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The Disability Insurance Policy


Disability insurance policies are confusing and difficult for the general public to read and understand.  The following is a summary of the major individual disability insurance policy clauses every insured should be familiar with.

Renewability of Policy

There are three basic types of individual disability provisions used by insurance carriers:

  1. Non-Cancelable and Guaranteed Renewable

    Generally considered as the “best” renewability provision, this guarantees that after you purchase your policy the insurance company cannot change any policy provision, increase premiums and it must renew your policy until a specific future age (usually age 65).

  2. Guaranteed Renewable

    Similar to the non-cancelable provision except that premiums may be increased after the policy is purchased. The insurer can change premium rates for broad classes of insured’s.

  3. Conditionally Renewable

    This type of renewal provision does not offer the insured many real guarantees as the insurer has the right to refuse to renew the policy for reasons specified in the policy at the end of a premium payment period.

Total Disability and “Own Occupation” or “Regular Occupation”

Total disability is the inability, due to an accident or sickness, to perform the material and substantial duties of your occupation (engaged in at the time of disability). This type of total disability provision protects you when you are disabled and cannot engage in your specific occupation but can engage in some other occupation. You would still be able to qualify for total disability benefits. “Own Occupation” definitions of total disability are most important to those who work in recognized specialties of medicine, surgery, dental, legal and other professional occupations.

Total Disability and “Loss of Earnings”

Total disability is the inability, due to an accident or sickness, to earn 80% or more of your earnings prior to the start of disability. The emphasis here is on loss of income and not loss of occupational duties as in the “Own Occupation” definition.

Residual Disability (also called Partial or Proportionate Disability)

The disabled insured is still working in their occupation (or another occupation) but due to an accident or sickness, suffers a loss of time and (or) duties. Some residual disability provisions require the disabled insured to also have a loss of 20% of more of prior income (prior to the start of disability). Other residual provisions require only a 20% loss of prior income (not time and/or duties). Most residual provisions also state that if the disabled insured has a loss of 75% or 80% of prior monthly earned income, 100% of the monthly total disability benefit is paid. Most companies have a COLA type increase built into their residual policy provision (called indexing of pre-disability income) with the typical historical increase being a minimum of 4% and maximum of 10% (or actual CPI-U). The residual benefit you receive is based on a percentage of your total monthly disability benefit. It is calculated by comparing your post-disability monthly income with your pre-disability monthly income to see what percent of lost income you incurred.

Elimination or Waiting Period

This is the period of time between the onset of a disability and the time you are eligible for benefits. This can also be thought of as a “deductible period” in the policy. Typical elimination periods are 30, 60, 90, 180 & 365 days. Some policies require that total disability only, be used to satisfy the elimination period while others use both total and/or residual days of disability. In addition, while some policies require “consecutive” days of disability, others will accumulate days of disability over a period of time, to satisfy the elimination period.

Benefit Period

A benefit period is the period of time you are eligible to have benefits paid to you. Typical benefit periods include 2 years, 5 years, To Age 65, To Age 67 and Lifetime benefits. For lifetime benefit periods, there is a difference between accident and sickness requirements. If the disability is caused by an accident, lifetime benefits are usually payable if the disability begins prior to age 65. For those disabilities caused by a sickness, lifetime benefits are payable if the disability begins prior to either age 50, 60 or 65. Insurance companies have substantially discontinued "Lifetime" benefit periods.

Policy Exclusions

Disability policies contain exclusions or specific limitations when benefits are modified or not payable. These exclusions typically include a 2-year benefit limitation for mental & nervous conditions, non-payment of benefits for a period of incarceration of 30 days or more for criminal activity, commission of a felony, war or act of war declared or undeclared and, a limitation of benefits for alcohol or drug use.

Optional Benefits

  1. Future Insurability

    This optional benefit is offered by most companies to help protect your future increase in earnings. Until either age 50, 55 or 60, the insured has the right to increase monthly benefits by virtue of increased earnings. Additional monthly benefits are issued without medical underwriting. The typical increase in monthly benefits is from $1,000 to $4,000.

  2. Cost of Living Adjustment (COLA)

    This optional benefit is designed to provide the disabled insured with increasing benefits, during each succeeding year of disability. This helps your disability income dollar benefit keep up with the cost of living until age 65, when the increases end. The typical historical annual increase is from 4% to 8%.

  3. Automatic Benefit Increase

    This is an automatically available increase in benefits each year during the first 5 years of your policy (and thereafter if you qualify). This policy provision is available without medical and/or financial requirements. The insured pays a small increase in annual policy premium as this provision is exercised. Benefit increase is usually tied to either a specific percentage increase, a stated monthly increased benefit or the CPI-U. These increases usually end at age 50 or 55.

We are continuously monitoring the needs of our visitors and clients and extend an invitation to you to make suggestions and/or ask questions that we can help you with. Please email your comments and questions to: Gerry Katz, MSPA, RHU, ALHC, FACFE, DABDA at or fax them to: 352-661-3026.


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