Policy Features and Provisions
Understanding the key features of disability income policies helps in comparing options and making appropriate recommendations.
Elimination Period
The elimination period (also called waiting period) is the time between disability onset and when benefits begin:
Common Elimination Periods
| Period | Use Case |
|---|
| 0-14 days | Short-term disability |
| 30 days | Higher premium individual policies |
| 60 days | Moderate premium |
| 90 days | Most common for LTD |
| 180 days | Lower premium |
| 365 days | Lowest premium |
Elimination Period Considerations
| Factor | Impact |
|---|
| Shorter period | Higher premium, earlier benefits |
| Longer period | Lower premium, more self-insurance |
| Savings needed | Cover expenses during elimination |
| Coordination | Should match end of sick leave/STD |
Exam Tip: The elimination period acts like a deductible—the insured self-insures for this period. A 90-day elimination is most common for individual long-term disability policies.
Counting the Elimination Period
| Method | Description |
|---|
| Consecutive days | Must be disabled for continuous period |
| Accumulation | Days can accumulate over longer period |
Example - Accumulation Method:
- 90-day elimination, 6-month accumulation
- Disabled 60 days, return to work, disabled 30 more days
- Elimination satisfied if within 6-month window
Benefit Period
The benefit period is how long benefits will be paid:
Common Benefit Periods
| Period | Use Case |
|---|
| 1 year | Rarely offered (short-term) |
| 2 years | Economy policies |
| 5 years | Moderate protection |
| To age 65 | Standard LTD |
| To age 67 | Matching Social Security retirement |
| Lifetime | Maximum protection (rare) |
Benefit Period Considerations
| Factor | Impact |
|---|
| Longer period | Higher premium, more protection |
| To age 65 | Bridges to retirement income |
| Shorter period | Risk of benefit exhaustion |
| Cost vs. protection | Balance affordability with needs |
Benefit Amount
Monthly Benefit Limits
| Limit Type | Purpose |
|---|
| Participation limit | Percentage of income (typically 60-70%) |
| Maximum benefit | Dollar cap on monthly benefit |
| Minimum benefit | Floor on benefit amount |
Why Benefits Are Limited
| Reason | Explanation |
|---|
| Prevent over-insurance | Maintain incentive to return to work |
| Moral hazard | Reduce temptation to stay disabled |
| Underwriting | Limit insurer's exposure |
| Tax treatment | After-tax benefit may equal net income |
Key Point: Benefits are typically limited to 60-70% of pre-disability income to maintain work incentive.
Renewability Provisions
Non-Cancellable
| Feature | Details |
|---|
| Renewal | Guaranteed to specified age (usually 65) |
| Premiums | Cannot be increased |
| Coverage | Cannot be changed by insurer |
| Premium | Highest of all renewability types |
Guaranteed Renewable
| Feature | Details |
|---|
| Renewal | Guaranteed to specified age |
| Premiums | CAN be increased for entire class |
| Coverage | Cannot be changed individually |
| Premium | Lower than non-cancellable |
Exam Tip: Non-cancellable = guaranteed renewal AND guaranteed premiums. Guaranteed renewable = guaranteed renewal but premiums can increase for the entire class.
Conditionally Renewable
| Feature | Details |
|---|
| Renewal | Subject to certain conditions |
| Conditions | May include employment status, age |
| Premiums | May change |
| Less protection | Than guaranteed renewable |
Optionally Renewable
| Feature | Details |
|---|
| Renewal | At insurer's option on anniversary |
| Risk | Insurer may refuse to renew |
| Premiums | May change |
| Least protection | Of all renewability types |
Other Key Provisions
Recurrent Disability
Addresses what happens if disability returns after recovery:
| Provision | Details |
|---|
| Same disability | New occurrence or continuation? |
| Time period | Typically 6-12 months |
| Elimination period | Waived if recurrence within period |
Rehabilitation Benefit
| Feature | Details |
|---|
| Purpose | Encourage return to work |
| Coverage | Training, education, job placement |
| Benefit | May continue partial benefits during rehab |
Waiver of Premium
| Feature | Details |
|---|
| Trigger | Usually after elimination period |
| Effect | Premiums waived during disability |
| Continuation | Coverage continues without payment |
Survivor Benefit
| Feature | Details |
|---|
| Trigger | Death while receiving benefits |
| Benefit | Lump sum to survivor (3-12 months typical) |
| Purpose | Transition assistance for family |
Premium Factors
| Factor | Impact on Premium |
|---|
| Age | Older = higher |
| Gender | Varies (women historically higher) |
| Occupation | More hazardous = higher |
| Income | Higher income = higher premium |
| Health | Medical conditions = higher |
| Elimination period | Longer = lower premium |
| Benefit period | Longer = higher premium |
| Benefit amount | Higher = higher premium |
| Definition of disability | Own occ = higher premium |
| Riders | Additional = higher premium |