Disability Income 101 - Benefit Period

Trevor Tarpinian, CEPA®
Licensed Insurance Counselor
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trevor@tfi4insurance.com

Disability Income Insurance 101 - Benefit Periods

The benefit period is the maximum length of time a disability income insurance policy will pay benefits while an insured is on claim. There are typically 2 types of benefit periods. The first sets benefits to a certain age in the future to line up with expected retirement age. For instance, a to-age-65 benefit period would pay $x per month until the insured is age 65 (assuming the insured was permanently disabled). The second type of benefit period sets a flat rate amount of payable years. A 5-year benefit period would pay $x per month for 5 years.

If you receive disability income insurance from an employer-paid, group plan, I generally see the benefit period to age-65. However, I've witnessed some limited benefit periods in corporate plans, particularly in the automotive industry. The one recurring example I see, limits the benefit period to the number of years employed if an employee has worked less than 10 year with the company. So if you worked 4 years with the company, your benefit period is only 4 years. Not a great deal, but still better than nothing. In these cases, clients call me to see how they can supplement the group coverage with their own individual policy.

Basic concepts: As you review your financial and retirement goals, ideally the benefit period should match your retirement horizon. For instance, if you expect to retire at age 70, notwithstanding other factors, a disability income policy should have a benefit period of to-age-70.

Intermediate concepts: The pricing on to-age-65 benefit periods is usually more expensive than a 5-year benefit, which makes sense because on a 35-year old, the potential payout of benefit would be far greater on a to-age-65 benefit period. However if you're nearing age 60 and still need disability coverage, a 5-year benefit may provide the same coverage as a to-age-65 benefit period but with better pricing.

Advanced concepts: In a reduced or modified disability offer, consider negotiating a higher monthly benefit amount to compensate for any lost benefit period. For example, perhaps you've applied for a IDI policy with $2,000 monthly benefit and a to-age-65 benefit period. Due to medical results, the company makes an offer but only with 5-year benefit. If the applicant is 30-years-old, the potential total benefit for the policy would be $840,000 with a to-age-65 benefit period ($2,000 x 12 x 35) but significantly reduced to $120,000 with a 5-year benefit. If you can go back to the company and negotiate a higher monthly benefit (for this example, say $4,000 monthly benefit) and the company accepts that, the potential total benefit would now be $240,000 ($4,000 x 12 x 5). Although that still a quarter of the originally applied-for amount, consider two things here. In the first 5 years of disability, the insured would receive more money sooner than originally applied. Second, take that $240,000 of potential total benefit, and divide by $24,000 ($2,000 monthly benefit x 12 months). Based on the original $2,000 monthly benefit applied for, that essentially gets your insured a 10-year benefit period, up from the 5-year benefit the company offered.