How to Add Disability Income Protection to a Permanent Life Insurance Policy

The disability income rider provides both a waiver of premium (or a waiver of policy charges) and a supplementary income if the insured becomes totally disabled. The definition of total disability is the same as that used for purposes of the waiver-of-premium or waiver of policy charges riders. Customarily, the policies express the disability income benefit as a specified percentage of the face amount payable monthly. The common percentage is 1 percent. For example, if the face amount of the policy is $50,000, the DIR will pay $500 per month in the event the insured becomes totally disabled.

As with regular disability income insurance policies, insurers generally place maximum limits on the amount of disability income they will issue to some stated figure, such as $1,000 per month. Also, through coordination of benefits provisions, they may further limit the amount of disability income they will issue and pay based on the total amount of income payable on all other disability income policies on the insured. As a general rule, insurers are reluctant to issue disability income policies when aggregate disability income payments may exceed 65 to 80 percent of the insured’s net earned income.

Commonly, the disability must continue for a six-month waiting or elimination period before benefit payments commence, although a few companies use a four-month waiting period. As with the waiver of premium or waiver of policy charges riders, if the insured overcomes the disability, disability income payments cease and the insured must commence paying premiums on the life insurance policy once again. However, in those cases where the disability ceases after age sixty-five and when the waiver of premium or policy charges provision pays up the policy at age sixty-five, insurers require no further premium payments.

The additional premium companies charge for a given disability income benefit varies among companies, but generally will be higher for policies issued by the companies that use the most liberal definition of total disability (as described above for the waiver of premium) and lower for those that use the most restrictive definition. Regardless of the definition used, the DIR generally will only pay if the insured is totally disabled and the disability is presumed to be permanent. Therefore, advisers generally do not consider the DIR to be the most suitable form of disability income insurance. For insureds who need disability income protection, insurers generally will tailor comprehensive disability income policies (independent of their life insurance policies) to fit their needs better and more cost-effectively.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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