Individual Disability Insurance
for Personal Income Protection
How long does Individual Disability Insurance cover me?
The market standard is Guaranteed Renewable to age 65. Such a policy would remain in-force regardless of changes in employment, occupation, hours, health or other risk factors until the policy anniversary following the individual's 65th birthday. Some policies go to age 70.
After the guaranteed period, policies are conditionally renewable up to some age (typically 75) with a two (2) year Benefit Period.
The importance of Guaranteed Renewable Non-Cancellable Individual Disability Insurance
With Guaranteed Renewable Non-Cancellable Individual Disability Insurance, the policy and the premium remain the same until the guarantee period expires (typically to age 65).
Guarantees are important for policy performance reasons. With the individual not being dependent on their employer in any way for continued coverage, the individual can always ride out a period where they don't qualify as disabled until they eventually do, without losing coverage due to health related under-performance.
Additionally, guarantees allow the individual to be more flexible in how they return to work without losing coverage. Again, with individual not being dependent on their employer they have substantial freedom to entertain self employment, reduced work hours, or joining a small employer - without losing coverage. This is no small thing. To a person just coming off of disability, the risk of recurrence is a top of mind concern.
What defines disability?
Individual disability insurance generally uses an "own-occupation" definition of disability, meaning you're considered disabled if you cannot perform the material and substantial duties of your own occupation.
The base policy normally requires a person to not work at all. However, working may be permitted by rider, for additional cost. Working in the same occupation with a loss of earnings is one possibility. Another would be to do something different.
"True" own occupation has long been considered the gold standard in individual disability insurance because it permits a disabled person - while on claim - to moonlight in a different occupation without disqualifying themselves or reducing benefits, thereby creating a path to full income replacement.
When do disability benefits start?
Benefits begin after the Elimination Period is satisfied, which is selected at the time of application and is the number of days after disability starts. A typical policy has an Elimination Period of 30 or 90 days.
How long do disability benefits last?
Benefits cannot go past the Benefit Period chosen at application, which is typically to age 65, 67, or 70. Lifetime benefits may be available with some policies in special situations. As a worker approaches this age and continues to work beyond it, most policies renew with a rolling 2 year Benefit Period.
Absolute Benefit Periods like 2 years or 5 years are also available, which can reduce the cost. These are per claim Benefit Periods - not aggregate - meaning the policy can be used multiple times with a fresh Benefit Period. With non-cancellable versions (the most common) the cost does not go up over time regardless of how many times the policy is used.
Some policies have special limitations for psychological claims. This is also referred to as a "psych limit" or "mental/nervous limit", and is commonly defined by what is published in the current version of the Diagnostic and Statistical Manual of Mental Disorders (DSM). Psych limits are typically 24 months which may be either per claim or aggregate depending on the policy.
What is the benefit amount based on?
You may be most familiar with group insurance, where a percentage of earnings is insured. Group insurance defers calculation of the benefit until the time of claim, at which time formulaic reductions are applied such that the actual benefit is usually less than the gross benefit percentage.
Individual disability insurance does not go by a percentage of earnings. Instead the benefit is pre-determined at front end of the process (application) as a fixed dollar monthly indemnity amount - e.g, $5,000 per month, $10,000 per month, etc. The insurer underwrites the application so that the issued policy is whatever the person applied for, so long as the amount is not too large relative to current earnings.
The maximum issue amount is somewhere between 50% and 100% of current earnings, after other existing coverages are accounted for. This is based on a snapshot at the time of application and does not change after the policy is issued. As future earnings fluctuate, coverage may go up but it generally will not go down, at least before age 65. Over the course of a worker's career, increases to the benefit amount are ratcheted up, knowing that there will be no take-backs if earnings later decline or group coverage is later acquired. Therefore, as earnings increase it is important to take advantage of the opportunity to acquire more.
Despite insurer's intentions to keep issue amounts modest, 100% income replacement can and does happen due to the inability of the insurer to cancel previously issued layers of coverage. There are four (4) ways this can happen.
(1) A future decline in earnings can result in 100% income replacement.
