Designing a Long Term Disability Insurance Plan

September 28th, 2011 | Author: Mitch Reynolds

Long Term Disability Insurance is Complex to Design

The many moving parts of long term disability insurance

Long term disability insurance is one of the more complex insurance products to design for people. It has many moving parts and various riders and options that can be added to it. In this article we will cover the fundamental plan design elements to setting up a proper disability insurance plan. Also, we will discuss the three elements of underwriting that take place to get qualified for disability insurance.

This is different from group long term disability insurance, which usually has a static plan design and cannot be customized by the policy holder. When you purchase a personal disability insurance policy you can adjust many of these features to make the plan fit your unique needs.

Plan design elements of long term disability insurance

Elimination Period

The elimination period is also called the waiting period for a long term disability insurance plan. In fact, with most disability insurance policies, this elimination period can be as short as 30 days, but that is the most expensive option. The real premium sweet spot is a 90 day elimination period. This means you would be covered for all major illnesses and injuries that would keep you from work after waiting 90 days, and the insurance company is not likely to pay claims for short term events, like sprains, strains, break and cuts.

If you have enough money in the bank to afford to wait 3 months before your benefits start, then your long term disability insurance plan will be priced very competitively for your most financially impactful risks. Insurance industry statistics show that if your disability lasts more than 90 days, the average time off work is 2.9 years.

Benefit Period

This is how long you would like your insurance payments to go for if you were disabled. The shortest timeframe is for 2 years, or 24 months of benefit. You can also choose from a 5 year benefit, 10 year benefit or until age 65 benefit. For most people, even though the coverage to age 65 is the most expensive, it provides the best level of protection they are looking for.

Even though about 95% of all disability cases are back to work within 5 years, the 5% who don’t go back probably will never return to the workforce. For these people, knowing their disability insurance payments will never end throughout their working career is very valuable. Also, the price difference between a 5 year benefit and a “to age 65” benefit is not that steep, and can usually be managed by the budget.

Coverage Amount

When determining the amount of coverage you can buy for long term disability insurance, you have to look at your actively earned income. Passive income, like collecting rent cheques or interest payments from an investment, is not included in calculating your coverage amount. This is because passive income would continue even after you become disabled. Only a percentage of your actively earned income is insurable. The insurance company doesn’t want to over insure its clients so as to give people a financial incentive to remain on a disability insurance claim. They want to provide enough income for paying day-to-day expenses but give you incentive to go back to work.

So, there is a maximum you can qualify for. It is usually about 60 – 65% of your gross income before taxes. If you are a high income earner in Canada, this percentage will decrease. Disability insurance companies do allow for high income earners to get a much larger benefit but it is a much small total percentage of their take home income. For instance, if you earned $75,000 per year you could get a month benefit of $4,125 per month tax free benefit (or 66% of gross earnings). If you earned $250,000 per year from all sources of active income, like salary plus bonus, you could get $9,500 per month tax free benefit (or 46% of gross earnings).

If you feel you don’t need the maximum amount of monthly benefit, you can always reduce your coverage and thereby reduce your monthly premium. You cannot, however, get more monthly long term disability insurance coverage than your earnings qualify you for.

Regular Occupation vs. Any Occupation

A very common difference between personal long term disability insurance group coverage is the definition of regular occupation vs. own occupation. Regular occupation is defined as the job duties needed to perform the regular occupation under which you were insured. For example, if you are an oilfield consultant, you need to drive to sites, be able to walk around the job site, be able to use a computer, have strong cognitive abilities to write reports and analyze data, etc. And these job duties would be related to the job of oil field consulting, not supervising a manufacturing facility for instance. An inability to do these duties because of injury or sickness would trigger your long term disability insurance claim.

Any occupation definition, on the other hand, is defined as being able to perform normal job duties that would qualify you to re-enter the workforce in ANY occupation for which you are suitable trained and/or have experience in. A disability insurance company would also have the right to demand that you engage in retraining so you would become qualified to re-enter the workforce, and thereby get you off a long term claim.

With a personally owned long term disability insurance policy you can have the regular occupation benefit through to age 65. With group insurance you have regular occupation definition for 24 months, and then it switches to any occupation definition.

Total, Partial and Residual Disability Definitions

With group benefits disability coverage your only definition of coverage is total disability. This means you must be incapable of returning to work in any capacity and staying home 100% of the time. Even if you return to work part-time you would lose all your disability insurance payments under the total disability definition.

With a personally owned long term disability insurance policy you always get the total disability definition, but you also could get partial and/or residual disability definitions. A partially disability definition is if you are away from work about 50% of the time and/or you cannot perform one or more of the major duties of your job. Qualifying for a partial disability benefit would give you 50% of your monthly benefit. Residual disability coverage is defined as percentage of income loss while you are injured or sick and under the supervision of a doctor. If you are losing more than 20% or your prior income you would get that percentage of you monthly benefit. For example, if your benefit is $5,000 per month and you are losing 60% of prior earnings, you would get $3,000 per month and still be able to work part-time.

Having total, partial and residual disability definitions gives you a lot more choice and flexibility when on claim. Being bored at home and feeling trapped by a long term disability insurance policy is the last thing you need when trying to re-enter the workforce.

Three underwriting factors to qualify for personal long term disability insurance

Health Underwriting

As with life insurance or critical illness insurance, the insurance company will need to evaluate your health risks. What they are looking at is very different from a life insurance policy though. The insurance company needs to evaluate your likelihood of going on a long term disability insurance claim in the future based on your health today. Things like having prior mental or nervous disorders, like depression or anxiety, would make it hard to get disability insurance (since over 20% of all claims today are related to mental/nervous disorders). Having a prior injury to certain part of your body, like a torn ACL, would usually mean exclusion for that particular body part for any future claims.

If you are healthy and without prior injuries or illnesses it is very easy to get disability insurance (or any insurance for that matter). Unfortunately, as we age, it is more and more likely we have at least one thing wrong with us that makes getting a disability insurance policy a problem. Be prepared for certain exclusions and limitations to your long term disability insurance policy if you have any prior conditions.

Income Underwriting

This was referred to above, in that you can only qualify for a certain percentage of your actively earned income. When going through underwriting you need to provide proof of income. This is usually in the form of a T1 income tax statements for the last two years of earnings. If you are on contract, a copy of your contract agreement would also be needed. The insurance company will average your earnings over the last two years and offer maximum coverage based on the aggregate amount. To get more disability insurance coverage, be sure to provide additional evidence of other earnings that might qualify for coverage.

Occupational Risk Underwriting

Occupational risk is a big factor when getting long term disability insurance coverage. Disability insurance companies have many years experience with workers from different industries, and they have a long term history of claims. For instance people in the nursing profession have a higher rate of claims vs. accountants, so the accountant would pay less for the same monthly disability insurance benefit. Be sure to shop around with a broker, as some companies have had poor experience with certain groups and charge them more, while the other company would be able to offer a more competitive premium.

Just be prepared that if you are in a more physically intensive job or a blue collar trade you will pay more for disability insurance coverage than someone who works in a white collar professional career like a doctor or lawyer.

Get a Long Term Disability Insurance Quote Now

Designing a quote for long term disability insurance coverage is not quick and easy, and that is why there are no online tools to get a quote instantly. You can either use our Disability Insurance Request a Quote form or feel free to contact Life Guard Insurance directly to be put in touch with a qualified insurance broker who can design you a personalized long term disability insurance plan.

The article was written by +Mitch Reynolds. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about long term disability insurance would be very much appreciated.