Disability insurance is one of the most important investments many people make. It aids in providing financial protection to you should you become unable to work. Just like purchasing life insurance, the investment in disability coverage aims to cover those “what if” situations. Disability insurance riders are a way to customize your policy to ensure it matches your unique needs. There are various ways to do this, including with residual disability and partial disability. Here’s what you need to know.
Here is a quick review of disability insurance and a deeper dive into some of the riders.
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What Is Disability Insurance?
Consider that every year, about 5% of people working in the U.S. will experience an illness or injury that leaves them unable to work for six months or less. Most of these are not workers’ compensation-related claims, meaning many people could find themselves without the ability to earn money for some time, as noted by the Council for Disability Awareness.
Long-term disability is also worrisome, with conditions like musculoskeletal disorders, cancer, significant injuries, and mental health crisis being some of the most common reasons for people to miss work for more than six months at a time.
In these situations, it’s critical to think about what could happen to your financial health. Would you have the financial ability to cover your costs long-term, maintaining things like your mortgage payment and day-to-day expenses? This is where disability insurance can help.
Disability insurance provides financial compensation when an individual is injured or becomes ill and cannot work due to a disability. It aids in providing continued income for some or all of the time you’re unable to work.
What Is a Rider on a Policy?
You may hear that you can add a rider to your disability insurance policy. Doing so can help you modify the policy to make it a better fit for your specific needs. A rider is typically an optional investment on your disability insurance contract. Most of the time, it will increase the cost of your policy, but it may offer protection that you know is valuable and want to include.
Why are riders important in disability insurance?
A disability rider can help ensure your policy covers your specific needs and any type of limitation that your existing policy may include. When you choose a rider, you can select benefits that help to make your policy more fitting, often for a higher premium. This is often essential because there could be factors that impact your ability to use your disability insurance.
You can pick and choose which riders to add to your disability insurance. It’s wise to compare several options and find out which is most suited for your needs.
Some riders are pretty straightforward. For example, you could choose a rider that will pay off your student loans should you become disabled. Others may pay more when you need daily care on a long-term basis.
There are some disability insurance riders that are more complex. Here are a few of them: COLA, FIO, and AIB, which you may need more information about before selecting.
COLA Rider
This rider, or Cost of Living Adjustment Rider, is specifically designed to help increase the amount of your monthly disability payment based on inflation. You’ll need to compare options in policies as some provide inflation at a fixed annual rate while others will base it on the Consumer Price Index, which assesses inflationary measures consumers are facing. All physicians should consider the value of the COLA rider because it will continue to meet more of your financial needs over time.
FIO Rider
The Future Increase Option rider helps to protect your future income. It can help to increase your income over time, but it is not an automatic process. You will need to ask the insurance company to apply this rider, increasing the amount of your monthly benefit should you need to use it. One key benefit to the FIO rider is that it will increase no matter the condition of your health or your age.
AIB Rider
The Automatic Increase Benefit rider will increase your coverage over time as your salary grows. This is an automatic process. Most policies will involve a monthly benefit increase for the first four or five years. Keep in mind that as your benefit availability goes up, so does the cost of coverage.
What Is a Residual Disability Rider?
A residual disability rider is one of the most important types to consider. This type of rider will pay disability benefits based on the amount of income that is lost due to the disability. That means that if you can go back to work but only work part time or only do some of the services you were providing, this residual disability rider enables you to receive disability payments.
The amount paid through the residual disability rider is typically a percentage of your benefit based on how much you are working.
If you have this rider on your disability insurance policy, and you suffer an injury that limits the number of hours you can stand and work, you can still use the disability insurance to cover what you are missing from your income. For example, if you are able to work just 60% of what you were working, the disability policy will pay out 40% of the disability benefits you are entitled to, compensating you for what you lost.
The amount paid is always dependent on how much your disability benefit is. For example, if your disability benefit is not your full salary, it will pay a percentage of the disability payment you would receive rather than a percentage of your salary.
Most of the time, the cost of a residual disability rider will be dependent on the amount of coverage you receive and the policy itself. A typical $10,000 per month benefit, for example, may allow you to add a residual income rider to the policy for $200 to $500 per month.
Many times, to qualify for this rider’s use, you have to have an income loss that is significant. Some disability insurance policies list this at 20% income loss or more. Some may require less than this.
Finally, make sure to know what the restrictions are. For example, your policy may state that you will qualify for this benefit if you are unable to perform the work you were doing – not just if your income is lower.
What is a Partial Disability Rider?
A partial disability rider helps to pay you if you have a disability that impacts your ability to work. To be applicable, you may have a loss of income of at least 20% or more. This must be due to an accident or an illness that causes the partial disability itself.