(2) The acquisition of group insurance after individual insurance is issued may result in 100% income replacement, because group and individual coverages generally don't integrate with one another, and group insurance does not ask about other coverages at the time of enrollment (whereas individual does).
(3) If (and only if) the policy is of the "true" own occupation sort, it is possible for benefits plus work earnings from a different occupation while disabled from one's own occupation to equal or exceed 100%. Since true own occupation does not penalize a person for moonlighting, any work earnings will supplement benefits.
(4) 100% may be possible right out of the gate by including certain riders designed to achieve this, such as catastrophic riders, group supplement riders, and retirement contribution riders.
Replace 401(k) or other retirement contributions so that you keep saving during a period of disability.
For individuals contributing to a retirement plan.
Is bonus and equity compensation covered?
For purposes of qualifying for a new policy and determining the maximum issue amount, insurers will generally consider incentive compensation and equity compensation as well if it appears on the W-2 and if it is a steady part of a person's compensation.
For purposes of determining the benefit, the issue amount is the benefit amount and the type of compensation is irrelevant. One exception is if a person continues to work (usually in their own occupation) but makes less money for health reasons. If the policy has this feature, the carrier pays based on the loss of earnings; and in order to know that, they need to determine what the person was making before. Pre-disability earnings generally includes bonus compensation and taxed equity compensation.
Will I be able to increase coverage in the future to keep pace with earnings?
Yes, if you build in that option into the policy from the start with the appropriate rider(s).
Carriers offer different types of increase options. Some are automatic and require no action at all - not even financial evidence, but the increases are modest (like 3%). Other options allow for large increases at annual or tri-annual intervals, or upon certain life events such as losing group coverage. Some options put a person on a track where a minimum increase has to be taken, while others leave it up to the insured to wait as long as they want up to a certain age (usually 55 or 60).
In general, future increase options do not require a person to medically qualify for the increases because the policy was underwritten for future increases up front, with the applicable rider attached to the policy. However, increases do require a person to financially qualify at the time each option is exercised.
The cost of adding layers of coverage in the future is not free. There is a charge based on the added volume, and the rate for any given layer is based on the current age when that layer is added. Thus, each layer has a higher unit cost than the one added before it. The favorable price of previously purchased layers is not affected. So the premium for the policy as a whole is actually the sum of each layer of coverage added over the years. While the term "non-cancellable" does mean "the premium can't go up," it refers to each layer independently rather than the policy as a whole. Of course if you never exercise an increase option, the premium for a non-cancellable policy would stay the same.
If you expect your earnings to rise significantly in the future, plan ahead for future increases and be sure to apply for the appropriate rider. There may be a cost for the rider itself.
What if I change occupations after my policy has been issued?
The test for disability would be relative to your new occupation. You don't need to update the carrier and the policy is just as valid as it was before. Insurers take the chance that you may enter a different, high risk occupation after the policy is issued and there is nothing they can do about it.
If you file a claim while unemployed, the test for disability will depend on the policy. Some will base it on your career occupation using a common sense standard, others will use an any-occupation test.
Can I cancel my disability policy at any time?
Yes. The refund amount depends on timing.
When a policy is first issued, there is a "free-look" period - usually 30 days but sometimes 10 - where all premiums paid are fully refundable. Due to the influence of health on policy configuration, it is not really possible to see the policy until its been delivered to you, so the free look period is a standard part of the process.
After the free look period, you can still cancel but refunds are limited to the unallocated portion. For example, if you are on an annual billing cycle and request cancellation half-way through the cycle, the other half would be refunded. If you are on a monthly billing cycle, you're effectively paying the minimum as you go, so in that case there would be no refund.
What is the process of filing an individual disability insurance claim?
The first step is to contact the insurer to describe the underlying cause. This allows the insurer to send out a claims kit, part of which is specific to the diagnosis. Without a diagnosis on the first call, your doctor may have to fill out a second set of forms later, so it's best to get the diagnosis-specific forms up front.
There are at least two (2) parts to every claim kit. The primary part is medical, which needs to be completed by your attending physician(s) and/or other medical professionals. Most medical forms devote a lot of space to questions about the physical condition of the patient because these are typically measurable and observable, even though it may be irrelevant to the individual case.
