When you’re considering purchasing a Long-Term Disability Insurance policy, you might feel overwhelmed trying to choose the right policy for you. We recently spoke with Michael Relvas, the owner of MR Disability Insurance on how to compare disability insurance riders, and what is important when narrowing down your options. Michael specializes in disability income insurance for physicians.
How to Compare Disability Insurance Riders
When comparing disability insurance riders, it’s important to focus on more than just the price of the policy. You’ll want to find out what features are valuable to you, and what you don’t actually need to pay for based on your unique situation.
Generally, physicians want Long-Term Disability Insurance policies that are non-cancellable, guaranteed renewable, and have a true own-occupation definition. Once those filters are applied, then you’ll want to dive into these four main areas:
- How are Benefits Calculated for Partial Claims,
- Mental, Psychiatric, and Substance Abuse Benefit Limitations,
- Future Increase Option Vs. Benefit Purchase & Benefit Update Riders, and
- Cost of Living Adjustment Riders
By reviewing these differences in policies, you should be able to narrow your choices down to a few policies to select from.
How are Benefits Calculated for Partial Claims: Residual Disability Benefits
Partial loss of income from a disability is more common than you might assume. Many disability claims start as a partial disability and then either the policyholder recovers or the claim progresses to a total disability.
There are two main types of partial disability benefits that could be offered in your Long-Term Disability Insurance policy; enhanced or basic. These Residual Disability Benefit riders define how much you receive if you are partially disabled, and experience a partial loss of income.
In general, an enhanced partial disability benefit rider will offer you more benefits, however, additional benefits typically come at a higher premium.
Enhanced Partial Disability Benefit Rider
The enhanced partial disability benefit rider offers a higher benefit for the first 12 months of your claim if you are partially disabled compared to the basic partial disability benefit rider.
To qualify to initiate a claim under the enhanced partial disability benefit rider, you’ll need a 15% loss in income.
This Residual Disability Benefit rider will pay the full amount of income you have lost for the first 12 months, after the elimination period, up to the benefit amount. So, if you qualify by losing $2,000 a month and your policy limit was $4,000, you could receive the full $2,000 benefit.
The Enhanced partial disability benefit rider also includes a guarantee that if you lost less than 50% of your income, they will not pay less than 50% of the total disability benefit during the first 12 months. This is often referred to as a dollar-for-dollar benefit period.
After the initial 12 month period, an enhanced partial disability benefit rider changes the benefit you can receive to a percentage-based formula. This formula considers the percentage of income you lost, say 40%, and pays the proportionate percentage of your total benefit, in this case, 40%. If your policy has a $4,000 benefit, and you lost 40% of your income, you would be eligible for $4,000 x 40%, which equals $1,600.
Basic Partial Disability Benefit Rider
Alternatively, the basic partial disability benefit rider offers a lower benefit amount than the enhanced partial disability benefit rider. This rider offers a shorter dollar-for-dollar benefit period and requires a higher percentage of income loss to use.
To qualify to initiate a claim under the basic partial disability benefit rider, you’ll need a 20% loss in income and satisfy any loss of time or duties requirement.
The loss of time or duties requirement refers to the ability for you to perform the primary duties of your occupation, but you are unable to perform these primary duties for the same amount of time as you normally would.
After the elimination period, a basic partial disability benefit rider pays a proportionate percentage of your total benefit based on the percent income you have lost. For example, if you lose 50% of your income, the basic partial disability benefit rider would pay 50% of your total benefit.
During the first 6 months, a basic partial disability benefit rider guarantees that it will pay at least 50% of your total disability benefit, however, after the 6 month period, payments are proportionate based on the percentage of income lost.
Here’s an example to compare the enhanced partial disability benefit rider with the basic partial disability benefit rider. We’ll assume that the policyholder earns $100,000 annually and is forced to work 30% less, resulting in a 30% loss of income, due to being partially disabled. This equates to $2,500 a month in lost income. We’re also assuming their total benefit amount is limited to $4,000.
| Benefit Type | Months 1-6 | Months 7-12 | Total |
| Basic Partial Disability Benefit Rider | $2,000 | $1,200 | $19,200 |
| Enhanced Partial Disability Benefit Rider | $2,500 | $2,500 | $30,000 |
During the first six months, the basic partial disability benefit rider pays the minimum benefit of 50% of the total benefit limit, or $2,000 a month. After this 6 month period, the basic partial disability benefit rider switches over to using the proportionately based formula, limiting the benefit amount to 30% of the total benefit limit because there was a 30% loss of income.
For the entire 12 month period shown in the example above, the enhanced partial disability benefit rider pays a dollar-for-dollar match, up to the total benefit limit, or $2,500 a month.
Because the enhanced partial disability benefit rider pays a larger benefit for a longer period of time, as compared to the basic partial disability benefit rider, the person in the example above receives more over the course of a year.
For both the basic partial disability benefit rider and the enhanced partial disability benefit rider, a loss of more than 75% of your income could allow for a 100% payment of your total benefit under certain circumstances.
