Provisions to Strengthen Your Coverage

You have expressed an interest in a review of your existing disability policy with an emphasis on the quality of the coverage and the amount for which you could qualify.

Amount and quality of coverage: The amount of coverage for which you can qualify is tied to your earned income, which, in your questionnaire, you said you expect to increase significantly over the next several years. There are three possible ways to maximize your coverage while improving the quality of it at the same time. Either of these will require additional underwriting relating to both your current health and finances.

     Additional disability insurance to provide a retirement benefit: Disability insurance benefits will generally only cover up to 60-65 percent of pre-disability earnings. This reduced income would, in most cases, leave little ability to continue to set aside additional savings for retirement. However, you can effectively increase the percentage of your disability coverage with an additional benefit that will pay a retirement benefit equal to your existing contributions, including any current employer match. This additional disability coverage for retirement contributions is available as a separate policy from at least two good companies.

     Keeping your benefit up with inflation and earnings: Your disability insurer offers a separate policy feature (“rider”), at an additional cost, that enables you to keep your initial benefit up with inflation up to a maximum of 6 percent annually. This provision would not match increases in your benefit with your earnings if your earnings rise faster than inflation, as you expect, but it will at least have it keep pace with the cost-of-living. For an additional premium, you can purchase the option to acquire additional coverage every few years as your earnings increase without having to submit to an additional medical exam at that time. If you want to run the risk that your health will not change, you can apply for this extra coverage as your earnings rise and avoid the separate cost of buying the option to purchase the additional coverage without the requirement of another medical exam.

     Coverage for a partial disability: Your current policy only provides a benefit if you are totally disabled. There is no coverage if you are only partially disabled and still able to work part of the time and maintain some of your current earned income. As with the inflation-protection feature mentioned above, coverage for a partial disability is sold separately as a policy rider on your current policy, and you need to pay an additional premium for it. We believe it is an essential part of quality disability coverage, as it is easy to contemplate all sorts of circumstances that would result in partial but not total disabilities, including the possibility of being partially disabled for a period of time after recovery from a total disability.

Cost of coverage: There are various ways that you might contain the cost of your coverage, with policy certain modifications, while also including the features discussed above that will broaden the scope of your disability protection. Some of these would require the replacement of your present policy with one from another company. You would want to closely compare policy projections for both your current policy and any possible replacement policies and closely review the policies’ contractual provisions before making this decision. Outlined below are seven ways that the cost of disability coverage can be limited without, in many cases, sacrificing necessary or desirable features in a policy.

With a policy from a company that pays premium-reducing dividends: A “mutual” company (one owned by its policyholders rather than by its shareholders) that pays a substantial dividend that offsets the policy premium may well, at least over time, provide a lower net cost than a policy from your current carrier containing similar policy provisions.

With a “guaranteed renewable” policy rather than one which is also “non-cancellable”: A “non-cancellable” policy, such as you have, guarantees that the premium will not increase. A policy that is “guaranteed renewable,” but not also “non-cancellable,” could have its premiums increased, but only if premiums are increased for all policies of the same kind. With a good company with a consistent performance and one that has not increased its premiums on such policies in the past, it is probably unlikely that premiums on these “guaranteed renewable” only policies will increase in the future or that the premium would rise to the level of the non-cancellable policy. In such case, the 20% initial premium savings from forgoing the “non-cancellable” feature should more than offset the modest risk of a future premium increase.

With a different definition of disability: Your policy contains an “own occupation” of disability for two years followed by the policy’s basic definition thereafter. This means that you could collect the benefit even if you are working at some other occupation during the first two years of being disabled from performing your current job and, after that, if you remain disabled from working in your current occupation, that you could receive the benefit and not be required to work in any other capacity for which you might be qualified.

However, an “any occupation” definition of disability might save you 10%-15% of the cost of the premium on your existing policy. Under this alternative, you would qualify for the benefit if disabled from your current occupation but would be required to work at another job for which you are suited by virtue of your education and training, if your condition would not prevent you from performing this other work. Given the nature of your work, if you were disabled from doing it, it is highly unlikely that you would be able to work in any other capacity. In that case, the “any occupation” definition of disability should be adequate for you and offers a meaningful premium savings.

With a longer waiting period after a disability before receiving the benefit: Your current policy has a 90-day waiting (“elimination”) period after the beginning of a disability before you would begin to receive the benefit. Given your current and anticipated increased amount of savings, you may feel comfortable with a longer waiting period of 180 days or perhaps even one year. Because many disabilities are short-term in nature, a longer waiting period will lower your premium.

With an increasing premium beginning with a lower amount vs. level premium pricing: For any additional insurance coverage you acquire, you might consider a policy or policy structure with a premium price that starts much lower and then increases over time. This might both be less expensive in total and better accommodate your budget since you expect consistently increasing earnings in coming years. The increasing premium can be selected for just a portion of the coverage, rather than all of it, if you would prefer a level premium for part of the policy and an increasing premium on the balance of it. The increasing premium will especially make sense if you anticipate the likelihood that you will drop some or all of your disability coverage well before age 65, as your increased retirement savings provide the financial security that the insurance gives you today. In that case, you would have the advantage of lower pricing in the early years while avoiding the cost of the higher premiums in the years before your retirement but after you have dropped the coverage.

With part of a benefit contingent on ineligibility for Social Security disability: If a portion of the benefit you receive is contingent upon your inability to qualify for Social Security disability under the stringent guidelines for it, you can lower your premium further. Let’s say that $1,500 of your total monthly benefit from the insurer would not be received if you are so severely disabled that you receive a Social Security disability benefit of at least this amount. Your total benefit paid by your insurer is therefore offset by the $1,500 amount you receive from the government. On the other hand, if you are disabled within the meaning of your policy but are not so disabled that you qualify for Social Security disability, the company will pay this additional $1,500 amount. Because the company only pays if you are disabled and yet not so disabled that you qualify for social security, the premium for this portion of the benefit is reduced substantially, but you are covered for this amount either way. So this policy feature is a way to reduce the cost of a policy for a given amount of insurance.

With a lower costs and premium discount with a group policy or multiple individual policies: Your description of your firm’s ownership in your questionnaire indicates that there may be a possibility, if you are interested, of either a group policy or separate individual policies. Either alternative would offer a substantial premium savings compared to the cost of each of you obtaining disability coverage on your own. If you are interested in disability insurance for more than yourself, we should discuss the possibility of arranging it to provide savings for all of you without sacrificing the quality of the coverage.

If you like, please call to discuss our findings and suggestions and the additional ways we can help you obtain the best value from your existing policy and future premium payments.