Many claims are sensory in nature or based on reduced cognitive acuity which are somewhat subjective. For example:
Inability to concentrate for long periods
Amnesia or forgetfulness
Delayed word recall, aphasia, or repetitiveness
Poor retention of tasks, responsibilities, and protocols
Narcolepsy, fainting, seizures or blackouts
Inability to remember people of importance
Visual impairment, affecting ability to read or drive
Poor hand-eye coordination
This type of information often requires essay style answers and the only place to include it is the remarks section or in an attachment. Performance deficits don't always appear on a single medical form due to the field of expertise of the medical practitioner filling it out, but the whole picture may be strung together by several different practitioners that can speak authoritatively.
The medical form will always ask if the physician has discussed return to work prospects with the patient, and whether work modifications are possible. Caution is advised on this question, because work modifications may not be practical for business reasons the insurer cannot be expected to understand. If you are prematurely optimistic, this could prove difficult to walk back. You might have the type of policy that does not consider duties modification, in which case there is less risk. Nevertheless, when you are initially presented with the idea it is safer to assume that job modifications are not possible until you have had time to consider whether this is really true.
The second part is personal. The personal section prompts for information about occupation, earnings, and other benefit sources which may or may not be relevant depending on the type of coverage you have.
There may be a third part, which would be for your employer. Individual policies are designed to function without having to depend on the support of an employer, so this often not required. It usually comes into play if you happen to have acquired your policy through your employer and you are still with that same employer. Group insurance claims always require the employer part.
These forms are returned to the claims department with any required supporting documentation and reviewed by the claims department. As a consumer it is important to file early in the process because follow-up clarification may be required. If your Elimination Period is 90 days, it's a good idea to get started before the 30th day after you first experienced a loss of time, duties or earnings for health reasons.
During a claim, there may be ongoing requests for physician statements unless it would be of no value. Tax returns may or may not be required.
How do Pre-Existing Condition Limitations work in an individual disability policy?
As a general rule, only undisclosed medical history is subject to the pre-existing condition limitation, and even then, only for a limited period of time - usually two (2) years beginning from the policy's effective date - and only if it is materially relevant to the claim. Unlike group coverage, the clock does not start over when you change employers.
If you're worried about the carrier excluding for something in your medical past, it would be important to put it on the medical part of the application for two reasons. First, you might get lucky. More importantly, disclosure keeps the underwriter open to issuing something. If the underwriter uncovers something materially significant to the risk that is not admitted - the file will be closed out without an offer and reported to the MIB with adverse information, which would make it more difficult to acquire coverage at another insurer.
If you have a pre-existing condition, it's a good idea to disclose that up front because it may influence carrier selection.
What Sources of Information Do Disability Insurers Use to Determine if an Applicant Qualifies for a Policy?
The underwriting process seeks to determine the overall financial stability of an applicant in addition to medical and lifestyle risks. You can learn more why the underwriting process is designed the way it is, and how various underwriting requirements are personally relevant to you, in the Get Started qualifying questionnaire.
The carrier will conduct a background check with the Medical Information Bureau (MIB) to check for prior declines, other existing coverage, and pending applications with other carriers.
The carrier will conduct a Prescription Drug background check to look for any prescriptions you may have been issued within the last five (5) years.
ADDITIONAL POSSIBLE SOURCES
These items are not always required
The carrier arranges and pays for these items, if required:
Motor Vehicle Report (MVR)
Paramedical Exam (blood draw, urine, blood pressure, build)
Medical Records, if there is cause based on other sources or for high issue amounts.
Phone Interview, if clarification is needed on something from the application or to collect additional application information.
Social Media may be searched.
LinkedIn profile may be viewed to understand occupation and employment history.
Public records may be searched for judgments and bankruptcy.
You may be required to furnish these items, if required:
Financial Documentation, such as recent paystub, W-2 or tax returns in order to verify income and avoid over-insurance.
If not a US Citizen, Green card (front and back)
If newly self-employed (<1 year), Client Service Agreements in order to establish stability of future revenue.