Your disability policy’s benefit length impacts two major components of your coverage. For one, your premiums are directly affected by your benefit period. In all cases, the shorter the benefit period is, the more expensive your premiums are. The second impact comes becomes important when you need to actually go on claim. Your benefit period/length specifically tells you for how long you’re able to collect benefits. If you would like us to analyze the benefit length of your existing disability insurance policy to see if it fits your goals, please contact us.
What is Your Policy’s Benefit Length?
Your disability insurance policy has several components that affect your premiums and your total benefit should you go on claim. Your policy’s benefit length is one of the most critical features of your policy. Essentially, the benefit length determines how long you’re eligible to receive benefits once you go on claim.
Once you are considered disabled and the conditions spelled out by your policy definitions and your elimination period are satisfied, you are “on claim”. The length of that claim eligibility is determined by the benefit length. Typically, the benefit length will apply to each disability (separated by a period of time). A recurring disability, should it manifest relatively quickly (within 180 days for example), might be considered the same disability period and subject the policy owner to the benefit length limit.
Wade Phillips is a tree surgeon. He purchased a disability insurance policy with a 5-year benefit. Two years ago, he fell out of a tree and severely injured his back. After satisfying his 90-day elimination period, he went on claim for 18 months. After going back to work for a few months, he aggravates his back doing yard work. Because this injury is considered a recurrence of the original disability (due to the short time between going back to work and becoming injured again), the maximum time he’ll be able to go on claim will be 42 months (60 months of original coverage minus the 18 months he used previously).
Had his back been injured several years later, Wade would have been eligible for the full five years of his original benefit, even though he used 18 months previously.
Benefit Length Options
Benefit length options will vary from carrier to carrier. Mostly, options will range from as short as 6 months to a long as age 70. The most common benefit periods are 2-5 years and to age 65-67. The reason 2-5 is popular is it might be the policy owner’s only choice, depending on their occupation. Several carriers do not allow certain professions to have a benefit for longer than 2 or 5 years. Those professions are typically more difficult to insure since the likelihood of disability is higher. Our case study featuring Wade is a perfect example. Tree surgeons are not normally eligible for benefit periods longer than 5 years.
Non-Cancellable vs. Guaranteed Renewable
Another component of your disability insurance policy is the premium.
This relates to benefit length since you’re going to own this policy for several years. In the case of most high-income professionals, you’ll likely own your disability insurance policy until you retire. That being said, it is important to note whether the terms of your policy are guaranteed, specifically your premiums.
A policy that is guaranteed renewable requires that the insurance company keep your policy in force (assuming that you pay the premiums on time) however, they may raise the premiums. Keep in mind, the disability insurance company cannot single you out for a rate increase. It can only raise rates across a group of policy owners.
Like a guaranteed renewable policy, a policy that is non-cancellable does not allow your insurance company to cancel your policy either. However, a non-cancellable policy will also have guaranteed premiums. That means that the insurance company cannot increase your premiums, giving the policy owner peace of mind.
Because of the rate guarantees, non-cancellable policies normally cost more than policies that are just guaranteed renewable. That being said, every case is different so what might be the best disability insurance policy option for one person may not be the best for another.
We can help guide you through this process and select a policy that fits your needs and goals. Please contact us if you’d like to discuss whether a non-cancellable or a guaranteed renewable disability insurance policy is right for you.
Choosing the Right Benefit Length
Clients will occasionally ask: “How long should my disability insurance policy last?” While there is no hard and fast rule, my philosophy is that your disability policy should last as long as you are creating income. Disability insurance fills a very specific risk in your financial plan, the risk that you’ll be unable to work and earn money. Once you’re no longer earning money (you retire, win the lottery, etc.), that major risk goes away. With paycheck protection (disability insurance), you’re protecting your income. No income=nothing to protect.
Your policy might restrict you from having full coverage until retirement. If that’s the case, having something is better than nothing. You should purchase as much disability insurance as is reasonable and allowable, based on your occupation, health, and income.
The benefit length of a disability insurance policy directly affects your premiums and the total benefit of your policy. Should it be allowable, purchase a benefit length equal to your expected date of retirement (or as long as you expect to continue making an income). If not, any benefit length is better than zero, so try to secure whatever you’re offered.
The most important fact to note is this: No disability insurance client is the same. Each of you have different financial situations, goals, and overall objectives. Purchasing a plan from an unbiased, independent expert is the best way to get the proper coverage in place. Please contact us today or fill out the quote form on the left for a complementary analysis.