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Can You Change Your Disability Insurance Coverage Over Time?

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Many hardworking professionals purchase disability insurance to safeguard against an illness or injury that renders them unable to work for an extended period of time and the financial uncertainty that follows.

However, many policyholders do not revisit their coverage after they become insured, even as their income grows and circumstances change. Since disability insurance covers a fixed amount of your earnings at the time of purchase, this means policyholders may only receive benefits totaling up to 60 percent of a much smaller income than they currently earn.

This brings us to a question many professionals do not think to ask: can you adjust your disability insurance policy over time?

Here are two optional riders that may help your disability insurance coverage grow with you to fit your changing needs.

Guaranteed insurability

According to the 2016 WorldatWork Promotional Guidelines Survey, the average size of promotional salary increases, as a percentage of base pay, are increasing among hourly and salaried employees, to 8.1% and 9.3% respectively.

As your income increases, you may take on bigger expenses due to starting a family, purchasing larger homes, investing in higher education and more.

As a result, your expenses could easily exceed the benefits provided by the disability insurance policy you purchased years ago.

Fortunately, many individual disability insurance policies offer riders that allow you to increase your monthly benefit. Known as guaranteed insurability, guaranteed purchase option or future increase option, this rider typically lets you purchase additional coverage every three to five years on the anniversary date of you original policy.

Some individual disability insurance policies may not charge for the guaranteed insurability rider, but most will require an extra premium, which you will pay at the time you choose to exercise the rider and purchase additional coverage. This premium will be calculated on your age at the time you purchase the new coverage.

Rider limitations

You are typically not required to undergo any additional medical underwriting for future purchases under the guaranteed insurability rider.

However, there are usually limitations to the increase amount; generally, any future purchases are limited to half of your original benefit amount.

You may also have to undergo financial underwriting at the behest of the insurer prior to each purchase, which will prove that your earnings actually warrant additional coverage and will avoid over-insurance.

If you do not meet the financial requirements, your insurance company may terminate the rider prematurely.

There are also age limits - in many cases, you cannot purchase and/or exercise the rider after the year you turn 40.

Who should consider it?

The guaranteed insurability rider is optimal for young adults who are just beginning their careers and highly skilled professionals who are likely to see their income grow substantially over time. This can include those working in medical, dental and chiropractic fields, as well as lawyers and engineers.

This rider can also be beneficial to workers with a family history of illness. If you were to develop this illness later down the line, it could be difficult or impossible to buy more insurance without such a rider in place.

Automatic benefit increase

While the guaranteed insurability rider provides you the option to increase your monthly benefit as needed over time, the automatic benefit increase rider works a little differently. As the name suggests, this rider automatically increases your total monthly benefit on a yearly basis over a specific term, which is usually five years.

Also referred to as an automatic increase and/or automatic benefit enhancement, this rider is meant to increase your base coverage over time in order to account for anticipated increases in income and to keep up with inflation.

How it works/limitations

The annual coverage increases typically range from three to five percent, topping out at approximately 25 percent over the course of five years. Initially, you will not be required to provide proof of medical or financial insurability to purchase the rider, but you cannot be disabled at the time of purchase.

After this term ends, you may be required to provide evidence of increased income in order to renew the rider. In order to renew this rider, you may have to provide proof of increased income.

You also may not be able to utilize the automatic increase rider beyond a certain age, usually ranging from 50 to 55.

There is usually no cost associated with adding this rider to your policy. Instead, you would pay a premium for each additional purchase, which is based on your age at the time of purchase.

It is also likely you will pay an increased premium if you choose to renew the rider.

Who should consider it?

The annual benefit increase rider is ideal for professionals who anticipate steady increases in income over the course of several years. This rider may appeal to the same policyholders who seek guaranteed insurability, such as medical professionals, attorneys, IT professionals and even sales managers.

Have policy questions?

If you are unsure if these riders make sense for your personal and financial circumstances, it may help to consider the following questions:

  • Do you work in a profession where it is likely to see significant salary increases in the first several years?
  • Do you anticipate these salary increases to last into your 40s and 50s?
  • Is it worth the additional cost to secure additional coverage?
  • How much do you value the ability to maintain your purchasing power?

If you have additional questions about your disability insurance policy, or about whether guaranteed insurability and automatic benefit increase riders make sense for you, contact a top-rated insurance attorney for a free policy analysis and consultation.

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