 45, although some insurers make it available through age 50. The future increase option may also be called a guaranteed insurability option or a guaranteed purchase option.

Cost-of-Living Rider

A cost-of-living rider protects the purchasing power of your disability benefits against the effects of inflation. After you have received benefits for a year, this rider automatically increases the amount of your benefits as the cost of living increases. Typically, increases in benefits occur annually and are tied to an established index that measures the cost of living. Although some companies cap the increase amount, others let you choose your own maximum at the time you purchase the rider. The cost-of-living rider is often very expensive, but it may pay off if you suffer a long-term disability.

Social Security Rider

The Social Security Administration has a very narrow definition of "total disability," and consequently about two-thirds of all initial applications for Social Security disability benefits are denied. Even those that are approved must wait a full year before Social Security benefits begin. A Social Security rider provides additional benefits during the first year of your disability, while you are waiting for your Social Security benefits to kick in. This rider may be structured in one of two ways:

All-or-Nothing Rider

If Social Security approves your application and provides any benefit, this rider pays nothing. If you do not get Social Security benefits, the rider pays out the specified benefit.

Offset Rider

The benefit paid by the rider will be reduced (or offset) by any amount you receive through Social Security.

Hospital Income Rider

This rider provides a set payment for each day you are hospitalized because of your disability. Payments can last up to 12 months, which can be especially beneficial if you have elected a long elimination period. However, this rider is typically unnecessary, as most hospital stays are relatively short these days.

Lifetime Extension Rider

The lifetime extension rider extends your benefit period beyond age 65. In other words, if you are totally disabled as a result of an injury or illness that occurs before age 65, benefits will continue throughout your lifetime as long as you remain totally disabled. The insurance company may specify that the injury or illness must begin before a certain age (usually 45 or 50) in order to receive a full benefit under this rider. If the disability begins after this specified age, you would typically receive a reduced benefit until age 65, at which time the benefits would end. The amount of your reduced benefit would be based on your age at the time you became disabled.

Waiver-of-Premium Rider

The waiver-of-premium rider allows you to stop paying premiums in the event you are disabled. This rider provides that you will not be required to pay any further premiums once you have been disabled for 90 days. Premiums you paid during the first 90 days of your disability may be refunded to you. Once you are able to return to work full-time, the rider requires you to begin paying premiums on your policy once again.

Accidental Death and Dismemberment Rider

This type of rider provides a benefit only if you suffer death, loss of limbs, or loss of sight as a result of accidental bodily injury. When you purchase this additional coverage, the insurance company provides a schedule that assigns a benefit amount to each specific type of injury. Keep in mind, each insurance company has its own definition of "accidental," which may be very specific. Make sure you understand how your insurance company defines this term.

Transplant and Cosmetic Surgery Option

Most health insurance policies exclude elective or voluntary surgical procedures. However, you may be able to add this option to your disability policy to cover injuries that occur as a result of elective surgery. Under this option, if you become disabled as a result of a transplant or cosmetic surgery, you would be entitled to disability benefits.

Automatic Benefit Increase Rider

This rider stipulates that the monthly benefit amount will be adjusted automatically every year to account for pay raises or increased income you are likely to receive after you purchase a disability policy. The rider provides annual increases for a certain term (often five years). During this time, you won't have to provide any proof that your income has gone up. However, upon renewal of the rider, you may have to show evidence that your income has increased; otherwise, you won't be able to renew the rider. In most cases, there is a corresponding increase in premium, so most companies allow you to decide whether you want to accept the higher benefit level and premium.

Partial Disability Benefits Rider

A partial disability benefits rider will pay you benefits in the event that you can perform some, but not all, of the duties of your occupation full-time or part-time. However, a partial benefits rider doesn't pay benefits based on the percentage of earnings you've lost. Instead, it simply states that you must first be totally disabled and pays you benefits equal to 50 percent of your total monthly disability benefit once you return to work. However, the benefits will be paid only for a specified period (usually three to six months).

Return-of-Premium Rider

The return-of-premium rider might appeal to you if, like most people, you don't believe that you will actually become disabled, but you are buying a disability policy just in case. The return-of-premium rider entitles you to get back the premium money you pay in the event you don't need to use the policy benefits. Depending upon the type of rider you choose, you will either get a portion of the money back at certain ages or after a certain number of years, or all of your money back at age 65 when the rider expires. The return of premium is typically available only if no claims were filed. This rider will substantially increase your premium.

If you have questions, contact the experts at Henssler Financial:

Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.