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Disability insurance riders: Which ones to add (& which to skip)

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At its core, disability insurance protects you in the event a serious injury or illness limits your ability to work and earn an income.

But there are a number of moving parts to disability insurance. Some of those components are available in the form of optional riders. These add-on features enable policy owners to personalize and enhance their coverage. Disability insurance riders help customize a policy to fit a person’s individual needs and preferences.

No disability insurance policy is one-size-fits-all. The additional benefits that make sense for one person may be completely unnecessary for the next. In this article, we cover all of the disability insurance riders you need to understand, including:

Read on to learn more.

Residual disability rider

Some disabilities prevent you from working at all. Others only partially limit your ability to make a living. But working less because of a disability will negatively impact your income.

To protect against partial income loss, most policies offer residual disability benefits. Residual disability is generally defined in one of two ways:

  • Being able to perform one or more, but not all, of the material and substantial duties of your occupation.
  • Being unable to work in your occupation for a set percentage of the time.

A residual disability rider can supplement your income. It provides benefits if you are still working and not considered totally disabled.

Residual benefits are typically calculated as a percentage of:

  • The policyholder’s loss of earnings; AND
  • The benefit they would receive if they were unable to work.

It essentially makes up the difference between what you earned before disability and what you can still earn with your disability.

This is a disability insurance rider most applicants should consider. This is especially true if working fewer hours or handling less responsibility would cause a loss of earnings.

Residual disability benefits typically have a minimum benefit based on the percentage of the amount guaranteed for total disability. A common minimum is 50 percent benefit, which means your policy would pay at least 50 percent of what your disability benefit would have been if you were completely unable to work.

Residual benefit riders also don’t get triggered until you’ve lost a minimum amount of income, such as 15 to 20 percent of your pre-disability income.

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Future increase option rider

If you anticipate significant income increases after you are issued a policy, you should strongly consider this rider. It will help ensure your disability insurance policy benefits keep pace with your income.

A future increase rider, also known as a future purchase option, enables you to increase your coverage amount. You can do this at designated future dates. Plus, you can do so without going through underwriting again.

How much and how often you can increase your disability benefits depends on your policy. Your future increase option may be exercised:

  • Annually up to a certain age.
  • After a major life event, such as marriage or the birth of a child.
  • If your income increases by a designated percentage during a given period. For example, a 30 percent income hike during a three-year period may trigger the option.
  • If you lose or have a reduction in your group coverage. The future increase option can replace it with higher individual coverage.

There is typically a maximum amount you can increase your coverage by. You can decline the increases. If you elect a benefit premium, it will increase your premium.

Student loan rider

Disability does not often result in student loan debt forgiveness. A few carriers offer an optional rider that addresses student loan debt. A Student Loan Rider will cover some or all of your student loan payments during a period of disability.

It’s a relatively inexpensive option to add. However, it’s only recommended for people who have heavily invested in their education. It can help increase your coverage if:

  • Your maximum disability benefit falls short of covering monthly expenses.
  • You have a monthly student loan payment of at least $250.
  • Your payments will last 10 to 15 years.

Limitations on student loan riders typical include:

  • Proceeds are only available for a maximum period. Most stipulate 10 years or 15 years.
  • The maximum period begins when the policy is issued. It does not begin when disability benefits begin. For example, say you get a 15-year student loan rider. You incur a disability five years after you purchase the policy. In this scenario, you will receive student loan rider benefits for 10 years.
  • There are minimum and maximum benefit amounts. Minimum monthly amounts range from $100 to $500. Maximum benefits range from $2,000 to $2,500 a month.
  • Rider benefits are only paid for total disability. If you can still work in some capacity, you would not be eligible for rider benefits.

Non-cancelable feature

This means the insurer cannot change any part of the policy, including the premium amount, or cancel the policy for any reason. If you are older, this may not be a necessary feature because it’s more unlikely that a carrier would reprice your policy. But if it fits in your budget, most applicants should consider having it.