Mental, Psychiatric, and Substance Abuse Benefit Limitations
Another piece to consider as you compare policies is the mental, psychiatric, and substance abuse benefit limitations.
Some policies limit this benefit period to 24 or 60 months, others pay benefits until age 65. A few give the option to choose the benefit period limitation based on your needs.
If you are seeking a policy that offers a longer mental, psychiatric, and substance abuse benefit term, be sure to review the provisions of each policy and weigh the added premium for a rider with a longer benefit period.
Future Increase Option (FIO) Vs. Benefit Purchase & Benefit Update Riders
A future increase option rider could give you the option of increasing your benefit in the future. The logistics of this option varies by policy, but this can be a great option for residents as your income will increase drastically within a few years.
The traditional route is one where you preselect the amount you want access to, and the option to increase your benefit is available to you at each policy anniversary. Typically there isn’t a medical underwriting requirement once you choose to increase your benefit unless you are currently disabled, however, a review of your financial information is typically required.
Should you decide to increase your benefit amount, your premium is increased proportionally.
The other route to increase your benefit is through a benefit purchase or benefit update rider. This is a free rider, and you don’t have to preselect the amount you want access to.
There is a catch, however. Every three years you’ll go through an update process where the insurance company will review your eligibility for a benefit increase based on your current income. You’ll be eligible to take the full amount they offer you each time, however, in order to keep this free rider you’ll need to accept at least half of the new benefit amount they offer you.
So, if they offer you an increase of $1,000, you’ll need to accept $500 to keep the free rider in place. This increase in benefit will increase your premium.
The benefit purchase or benefit update rider also allows you to increase your benefit amount if your income increases significantly, such as when you transition from residency to attending, or when you experience an involuntary loss of group insurance.
Cost of Living Adjustment Riders (COLA)
Money becomes less valuable over time due to inflation. If inflation is 2.5%, $1,000 today is only worth roughly $775 in 10 years. So, if you purchase a policy for $1,000, and the cost of living adjustment isn’t keeping up with inflation – you could be paying for a policy that is actually losing value over time.
A cost of living adjustment rider (COLA) helps ensure that your total benefit amount keeps up with inflation.
Compounding or Simple Rates
The type of cost of living adjustment rider is important too, especially for younger policyholders. Ideally, your policy would have a compounded rate, verses a simple rate, that is used to increase your benefit over time.
A compounded rate compounds over time, allowing growth to grow further. Compounding interest rates for disability insurance is similar to how investment returns compound over time, once your investment has earned a rate of return, the next period is grown based on the new balance.
However, a simple rate is only applied once, not factoring in the growth from the prior period. For example, if your annual interest is $300 on a $10,000 policy that same $300 is added each year.
Here’s an example of the difference in the benefit amount over 5 years between a compounded fixed rate cost of living adjustment rider, and a simple fixed rate cost of living adjustment rider. We’re using a $10,000 policy with a 3% fixed rate of increase.
| Year | Compounded | Simple |
| 1 | $10,000 | $10,000 |
| 2 | $10,300 | $10,300 |
| 3 | $10,609 | $10,600 |
| 4 | $10,927 | $10,900 |
| 5 | $11,255 | $11,200 |
The compounding effect can have significant effects on the change in total monthly benefits over a long period of time.
Fixed or Variable Rates
Cost of living adjustment riders can use either a fixed or variable rate. Typically, fixed rates are set close to 3%.
Variable rates are tied to the CPI, Consumer Price Index, and fluctuate between 1% to at most 6%. Because inflation stays close to 2 to 3%, a compounded variable rate might offer you more potential for growth of the benefit and help account for changes in inflation.
Final decision
Long-Term Disability Insurance is a very detailed product and can be difficult to narrow down to the right policy for your needs, however, by focusing on the riders one at a time – it can make the process much easier.
If you’re seeking a policy that has favorable partial benefits if you are partially disabled, an enhanced partial disability benefit rider might be worth considering. If you’re content with lower partial benefit coverage, you might select a basic partial disability benefit rider.
If you would like a longer benefit term for mental, psychiatric, and substance abuse benefits, you might pay more for a rider with longer term limits.
As a resident, a future increase option might not be worth the additional premium if you’re able to use a free benefit purchase or benefit update rider to increase your benefit once you transition from residency to attending.
Finally, review the differences between the cost of living adjustment riders on the policies you are comparing. A policy with a fixed, simple interest rate is typically less favorable to a variable, compounded interest rate.
Once you have narrowed down the options for your Long-Term Disability Insurance, you may be left with 2-3 very similar policies to decide between. At this point, focusing on the pricing of the various policies should help you narrow it down to your final choice.
If you’re considering purchasing Long-Term Disability Insurance and would like to work with Michael Relvas, the owner of MR Disability Insurance, you can reach him at 800-817-4522 or submit a quote request on his website. His firm represents the leading disability insurance providers and can assist you in evaluating your options and ultimately applying for the policy that best suits your needs.
