After our discussion of the likelihood of disability and the sources of income available to disabled individuals, it should be clear that the only reasonable choice as a disability income source is a disability income insurance policy. Let's turn our attention now to the significant definitions and provisions of that policy.
A disability income insurance policy's renewability provision is important because it defines if, and under what conditions, the insurance company can change or cancel the policy or increase its premium.
There are four different renewability provisions that may be contained in disability income insurance policies:
· Noncancellable & Guaranteed Renewable
· Guaranteed Renewable
· Conditionally Renewable
· Optionally Renewable
Noncancellable & Guaranteed Renewable
Disability income insurance coverage that is Noncancellable & Guaranteed Renewable provides the greatest amount of protection to the insured and is, as a result, the most expensive of the four options. In coverage that is noncancellable and guaranteed renewable, the insurer makes two important guarantees:
It will not increase the premium for the issued coverage during the noncancellable period and
It will not refuse to renew the policy nor will it unilaterally modify any provision of the policy during the guaranteed renewable period.
Disability income insurance policies issued on a noncancellable and guaranteed renewable basis generally provide these two premium and renewability guarantees only until the insured's age 65. However, during that period, the premium is guaranteed to remain the same even if the insured changes his or her job to a more hazardous occupation.
The attorney who purchased a noncancellable & guaranteed renewable disability income policy and who, subsequently, became a stock car driver would continue to have the same coverage at the same premium as long as he or she paid the premium when it came due.
Coverage under early noncancellable & guaranteed renewable disability income policies generally terminated completely at the insured's age 65 -- the age at which workers were usually thought to retire. As many individuals, especially professionals, continue to work well past age 65 this guarantee is changing.
More recently issued disability income policies enable the insured to continue coverage beyond his or her age 65 on a modified basis, provided the insured certifies annually that he or she is working for at least 30 hours each week. The coverage that continues beyond age 65 is, however, modified.
The modifications to noncancellable and guaranteed renewable disability income policies for insureds that have attained age 65 usually affect two areas:
Duration of coverage
The disability income policy premiums, which were based on the insured's age at issue and guaranteed not to increase before age 65, change. At the insured's age 65 and later, policy premiums are normally increased to reflect the then-current age of the insured. Sometimes the premium for the same coverage increases significantly.
In addition to the change in premium following the insured's attainment of age 65, the policy's benefit period may also change. The benefit period -- which may have extended for as long as the insured's lifetime -- is typically reduced to 12 or 24 months for coverage maintained beyond the insured's age 65.
Coverage extension, allowed principally on policies issued to the higher occupational classes, is in response to the desire by many professionals to continue practicing beyond what had traditionally come to be regarded as the normal retirement age. Physicians, attorneys and accountants that elect to practice their profession beyond age 65 can now continue their disability income coverage, albeit on a modified basis.
Disability income insurance coverage that offers a noncancellable & guaranteed renewable provision is usually available only on disability income insurance policies issued to applicants in the professional or managerial occupation classes. While this renewability provision is normally available only to these white collar workers, it is sometimes seen on high quality coverage offered to skilled craftsmen.
Noncancellable and guaranteed renewable coverage offers the greatest amount of protection to the insured and has the highest premium when compared to identical coverage offered under the other three provisions.
As we saw, the noncancellable & guaranteed renewable provision guarantees that both the coverage and the premium will not change. As we turn our attention to other renewability provisions, we will see that those coverage and premium guarantees weaken. Having said that, let's now consider the second of our renewability provisions -- the provision known as Guaranteed Renewable.
The fundamental difference between Noncancellable & Guaranteed Renewable coverage and coverage that is just Guaranteed Renewable lies in the insurer's right to change premiums for the coverage. However, the insurance company's right to change premiums is a limited right.
Under the Guaranteed Renewable provision, the insurer can't just increase your premium because of your claims history. Instead, however, the insurer can increase the premium for all of the policyowners in your class. The Guaranteed Renewable provision normally contains language stating that the insurer:
retains the right to increase premiums on a class basis.
We will discuss the issue of insured classes later when we examine some of the underwriting considerations. As you might expect, since the protection afforded by guaranteed renewable coverage is somewhat less than that afforded by coverage which is noncancellable & guaranteed renewable, guaranteed renewable coverage normally has a lower premium than otherwise identical noncancellable coverage.
Moving down from the provision conferring the greatest protection, we come to the third type of renewability provision, known as Conditionally Renewable. The Conditionally Renewable provision gives the insured a conditional right to renew the policy, but the insurer retains the right to refuse to renew the policies of those insureds in a specific class, and rate increases are also possible.
A typical conditionally renewable provision contains language as follows:
The insured may not change his or her occupation to one considered more hazardous.
Since the insurer retains considerable power to cut its claims losses by refusing to renew coverage under a conditionally renewable provision, policies issued with this type of renewability provision generally have significantly lower premiums than either noncancellable or guaranteed renewable coverage. The lower premium comes with an equally significant reduction in guarantees. However, as long as the insured meets the conditions of renewability and remits the required premium on a timely basis, the insurer guarantees not to cancel the policy.
A conditionally renewable provision is generally offered to insureds in high-risk occupations and is frequently found in group or association type coverage.
The fourth and final type of renewability provision offers the least security for the insured and has little application in modern disability income insurance. It is known as optionally renewable coverage. Under an optionally renewable provision, premiums may be increased and benefits modified on a class basis. In addition, the insurance company may cancel an individual policy -- but, only on a policy anniversary or on a premium due date.
While conditionally renewable and optionally renewable provisions may be found on some association -- type disability income policies, they are seldom found in other disability income delivery systems. Fortunately, most individually underwritten disability income insurance policies are issued on a noncancellable & guaranteed renewable or just guaranteed renewable basis.