To obtain this benefit, you will need to have lost your income by at least 20%, and you will need to be unable to do the work you were doing or be unable to work as many hours as you were working.
In this situation, the policy will pay a portion of your disability benefit based on the amount of income you’ve lost. For example, if you are working only 70% of what you were, the policy will pay 20% of your disability benefit to you. Most policies will cap out at 75%. If you are not earning at least that amount, the policy may pay at the maximum disability benefit amount on your policy.
Also notable is that most policies will also pay up to at least half of your monthly benefit during the first six months. That applies even if you have a loss that is under this amount. Be sure to read the requirements on your policy to know what this limit is.
You may also want to consider an enhanced partial disability benefit. This applies the same rules but only requires you to have a loss of income of 15% or more.
The cost of a partial disability rider will range widely. Typically it is between $80 and $250 per month, but that is dependent on many factors.
How does a partial disability rider differ from a residual disability rider?
The partial disability rider requires that a person must be disabled totally during the elimination period. That means the person is unable to do any type of work that they normally do. In addition, they must have lost at least 20% of their earnings due to that exact injury or illness.
A residual disability rider does not always have this requirement. The employee may not have to be totally disabled during the elimination period. More so, to be considered disabled, the individual must be limited from performing substantial or material duties of their job and have at least a 20% loss of earnings each month as a result of that illness or injury.
What is the elimination period? This is the period of time from when the disability insurance begins and when you are eligible to receive payments. For example, many policies have a 30-day elimination period. During this time, the person is unable to work. However their benefits will not kick in to start paying them monthly until after that number of days expires.
Related: Top Signs You Will Be Approved for Disability
What Is a Catastrophic Disability Benefit Rider?
A catastrophic disability benefit rider (CAT rider) applies when there is a catastrophic disability. If this occurs, the policy will pay a monthly benefit in addition to the total disability benefit. This typically allows for coverage of up to 100% of income.
For many people, this type of rider is quite valuable because it can help to cover more of your costs if a serious injury or illness occurs. Policies will outline when this applies, and there could be limitations to it.
Typically, this type of rider will apply in situations such as:
- You become severely cognitively impaired due to injury or illness
- A person is unable to perform at least two of the Activities of Daily Living (bathing, toileting, eating, dressing, transferring, and continence)
- A person loses sight in both eyes, speech, the ability to use both of their hands or both of their feet, hearing in both ears, or loses one hand and one foot.
In these situations, the policy pays a monthly benefit on top of the total disability benefit. The investment in this type of rider will add to the cost of the policy. However, the amount it adds is dependent on factors such as the type of work you do, gender, and age. On average, this could be between $25 and %500 in cost, dependent on the situation.
Read Understanding Disability Insurance Elimination Periods to learn more.
Residual Disability? Partial Disability? How to Decide What You Want and Need
There is no doubt that the investment in this type of coverage provides added benefits to you as a physician. This is especially important when your family is counting on you to provide an income. Getting help from a professional to choose what works best for you is a must.
Choose someone that specializes in disability insurance to help you. They can explain each of the terms and options available to you. This way, you can determine how well each one fits your specific situation or which riders may not apply or be worth the cost to you.
The professional will then work with you to tailor your policy to fit your unique situation. The ultimate benefit here is that you learn more about all of your options. Additionaly, it will hep you to not overpay for benefits and riders that may not apply to you in the future or may not be worth the investment to you.
Most of the time, working with a professional to discuss disability insurance riders like this does not add to the cost you will pay for coverage. It also should never require you to commit to a policy. Rather, it should be an open conversation about your options, with education being the most important part of the process.
How to ensure you don’t overpay
Many people wonder about how they will know what they need in insurance products like this. Some may think that insurance agents will just sell you whatever they can to increase their commission. There is a way to avoid this.
Turn to an independent professional, one that is not being paid by a specific insurance provider. Be sure they are not connected to any one insurance company. This helps ensure they are not making recommendations that do not fit your specific needs. Nor are they encouraging you to buy more coverage than will benefit you in the long term.
It is also beneficial to choose a professional that is a fiduciary. In short, this means that the primary responsibility of that professional is to create a plan that is solely based on the best interest of the participant. In many ways, this helps to ensure you are getting the protection you need and nothing that you do not neerior to choosing a policy, it’s essential to consider your options and request quotes from various disability insurance providers. It’s crucial to make a selection eventually. Social Security Disability benefits may not be a feasible alternative since most physicians possess assets that prevent them from receiving them.
If you’re prepared to safeguard your financial well-being with a long-term disability insurance plan, reach out to Physicians Thrive. Our team can also assist you in selecting the most suitable whole life insurance policy.
Our financial advisors are at your disposal. They can offer the necessary guidance and recommendations for discovering the policy that meets your requirements.
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