Just like we have homeowners’ insurance to protect our house or auto insurance in case of an accident, disability insurance (“DI”) protects our income in case a long-term event prevents us from working. But what if we aren’t at our full earning potential right now? How can we lock in our insurability when we are younger – and likely healthier – but still have the opportunity to increase our disability insurance in the future? Most insurance carriers offer an optional rider for you to easily make this change without going back through medical underwriting!
How disability insurance benefit is determined:
Individual disability policies have monthly benefits that are calculated based on your current income. Most carriers will insure up to 60-80% of an individual’s income. If you have group long-term disability benefits through your employer, carriers will take this amount into account when determining the total amount you are eligible for with an individual disability policy.
What is a future increase option?
This is an optional rider that you can add onto your disability insurance policy that allows you to increase your monthly benefit amount without having to go back through medical underwriting. When your initial policy is issued, the future increase rider has a pool or maximum amount that you can increase the monthly benefit by – all you would need to provide is financial documentation (tax returns, W-2s, P&L statements) that supports your increase in income, which would translate into an increase in monthly benefit on your DI policy. This rider does come with an additional charge – meaning your overall premium is incrementally higher to have this rider on your policy!
If you do not have a future increase rider on your disability policy, you can choose to apply for additional disability insurance, which would involve both medical and financial underwriting.
Why does a future increase option matter?
Depending on your profession, you may have a training period that you need to complete before you start to earn your occupation’s average salary. A great example is medical residents and fellows: although they are in the workforce, they are not near their average or maximum earning potential while they complete training. If they apply for disability insurance while they were still in training, they could add a future increase option rider that would allow them to increase the monthly benefit on their policy once they become an attending physician in their field. If they waited to apply for disability insurance after they completed training, they run the risk of not being as healthy as they were post-medical school. Policy premiums are generally based on a combination of age and health, so a policy would likely be more expensive.
Another future increase option example would be for a new or younger business owner. As they are getting their business/practice/client base off the ground, their profitability or income may be significantly less than it would be once the business matures. The same goes for a working professional who is expecting a larger pay increase in the next couple years. If they apply for disability insurance to lock in their insurability and health rating, they can leverage a future increase rider once their income increases or reaches their expected earning potential.
Depending on your occupation, a future increase option may be a valuable rider to consider on your disability insurance policy. We encourage you to ask your Wealth Coach if you’d like to learn more or think it may be worth exploring when you are applying for disability insurance.
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