Just as riders can be added to a life policy, so too can they be added to a disability policy to customize the policy and better match the needs of the client. Riders to a disability income insurance policy include:
Future purchase option; Cost of living adjustment; Waiver of premium; Rehabilitation benefit. Future Purchase Option (FPO)
The future purchase option (FPO), also called the future income option (FIO), allows the policy owner to increase the amount of monthly income benefit to keep pace with his or her growing income, with no evidence of medical insurability. The premium will be increased in step with the increase in coverage. Income will have to be proven when this option is used.
The premium may also be adjusted if the occupational classification of the insured changes. The benefit period of the additional income will be the same as the original policy.
The future purchase option is available only as a rider to a policy and must be exercised before the insured is 50 years of age.
―Some years ago I took out a disability income policy based on the salary I earned as a plant foreman. Last year I was
promoted to plant supervisor. The only way I could increase my disability coverage to keep pace with my new salary was to apply for a new policy. Unfortunately, since I applied for my first policy I have been diagnosed with rheumatoid arthritis. Because of this, I can’t get a new policy. I wish now I had added the future purchase option to my first policy. It would have allowed my coverage to keep pace with my increasing salary.‖
+ FILE
See file 18 for examples of how these riders are used.
Cost of Living Adjustment (COLA)
The cost of living adjustment (COLA) option addresses the impact inflation has on the purchasing power of a fixed income. Fundamentally, a person who lives on a fixed income — that is, receives the same amount of money for a prolonged period of time — is able to buy less and less because inflation continually causes prices to increase.
The Cost of Living Adjustment rider is selected by the policy owner to increase benefits based upon the Consumer Price Index (CPI). If increases are compounded monthly, a more generous benefit will be received. The policy owner may find a ―cap‖ on how much benefits can increase; once the cap is reached, there are no further COLA adjustments.
This rider is essential for a young policy owner; if the policy owner is disabled for life at a young age, the purchasing power of the benefit would be greatly diminished as the years progressed in the absence of a COLA rider.
Waiver of Premium (WP)
The waiver of premium rider on a disability income policy transfers the payment of the policy premium to the insurer, while the insured receives disability benefits — exactly the way it works when this rider supplements a life insurance policy. The waiver of premium benefit with a disability income policy usually begins within one to six months of disability; in other words, if the waiting period is three months, premiums will be paid by the insured for three months and no longer. Also, the premiums paid during this time may be returned, if the rider is structured do so.
Rehabilitation Benefit
The rehabilitation benefit will cover the cost of any retraining or rehabilitation that is not covered by other programs, such as those provided by the government. Its
―I have a disability income policy to ensure there will be an income available for my family if I become sick or injured. My COLA option means that, even if I make a claim in ten years, the benefit will have kept pace with inflation.‖
purpose is to provide the disabled with a new occupation on a full-time or part- time basis.
Other Common Riders
Return of Premium: Some or all of the premiums are returned if claims are less than 20% of premiums paid and waived.
Lifetime Injury: Extends injury benefits beyond 65 for life. Lifetime Sickness and Injury: Extends total benefits for life.
Zero-Day Qualifying: Removes the requirement for total disability to occur before residual benefits can be paid.
First-Day Hospital Coverage: Pays benefits from the first day of disability, when the insured is confined to hospital.
Accidental Death and Dismemberment (AD&D): Just like the AD&D rider to a life policy, the AD&D rider to a disability income policy pays a lump sum for accidental death and all or part of that sum for dismemberment (loss of limb, sight, etc.), depending on the loss.
Summary of Life Insurance Riders
Type of Policy Best for people who…
Guaranteed Insurability Benefit
are younger
wish to guarantee future insurability
are anticipating increases in their future insurance needs Accidental Death
Benefit are concerned about the chance of dying in an accident work in an occupation in which there is a chance of accidental death
Accidental Death and
Dismemberment
are concerned about the chance of dying in an accident work in a dangerous occupation
participate in dangerous hobbies Waiver of
Premium would enjoy the security of having the insurer continue to pay their premiums in the event of a disability Accelerated
Death Benefit wish to obtain benefits similar to a critical illness policy and/or a long-term care policy without acquiring an additional policy
Parent Waiver are purchasing insurance for dependent children
Term Rider are purchasing permanent insurance, but cannot afford the full amount of insurance necessary to meet their needs are purchasing permanent insurance, but would like the flexibility to reduce the amount of coverage at a later date (i.e., when the mortgage is paid off)