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How to Insure Your Income: Specific Policy Provisions

All disability insurance policies contain a group of mandatory provisions required by all states in any life or health insurance contract. In addition, there are some provisions that are common to most disability income policies. These include:

  • Change of occupation provides a method for handling disability income claims if you have changed occupations since the initial application -- specifically, if you have changed to a more or less hazardous occupation. This allows the insurance company to adjust benefits or premiums to reflect the change. If this provision is not contained in the policy, no changes can be made.

Example: Sydney buys a disability policy while she's working as a bartender and going to law school. Sydney finishes school, passes the bar exam and becomes a practicing lawyer. She moves into a less hazardous job classification with a higher income average. If a change of occupation provision is in her policy, Sydney should contact her insurance company and provide evidence of her new occupation. The company should adjust her premium.

  • Relation of earnings to insurance. Also known as the average earnings clause, this prevents overinsurance. It allows the company to reduce disability benefits based on your current average monthly income. This provision complements the insurer's issue and participation limits, which may state that you can't have a disability income benefit which exceeds a certain percent of earned income.

Example: Jake was earning $2,000 per month and was issued a disability income policy that provided a $1,400 monthly benefit (70 percent of his earned income). Two years later, when Jake files a claim, his earned income has dropped to $1,500 per month -- and it's been that low for the preceding year. If relation of earnings provision is part of the policy, Jake's insurance company can adjust the total disability benefit to 70 percent of his current income.

  • Recurring. Some people refer to this as the relapse provision. It states that if, within six months of a return to work following a period of total disability, you are disabled again from the same or a related cause (a relapse), then the second disability will be considered to be a continuation of the initial disability claim.

Example: Amanda has a heart attack on June 1. She is totally disabled for three months, but returns to work on September 1. Two months after her return to work, she suffers a second heart attack. In accordance with the recurring provision, the second heart attack and subsequent claim are considered a continuation of the initial claim, even though it was interrupted by a two-month return to work.

If Amanda satisfied the EP with the first claim, then there would be no need for her to satisfy a new EP, and benefits would be paid to her immediately. Amanda also would be subject to the same benefit period. Because the first claim took three months, the second claim would begin with the fourth month of the same benefit period.

If Amanda's second heart attack occurred eight or nine months after her return to work, it would be treated as a new claim. If her second disability was due to a broken leg and totally unrelated to her heart attack, it also would be a new claim -- regardless of when it happened.

Other, optional policy provisions are designed to enhance the overall benefits of the disability income policy. The most common optional provisions include the following:

  • Presumptive disability. This provides for total disability benefits to be paid with little claims administration if the disability results in the loss of speech, hearing, vision or use of two limbs.
  • Transplant and cosmetic surgery benefit. This provides total disability benefits for elective medical procedures, such as donating a bodily organ.
  • Rehabilitation benefit. This enables you to undergo vocational rehabilitation, during which time total disability benefits will be paid -- as long as you remain totally disabled during the training period.
  • Future increase option. This protects your future insurability by providing certain birthday, marriage and birth of children option dates on which additional, predetermined amounts of disability income benefits can be added to the policy without proof of insurability -- provided that your income warrants these additional benefits.
  • Cost of living benefit. This option provides stated increases in benefit payments once you are on claim, so that disability benefits can keep pace with inflation and the cost of living.
  • Lifetime benefit. Although rare, this optional benefit provides lifetime disability income benefits -- usually if the disability commences prior to a certain age. Otherwise, benefits may be restricted.
  • Additional indemnity riders. These riders provide additional amounts of indemnity for short periods of time, such as six or 12 months. The primary purpose of these riders is to supplement or coordinate with other disability benefits, such as Social Security or group disability benefits.
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