Disability Insurance Provision Glossary

Non-Cancelable – Guaranteed to renew to age 65 and to never raise the price of the premiums.

Guaranteed Renewable – Guaranteed to renew to age 65 but can raise their overall rates. They can not single out an individual person for an increase.

Elimination Period – Disability jargon for “deductible”. The elimination or waiting period represents the number of days you’re willing to wait, while disabled, before coverage begins. This is usually 30, 60, 90, 180, or 365 days.

Benefit Period – This refers to the duration for which you want to receive the disability income. Typical lengths include 1 yr, 2 yr, 5 yr, to age 65, or to age 67.

Definition of Disability:

Total Disability – Every disability insurance plan has a definition of total disability in the policy; you should always know the exact language of this definition before you own anything. This is the most important part of the policy because this is the part that determines whether or not you are disabled. There are 3 basic types of disability definitions: Own Occupation, Modified Own Occupation also known as Income Replacement, and Gainful Occupation also known as Any Occupation.

Own-Occupation – Example Definition: The inability to perform the material and substantial duties of your regular occupation, the insurance company will consider your occupation to be the occupation you are engaged in at the time you become disabled, they will pay the claim even if you are working in some other capacity.

This coverage refers to the length of time you will be paid a full benefit when you can’t do your specific occupation but could do another. Many policies will have 2 year “own occ,” 5 year “own occ” coverage, or “own occ” coverage to age 65. If you’re still disabled after that period, your benefits are cut off only if you can’t perform another occupation for which you’re reasonably suited based on your education, training, and experience. The longer the period of protection for your specific occupation, typically the higher the premium is. 2 years “own occ” is typically reasonable for most professions unless you are someone (like a surgeon) who has spent many years mastering their craft.

Modified Own-Occupation – Example Definition: Because of sickness or injury you are unable to perform the material and substantial duties of your occupation and are not engaged in any other occupation.

Also known as “Income Replacement”, this has become the most common definition of total disability in the industry today. Most insurance carriers that have stopped offering own-occupation disability insurance have moved to an income replacement definition. You will find the first part of the definition is very similar to an own-occupation definition, but with one key major difference; the income replacement definition will typically penalize you during a claim if you make the decision to go back to work or earn another source of earned income while on a claim by reducing your policy benefit proportionately.

Gainful Occupation – Example Definition: Because of sickness or injury you are unable to perform the material and substantial duties or your occupation or any occupation for which you are deemed reasonably qualified by education, training, or experience.

Also known as “Any Occupation”, this definition provides the least amount of protection and should be cautiously considered and carefully studied and understood before purchasing because of its limitations.

Optional Riders:

Residual – A large percentage of all disability insurance claims either start or end in a residual claim. The basis of a residual claim is that a person is still actively engaged in their occupation but because of a sickness or injury is suffering a loss of time and duties or suffering a loss of income of at least 20%.

COLA – Cost of Living Adjustment. If you’re disabled for a long period of time, the monthly disability check you receive has diminishing spending power due to inflation. This rider allows for annual increases in your benefit while you’re disabled up to some predetermined percentage (usually from 3 to 6 percent)

Future Increase Option (FIO) - This option allows you to increase the amount of your monthly disability benefit to a pre-determined amount you purchase all at once or in increments usually every 1 to 3 years provided you have the income to justify the increase without going back through the medical underwriting process.

What is Disability Insurance?

“Disability Insurance protects your greatest asset — your income! It is a crucial part of any financial plan since it helps you pay your bills if you are unable to work due to injury or illness. It is just as important to have as life insurance.”
- DAVE RAMSEY

Why is Disability Insurance important?

Disability is 2.5 to 4 times more likely to occur than death; the probability increases as we age.

When an accident occurs that causes disability, people without Disability Insurance are typically limited to 3 options: depleting their life’s savings, depending on their spouse’s employment to pick up the slack, or borrowing money from a friend or family member.

Although the general level of savings in the United States is far less, if an individual saves 10% (Dave Ramsey recommends 15%) of their income each year, one year of disability would wipe out almost 10 years of savings.

Spousal employment is usually not a viable source because most spouses either already work, or have been out of the job market long enough that they cannot demand top dollar for their services. The reality of replacing the breadwinner’s income and functioning as a parent, a spouse, and part-time nurse is not very realistic.

Borrowing to pay bills may be the biggest financial disaster of all. Banks not willing to lend due to unemployment caused by disability, leave many borrowing from credit cards at 15% to 22%. This can make a bad financial problem become a catastrophic one.

Social Security’s stringent definition of disability results in a claims rejection rate greater than 60%, and even if one qualifies payout is very low.

Any of these scenarios usually effects 3 generations financially; the disabled individual who loses his or her income, their children who lose any potential financial support for college, and the disabled’s grandchildren because they have to support their parents who had to pay off student loans and take care of the disabled who was ill prepared.

Disability income insurance is the most economical and desirable form of income replacement during disability since the annual cost of each dollar of benefit is no more than 2-5 cents and it changes the possible catastrophe of disability to a reasonable, budgeted, monthly premium expense.

What should I know before buying?

“Remember to take the longer elimination period and use your emergency fund for short term needs. Consider the To Age 65 benefit period option if you can afford it, but the 5 year plan also provides valuable protection. Don’t forget to check with your employer to make sure they don’t offer a plan to avoid any costly overlaps in coverage."
- DAVE RAMSEY

To find out more information, fill out our no obligation disability quote form, and one of our friendly agents will contact you.