What are Disability Insurance Riders and Which Are Most Common?

What are Disability Insurance Riders and Which Are Most Common?

| December 28, 2020

What are Disability Insurance Riders and Which Are Most Common? 

Just like cars have a standard model, disability insurance has a base policy.  Just like cars have options that can be added to the standard model, so does disability insurance.  Optional "add-ons" to the base policy of disability insurance are called disability insurance riders.  Riders allow consumers to individualize--to add optional features -- to their base policy, which address their specific income protection needs.  

It is important to note that unlike standard car models that are normally consistent across dealerships, the coverage included in base disability policies, differ from provider to provider.

Most Common Disability Insurance Riders

The following disability insurance riders are among the most popular:  

  • Residual Disability Benefit
  • Cost of Living Adjustment (COLA)
  • Future Increase Option (FIO)
  • Automatic Benefit Enhancement (ABE) 
  • "Own Occupation" Total Disability

Residual Disability Benefit

In order to receive base disability benefits, the policyholder has to demonstrate the inability to work.  The benefit may be suspended once work is resumed.  A residual benefit allows the policyholder to receive some of the disability benefit once work resumes, even part-time work. 

The residual disability benefit is proportionate to the earning power you've lost, regardless of how many hours you work.  As an example, if you suffer a 40% loss of pre-disability income, you'll receive 40% of your total base disability benefit for as long as you are disabled (up to the end of the policy's benefit period.)

Residual benefits apply to temporary disabilities.

Cost of Living Adjustment (COLA)

Inflation erodes buying power.  This problem is even greater for people with disabilities because they cannot increase their income to compensate.  A disability insurance solution to this problem of inflation lies in COLAs.

A COLA rider adjusts the amount of monthly disability benefits received by the insured each year during their disability.  The adjustment that is made in the monthly benefit depends upon the way the rider is designed. 

Future Increase Option (FIO)

As your career progresses, your income is most likely going to increase with your experience.  Disability insurance replaces a percentage of your current income if you become sick or injured, but what about your future income? 

That's where a future purchase option rider is helpful.  It allows the insured to increase disability income protection without the normally required medical exam to show medical insurability.  

Automatic Benefit Enhancement (ABE)

This is one of the most convenient disability insurance riders.  It helps keep your disability insurance benefit aligned with standard annual income increases, which one might experience when healthy.  It is applied to eligible policies and provides an annual benefit increase each year for five to six years

Your premium will also increase each year as a result of the increased benefit. Annual benefit enhancements occur automatically, but you can easily opt-out in any year.  

"Own Occupation" Total Disability

"Own Occupation" disability insurance riders mean that a disability is determined by your inability to perform the duties of your specific occupation or profession.

By contrast, "any occupation" disability coverage does not consider you disabled if you are capable of performing the duties of any occupation for which you are reasonably suited.  In other words, if you purchase "any occupation" coverage, you may not receive any cash benefits from another occupation even though you can perform the duties of another, job, but  cannot physically tolerate the rigors of your specific occupation, e.g. doctor, lawyer, teacher. 

Choose the Riders that are Best for Your Circumstances

These are some of the more common disability insurance riders.  Different insurance providers offer variations of the above rider s and have different ways to apply them.  Many are available only at the policy's initial issuance, others may be added on later.  

Make sure to do your homework.  Read the small print.  Ask numerous questions to your insurance provider.