Many find finance topics confusing. A question often seen is “Does life insurance cover long-term disability?” Both policy types protect the income of the policyholder, but the payment triggers have distinct definitions, and overlap.
Like many finance-related topics, there is a simple answer (no), and a different more involved response: waiver of premium is an important rider option that protects your benefit in the event the policy owner becomes disabled, and the accelerated death benefit may act like short-term disability for a brief period.
- What long term disability covers
- What life insurance covers
- Waiver of premium rider and accelerated death benefits
What Long Term Disability Covers
If you suffered a serious accident or illness and were unable to work your income might stop coming in. Long-term disability policies cover accidents and illnesses that prevent you from working and earning an income up to age 65 in most cases.
In other words, long-term disability protects your income while you are alive. The issuing company makes benefit payments directly to the insured while disabled. Once the insured passes away, the benefit payments stop. A common disability definition entails three main points:
- You are unable to perform the material and substantial duties of your regular occupation;
- You are not engaged in any other employment or occupation for wage or profit, and;
- You are under the regular and appropriate care of a doctor.
What Life Insurance Covers
If you suffered a serious accident or illness and died, your income would most certainly stop coming in. Life insurance covers lost income due to death. When a policyholder passes away, the death benefit is paid to the beneficiaries named in the policy. The intention is to provide a lump sum of cash to offset the loss of expected income.
Life insurance does not cover long-term disability. By the definition noted above a disability requires that the policyholder remain alive. However, a common feature, and optional rider hinge upon disabling medical conditions that highlight the value of purchasing a policy: the accelerated death benefit, and the waiver of premium rider.
Accelerated Death Benefit
An accelerated death benefit may cover a short-term disability. The accelerated death benefit allows the policyholder to receive up to 75% of the policy face value if the insured is diagnosed with a terminal illness. Most people diagnosed with a terminal illness also meet the disability definition. The accelerated death benefit helps
defray costs while the policyholder is still alive.
A terminal illness is a sickness or injury that results in the policyholder having twelve months or less to live, and there is no reasonable prospect for recovery. Each state has different rules regarding the length of time the insured is expected to live.
Waiver of Premium Rider
Many life insurance policies provide an opportunity to purchase an optional waiver of premium rider. This rider waives all policy premiums in the event the policyholder becomes disabled due to an accidental bodily injury or sickness. This optional rider addresses two of the critical concerns many parents face: keeping coverage in force, and accumulating assets.
Keeping a Policy in Force
During a period of disability, it may become difficult to keep a life insurance policy in force. Without an income coming in expenses often get cut. The waiver of premium rider ensures that the policy remains in force while out on long-term disability. This works much better than allowing the policy to lapse, and then buying a new one later in life.
The cost of life insurance increases as we age; each year we are one-step closer to that inevitable day. There is no need to purchase a new policy at higher rates once the policyholder is working again.
Life insurance requires that the applicant show evidence of good health prior to purchase. The waiver of premium rider removes the worry about whether the issuing company will decline a new policy. Most people on long-term disability are unable to show evidence of good health, or that they are earning an income.
Continual Asset Accumulation
A waiver of premium rider allows cash value policies to continue growing while the policyholder is disabled. The monthly deductions include the cost of insurance and expenses. Cash values continue to earn interest at the accredited interest rates.
This rider helps make universal life insurance particularly appealing for parents seeking to accumulate assets for their family to use. Try telling your investment advisor to continue contributing into your mutual fund while you are disabled. He or she might laugh. Not your cash value policy with a waiver of premium rider!
If you are concerned about completely protecting your income from all accidents and illnesses, consider both policy types: life insurance, and long-term disability. Your waiver of premium rider will help keep your in force, but other living expenses remain which may require income.
Posted June 16, 2014 by Kevin Haney