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When you move money into your retirement investment accounts, it is easy to envision a secure and enjoyable future.  But it is difficult to get enthusiastic about the prospect of paying for disability insurance, especially long-term disability insurance. No one wants to think about a future where a physical or mental disability has such a significant impact on their life that they are unable to practice the profession that they’ve built their life around.

But that future is a real possibility for professionals in every field. Statistics from a variety of sources show that approximately 20-25% of adults will suffer a disability at some point before they reach retirement age. To prepare for that possibility, it is important to have a plan to provide the resources you will need to support yourself, your household, and your business interests. For many professionals, this plan includes long-term disability insurance. But not all disability policies are created equal , so it is critical to not only ensure that you have insurance but also that the insurance includes the provisions that are right for your situation.

At Seltzer & Associates, we have been helping professionals resolve disability insurance disputes for decades, so we know that many times, policyholders believe that they are covered in all situations only to learn that exclusions, limitations, or omissions in their policies leave them with inadequate protection. We do not sell insurance, so when we suggest that professionals consider making changes in their policies, we have nothing to gain. We just want policyholders to understand their coverage. If you’d like to discuss the terms of your policy with us, we invite you to schedule a free consultation and policy review. For general background information, here are some factors to consider about whether your disability insurance policy includes the provisions you need to account for the effects of inflation.

Why Inflation Protection is So Crucial for Professionals

Professionals in the medical field, as well as those practicing law, accountancy, or other executive positions, have invested an unusually large amount of time and resources in education and in building a reputation based on expertise. This investment pays off in a variety of ways while you are working and practicing the profession. But when something happens to hinder your ability to practice, everything may suddenly be put at risk, including the years spent building your practice. Even with partners, it will not be possible to continue operating the practice at the same level.

Your personal, financial, and professional life could suffer for a substantial period of time through no fault of your own. A traffic accident or debilitating illness like cancer can turn your life upside down in an instant without warning. If that were to happen, disability insurance can ensure that you have resources to maintain the lifestyle that you and your family enjoy. 

But costs rise over time, and it is important to ensure that you are prepared to meet rising costs if the disability continues to prevent you from resuming your practice. Will there be money to pay for college expenses for your children? Will you have the funds to keep up with home maintenance or replace your vehicle? The right provisions in your disability insurance can ensure that you are able to face rising costs without stress. It is important to consider your options and choose the one that makes the most sense for your situation.

Consider a COLA Rider

One of the most popular inflation-protection provisions in long-term disability insurance policies is a cost-of-living adjustment (COLA) rider. A COLA provision automatically increases the benefits paid as time goes on to adjust to increases in the overall cost of living.

Customizing Your Policy to Add a COLA Provision

This type of provision is usually not going to be a standard feature in a disability insurance policy, particularly if it is a group policy. In fact, to get full coverage and protection, it is usually necessary to purchase an individual private disability insurance policy on your own rather than (or in addition to) a group policy provided through an employer. An individual policy allows you to control the terms, whereas a group policy contains terms negotiated by the employer in a way that enables them to receive a discounted rate.

COLA riders are not standard, so it will be important to review and compare the terms offered. One term to consider is when the COLA provision takes effect. In many policies, COLA terms will not apply until the policyholder has been receiving payments from a claim for at least 12 months.

How COLA Increases are Calculated

COLA riders may use different approaches to calculate the amount of increase that will be applied to policy benefits.

• Indexed to the CPI – Many policies specify that benefits will increase in an amount that is based on increases in the Consumer Price Index. It is important to note which index is referenced, because some are based on urban prices nationwide, while others are based on local geographic areas.
• Fixed percentage—Some policies include clauses that provide for an increase in benefits based on a pre-set percentage, regardless of changes in economic data. For instance, a policy might offer a rider that increases benefit payments by 3% each year.
• Compound inflation—A policy that provides for an increase based on a percentage can be based on simple interest or compound interest. Simple interest adds a specific percentage of the initial benefit amount, whereas compound interest recalculates the percentage based on the new, increased benefit amount each year.  Over time, compound interest payments will pay significantly more benefits.

It is not always immediately obvious which method a policy rider will apply to calculate COLA increases, so don’t be afraid to get clarification. It is better to understand the application of the provision before paying for it than to have to work with a Pennsylvania disability insurance attorney to take the insurance company to court later to get them to honor terms intentionally left vague to mislead policyholders.

Alternate Option: Buying More Coverage

For some professionals, rather than paying extra to add a COLA rider to a disability insurance policy, it makes more sense to increase coverage, either by amending the policy or by issuing a new policy. It is important to complete a cost-benefit analysis to see which option is preferable in your situation.

Purchasing additional base coverage provides higher benefits that take effect immediately. This option may be preferable for professionals who are well-established in their careers and have invested years in their practice. A COLA rider may be more economical over the long-term and might be a better choice for younger professionals.

To understand the difference, consider a hypothetical example: a dentist who becomes disabled at age 40 and remains unable to work until age 65. The example assumes that the dentist spent the same amount on coverage, but in the first scenario, that money was used to purchase a policy that provided $10,000 per month in basic benefits with a COLA rider, while in the second scenario, the money was spent on a policy that provided $13,000 per month in benefits but did not include any COLA provisions.

In the first year of disability, the dentist would receive $10,000 per month with the COLA policy and $13,000 per month from the policy with the higher base benefits. The $3,000 difference per month amounts to $36,000 per year.

By the fifth year of the disability, the policy with the COLA is paying $11,255 per month, so the policy with the higher base rate is still providing more income, but the difference is not nearly as pronounced. At $1,745 more per month, the policy with the higher base rate and no COLA provides $20,940 more than the policy with the COLA.

However, by the tenth year of disability, the rates are nearly identical. The COLA policy now provides $13,047 per month. If the disability continues for another 10 years, so that the dentist has reached age 60 and been unable to work for 20 years, the policy with the COLA provision will pay $17,535 per month, while the policy with the higher base rate initially is still only paying $13,000 per month. That amounts to an additional $54,420 per year for the COLA policy.  

Obviously, the age of onset and the duration of the disability make a huge difference in determining which option provides better value. No one can predict these aspects in advance. But if you’re considering the purchase when you only anticipate working another ten years or so, running the numbers can make your decision easier.

Factors to Consider

It is important to make a choice rather than wait until a need arises. Policyholders cannot add a COLA provision after they become disabled. Some policies offer the ability to save money by purchasing a delayed COLA rider that does not take effect for at least four years.

It is also important to pay attention to the fine print. Is the interest simple or compounded? If a COLA rider is linked to the CPI, are there minimum or maximum increases written into the policy?

You need to review the details not only when purchasing a policy but also when filing a claim. Insurance companies do not always calculate benefits appropriately, and as the example shows, this can make a tremendous difference in the amounts you receive over time.

For Help Understanding or Collecting Disability Insurance Benefits, Call on Seltzer & Associates

An investment in disability insurance can provide essential resources if an accident or illness prevents you from continuing in your practice. But you need to be wise about making the investment and diligent in pursuing your claim when the time comes. 

Insurance companies can make it very difficult to receive full benefits, and that’s why we founded Seltzer & Associates. We have decades of experience fighting for policyholders in Pennsylvania when insurance companies try to avoid their disability insurance obligations. We fight for fair coverage so that our clients can focus on recovery and rebuilding their lives.

If you’d like us to review the terms of your disability insurance policy to help you understand what is covered and what may be excluded or limited, we invite you schedule a free consultation. We are also ready to help if you need to file a claim or appeal a denial or termination of your policy benefits. To schedule a free consultation, call us at 888-699-4222 or contact us online at your convenience.