What Is a Disability Income Benefit Rider?
According to the Council for Disability Awareness, over 51 million working adults in the United States have no disability insurance other than the basic coverage from Social Security. Most of these individuals are not offered group disability insurance where they work and have not chosen to purchase an individual disability insurance policy.
To fill that void, many life insurance companies not only meet the need of protecting families from financial hardship caused by the death of a family member through life insurance, they also offer an optional rider to replace the income of a policyholder who has become disabled and can’t earn an income. This rider is called a “disability income rider.”
This article will examine how a disability income rider works, who it is beneficial for (and isn’t), how it differs from other riders, how to file a claim, and answer other frequently asked questions.
How Does a Disability Income Rider Work?
Disability income riders pay a life insurance policyholder a monthly income if they become sick or injured and cannot work. The monthly benefit amount is based on a percentage of their policy’s face amount (typically 1%).
For example, if you purchase a life insurance policy with a face amount of $500,000 and your policy contains a disability income rider of 1%, your monthly disability benefit payment will be $5,000.
Although qualifying for the disability payment benefit varies by insurer, in most cases:
- You must satisfy a waiting period before payments begin
- You must have written proof that you are unable to work
- You must be totally disabled
- You must add the rider when you apply for the policy; it can’t be added once the policy is issued
To add a disability income rider to your life insurance policy, you will usually need to pay an added amount each time you make a premium payment.
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How Much Does the Rider Cost?
The cost of adding a disability income rider to your policy will depend on the same factors that determine the cost of the policy to which you’re adding the rider, including:
- Your age
- Health history
- Tobacco use
- Lifestyle/occupation
- The policy’s face amount
The underwriting department of the life insurance company you are purchasing the policy from will determine your eligibility for the rider and the premium. Approval for the rider is not guaranteed.
Who Is (And Isn’t) a Disability Income Rider Good For?
Adding a disability income rider to their life insurance policy is a good choice for anyone who needs a monthly income to meet their ongoing financial obligations.
For example, if you are actively employed and need your paycheck to pay your monthly expenses (mortgage/rent, utilities, food, clothing, etc.), having a disability income rider could potentially pay you tens of thousands of dollars in benefits during your lifetime in the event of a disability.
You should also consider adding a disability income rider even if you have group disability insurance available from your employer. Group disability insurance is usually not portable, meaning you’ll leave the benefit behind if you leave your job. Since there is no guarantee that your new company will offer group disability insurance, having this rider affords you an ongoing source of income protection.
However, adding a disability income rider doesn’t always make good financial sense. For example, if you’re nearing retirement and have substantial liquidity available through savings or retirement plans, you may not need to add this rider.
Example of a Situation in Which the Disability Income Rider Would Pay Out
For the disability rider to pay a monthly benefit, the insured typically must be totally disabled, meaning they are unable to work in any occupation for which they are suitably trained or experienced.
For example, a heart surgeon who relies on the use of their hands to perform surgery for their livelihood and who suffers a debilitating injury to one or both of their hands that prevents them from operating will likely be approved for a payout from the insurer.
Similarly, a salesperson who is unable to work because of a stroke that leaves them partially paralyzed and unable to speak will also probably be eligible for monthly benefit payments.
Steps to File a Claim for a Disability Income Rider
Filing a claim for a disability income rider includes:
- Notifying your insurer of your situation
- Completing a claim form
- Providing all requested supporting documentation (e.g., physician’s statements, Social Security benefit status reports, etc.)
- Satisfying the policy’s waiting period before benefits can begin
Your life insurance company’s Policyowner Service Department will help you complete the process.
What Is the Difference Between a Disability Income Rider and a Supplemental Disability Income Rider?
The amount of your benefit payment will be significantly affected by the type of disability income rider you have.
The “standard” disability income rider we’ve discussed above will pay the agreed-upon benefit amount written in your policy regardless of any benefits you receive from Social Security or any other government agency.
A “supplemental” disability income rider offsets (reduces) your benefit payment from the insurer by the amount of any income replacement you receive from Social Security or other government agency.
For example, if your monthly benefit from a supplemental disability income rider is $2,000 but you receive a $1,250 benefit from Social Security, your monthly payment from the life insurance company will be reduced to $750. However, with a standard disability income rider, you will receive the full $2,000 payment regardless of any benefit you receive from Social Security.
What is the Difference Between a Disability Income Rider and a Waiver of Premium Rider?
Although the two are sometimes confused, they are two very different riders.
Unlike a disability income rider that pays you a monthly benefit that is a percentage of your policy’s face amount, a waiver of premium rider simply relieves you of the responsibility of paying your policy’s premium while you’re disabled.
For example, if your monthly premium for your life insurance policy is $250 per month, the disability waiver of premium will pay that premium for you while you’re disabled. It will not, however, pay you a monthly income replacement benefit.
It should be noted that the disability income rider offered by some life insurance companies also includes a waiver of premium benefit.
What Is the Difference Between a Disability Income Rider and Critical and Chronic Illness Riders?
The primary difference between these types of riders is the method of the benefit payout.
While a disability income rider pays you a monthly benefit if you become totally disabled and can’t work, a critical illness rider pays you a lump sum benefit if you experience an illness covered by the policy (i.e., heart attack, cancer, stroke, paralysis, etc.).
For example, a critical illness rider allows you to access a portion of your life insurance policy’s death benefit and will pay you a lump sum payment (i.e., $10,000) if you are diagnosed with cancer, regardless of your ability to work. In contrast, your disability income rider will pay you a monthly benefit if you can’t work because of cancer.
Chronic illness riders also differ substantially from disability income riders. As opposed to a disability income rider which pays benefits for all types of disabling accidents and illnesses, chronic illness riders only pay a lump sum benefit if the insured is unable to perform two of the six “activities of daily living (ADLs)”, which include:
- Ambulating
- Continence
- Feeding
- Dressing
- Personal hygiene
- Toileting
Similar to critical illness riders, the benefit paid for chronic illness is an advance of a portion of the base policy’s death benefit and is deducted from the payout to beneficiaries when the insured passes away.
Will My Life Insurance Policy’s Cash Value Still Grow If I’m Receiving a Disability Income Rider Payout?
Depending on the insurer, the cash value of your permanent life insurance policy (whole life, universal life, etc.) will continue to grow, and dividends for a participating whole life insurance policy will also continue to be paid.
The cash value and dividend payments can further supplement the income you receive from your policy through policy loans and withdrawals.
Conclusion
According to the Social Security Administration Fact Sheet released in 2018, 25% of Americans will experience a disability in their careers before they retire. Because of this, the disability income rider is among the most popular life insurance riders available.
In some cases, a disability income rider may be less expensive than purchasing an individual disability income policy based on the benefit amount, your occupation, and other factors. A professional insurance agent can help you compare policies and make an informed decision.
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