Retirement protection rider

Several carriers pay benefits to replace contributions made to a retirement plan. Separate contributions are placed by the insurer in a trust and invested. Once you reach a certain retirement age, the trust will pay you income.

Presumptive disability rider

Insureds who suffer a presumptive disability typically will not have to wait through their elimination period to receive benefits. Policyholders also would not have to undergo medical examinations to show that their disability continues to impair them. Most carriers consider the following conditions to be presumptive disabilities:

  • Loss of sight in both eyes
  • Complete loss of hearing
  • Loss of speech
  • Loss of the use of your hands
  • Loss of the use of your feet
  • Loss of limb

Survivor benefit

If you die while still receiving disability insurance benefits, a contract with this provision will continue making payments to an eligible survivor, such as a spouse or dependent.

Waiver of premium rider

This provision waives the premiums on your policy if you’re disabled and receiving benefits. Premiums resume when you’re able to work again.

Catastrophic disability rider

Most major carriers offer a catastrophic disability rider. This disability insurance rider can help pay for the care needed due to a catastrophic injury or illness.

A catastrophic disability can be defined in one of the following ways:

  1. You suffer a complete loss of at least one of these senses: speech; hearing in both ears; sight in both eyes; or use of both hands, both feet, or one hand and one foot.
  2. Your condition prevents you from performing at least two of the six activities of daily living (ADL) without assistance: bathing, dressing, eating, using the restroom, continence, and transferring.
  3. You have severe cognitive impairment as measured by accepted medical tests.

The risk of a catastrophic disability is relatively low. Therefore, the rider is inexpensive to add. However, there are rider limitations:

  • The rider may be restricted to applicants of a certain age. Age 50 is a typical cut-off.
  • Insurers usually cap catastrophic benefits.
  • Often, the base policy will not allow a catastrophic benefit to exceed three times the base monthly benefit.
  • Others may prevent you from collecting more benefits than what you made before a disability. Say you earned $20,000 a month before you were disabled. Your base policy pays out $15,000 in benefits. In this scenario, your catastrophic benefit rider would be limited to $5,000 a month.

Cost-of-living adjustment rider

A Cost-of-Living Adjustment (COLA) Rider will increase your benefit amount each year you are disabled. The idea behind this rider is that your expenses — i.e., your cost of living — increase each year with inflation.

Because this rider can be relatively expensive, it’s not recommended for all applicants. The previously mentioned future purchase rider will help keep your benefits in line with inflation up until you file a claim. A COLA rider only increases your benefit amount once you’ve started collecting benefits due to a disability.

The younger you are, the more you should consider a COLA rider. Without the rider, your benefit amount will remain the same during your benefit period.

Why does this matter? Say inflation averages 3 percent a year. A level benefit amount will have a third less purchasing power in 15 years. With a COLA rider, your benefits will keep pace with inflation. You, therefore, won’t lose purchasing power.

Some policy riders increase the benefit based on a fixed percentage, such as 3 percent annually. Others use the Consumer Price Index. Some disability insurance carriers offer a choice between the two.

Return of premium rider

This rider returns some of the premiums you paid if you decide to cancel your disability policy. This disability insurance rider is more expensive than others, so it’s not recommended, especially since most people will not want to cancel their policies.

Learn More: Return of Premium Disability Insurance

Bottom line

As you consider which riders to add to your disability policy, keep in mind that:

  • A rider on one policy may be part of another policy’s base coverage. Own Occupation coverage is one example.
  • While some riders are available at no extra charge, many disability insurance riders will increase your premium above the base policy amount.
  • You typically have to purchase a rider when your policy is issued. You cannot add them later. Carefully consider what options you need before signing on for coverage.
  • You can drop certain riders after purchase. But you will not be able to reinstate them.
  • Riders that require extra premium add to the selling agent’s commission. That means the agent has a financial incentive to tack on as many riders as possible. Make sure the ones you select are right for you.

Ultimately, which disability insurance riders you decide to add on and which you decide to pass on is up to you.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published May 1, 2020
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