With long term disability insurance, the definition of disability determines when a claim will and will not be paid. Some policies only pay a benefit if you are unable to work in ANY occupation. An own occupation policy will pay you if, because of an injury or illness, you are unable to perform the material and substantial duties of your regular occupation.
The monthly payout from the policy during a period of disability is called the base benefit. The maximum monthly benefit you can purchase is determined by your monthly income at the time of application.
The length of time that must elapse from the date of disability until benefits are paid is called the elimination period. Options are 30, 60, 90, 180, and 365 days. The most common with long term disability insurance is 90 days. In most cases, extending the waiting period from 90 to 180 days will reduce the premium by less than 5 percent. Going from 90 to 60 days will more than double the premium.
The maximum length of time benefits will be paid is called the benefit period. Depending on the insurance company, options are 2, 5, 10 years, to age 65, 67, or 70 and to age 65 with lifetime extension.
The residual benefit pays a partial monthly benefit in the event of a partial disability. The percentage of monthly benefit paid is typically equal to the percentage of lost income.
An optional rider that increases the monthly benefit during each year of disability to keep pace with inflation is called the Cost of Living Addition (COLA). Depending on the policy, the increase is either a fixed amount or based on the consumer price index. This is an important policy feature in long term disability insurance because during an extended claim, inflation could double the amount of income needed for living expenses.
An optional rider that allows you to increase your monthly disability benefit at some point in the future, regardless of health status, is called the Future Insurability Option (FIO).
This is a valuable benefit if you expect large increases in future income (like Medical Residents).
This assures that if you become disabled, your premiums will automatically be waived until you are no longer disabled.
As long as the premiums are paid, a long term disability policy that is non-cancelable and guaranteed renewable cannot be changed or canceled by the insurance company even if there is a change in health or job status. In addition, premium rates cannot be increased while the policy is in force.
Most insurance carriers are rated by third party rating services such as AM Best or Moody’s. They measure a company’s financial stability as well as its ability to meet claim obligations. A higher ranking is more favorable. Comdex ranks an insurance company against its peers. The highest possible score is 100.