Hopefully if you’re looking at disability insurance riders, you already know that you need disability insurance (DI). If you don’t, If you aren’t aware of the importance of disability insurance, please review our primer on disability insurance for physicians.
One of the benefits of having your own individual disability insurance policy is the ability to customize it to your needs. A way that this is achieved is through the use of disability insurance riders. These can all get confusing (and expensive, so you shouldn’t buy riders you don’t need!), so you should take the guidance of an independent and experienced disability insurance broker to help walk you through these options.
Of the riders that are out there, in our opinion, one of the most important riders for physicians at earlier stages of their career to buy is the future increase option rider. In this article, we’ll cover why we feel most physicians need this rider initially, as well as commonly asked questions that come up when using the benefits of this rider.Â
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Take a deeper dive into disability insurance in our guide to disability insurance for physicians primer.
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Pattern: http://www.patternlife.com/partner/psg. This convenient option will allow you to enter your information and immediately begin generating quotes from the major disability companies, as well as schedule a meeting with the Pattern team to discuss the options and figure out which plan is best for you. Many in the group have had a great experience with this process.
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What is the future increase option rider?
The future increase option rider on a disability policy allows you to increase the amount of monthly benefit you are insured to get to reflect an increase in income, without having to requalify with another medical exam at a later time. You will have to purchase this additional benefit by paying proportionately more in premium, but it is good to have this option without having to start the application process from scratch. This is not just because disability insurance premiums are more expensive if you buy your policy at an older age, but because in the interim, you could develop a medical problem that would preclude you from qualifying for disability insurance or add exclusions to your policy.
Different companies may refer to this rider with different terms, including a future purchase option, a benefit update rider, a future increase option, or a future insurability option. While some insurance companies offer this option as part of a baseline policy, most of them require purchase of this benefit as a separate rider.
How does the future increase option rider work?
Note that every company will have different rules, but essentially, how it works is that an insurance company will periodically ask you to submit your salary information. How often this is depends on the company, but for some it’s annually when you are up for renewal and payment of your premium, whereas for others it’s every 2-3 years. Some policies may also allow you to utilize the option at other times in your life, like if you lose another disability insurance policy through your employer which was limiting your ability to increase your individual rider or after a qualifying life event.Â
If your salary has increased, it will typically trigger a proposal to you to increase your monthly benefit for a proportional amount of disability premium. You have the option of accepting the maximum amount that is offered to you, or a percentage of the amount that is offered, although most policies seem to require that if you accept an increase, you accept at least 50% of the amount you’re eligible for.
If you elect not to use the rider, again, every company will have different policies, but typically if you defer the rider a few times, it will eventually get dropped from your policy, so don’t be surprised if after a few years, your letter states that you must either accept an increase or drop the future increase option rider.Â
Importantly, your original policy will remain unaffected if you elect to drop the rider, so don’t worry about losing the benefits that you’ve already contractually received from the insurance company.
Why might I need to purchase the future increase option rider?
Ideally, doctors should buy their disability insurance policy as early as possible. If it were up to us, everyone would buy their policies on their first day of internship, as we’ve seen so many examples of physicians that have become disabled during residency or developed a medical issue that either disqualifies them from getting coverage later, significantly increases premiums, or leads to coverage exclusions if their disability is related to a pre-existing condition. Also, there are very significant discounts for buying disability insurance during training, in addition to the fact that like with all insurance, premiums are the cheapest when you buy young.
So what does that have to do with the future purchase rider? Well, the amount of insurance benefit you can qualify for is capped by your earnings at the time you buy your policy. Therefore, if you buy your disability insurance during residency or fellowship, or during your first few years as an attending physician, you likely haven’t met your full earning potential, and as your salary increases and you grow accustomed to nicer things in life, you are likely going to want more coverage than then $5000-$7500/month than most early career physicians will qualify for.Â
This may sound crazy to you as a resident who’s living on far less in income post taxes, but later on, once you get used to more income and have more expenses, it’s always hard to go back. You’ll likely want to maintain your standard of living, even if you are disabled, and that is exactly what disability insurance is intended to do - allow you to enjoy the financial security and lifestyle you’ve worked so hard to build, even if you can’t earn money as a physician anymore.
What are the pros and cons to having the future increase option rider on my disability insurance policy?
We’ve gone over the major upside - having the ability to increase the amount of benefit you have on a monthly basis without having to go through underwriting again.Â
The downsides to having this rider are basically that it’s an additional cost that you pay to have the ability to increase your premium even if there are medical issues that come up in the interim. This cost is charged by the insurance companies to cover themselves for potentially increased risk along the way.
The other con is that you may sometimes feel pressured to increase your benefit even if you don’t need an increase at the time. While every company is different in how this rider is written, most will require that you exercise the option to increase the benefit once every few years, or they will remove it from your policy. This may force your hand to increase the amount you pay for your disability insurance at a time when you don’t need to, because you have an inkling that you may want to increase your benefit in the future due to increased earnings or life changes.Â
FAQ: Is there a limit to the number of times I can use the future increase option rider?
While every insurance company has its own rules, the rider can be and is designed to be used multiple times. Check your individual policy for any limitations that might exist.
FAQ: I have the future increase option rider, and I just got an email or letter asking if I want to increase my benefit. Should I do it? Is it a good deal?
It depends. More is not always better, though it can feel like it at the beginning.
The big question you should be asking yourself is if you were to become disabled today, would the amount of benefit you currently have, in conjunction with the assets that you have accumulated, allow you to maintain your lifestyle? If the answer is no, you should think about increasing your benefit.
Typically at early stages of a physician’s career, they are pretty vigilant about increasing benefits as salaries are increasing significantly. However, as you start accumulating your own nest egg, over time, in general, your need for disability insurance coverage is going to decrease, particularly the amount of coverage that you need. In fact, some people actually start decreasing their coverage to reduce premiums as they progress on their pathway towards financial independence.
We don’t think anybody should over insure themselves. That’s money that could be going towards increasing your net worth, and hopefully you’ll never need to use your disability insurance. Increasing the cost of your disability insurance when you no longer need the proportional increase in benefit does not make sense.
FAQ: I was told that if I didn’t exercise the future increase option rider, I would lose the rider? What should I do?
This typically happens after you’ve declined the increase a few times (which there’s probably a reason for). If you are well into your career and don’t anticipate that you will need more coverage than you currently have given your personal spending habits and net worth, it’s okay to let the rider go.Â
If you are worried that you just don’t want it right now, but might need it later, this warrants more thought. For example, let’s say you’re part of a dual income family and you don’t need any more benefit right now because your spouse can bring in a certain amount of money if you are disabled. However, you want to have the ability to increase the policy if your spouse stops working in the future or if you get divorced. Then you may want to keep the rider.Â
Before you go ahead and accept the entire amount, though, know that you typically don’t have to accept the entire increase proposed to you in order to keep the rider. For example, you may be able to accept 50% of the increase (with 50% of the additional cost), and still keep the rider. Call your disability insurance agent and talk through your options with them.
FAQ: Do I even need disability insurance?
We’re going to sound like a broken record, but the answer is usually yes, unless you’re financially independent and the extra thousands of dollars a month wouldn’t change your ability to live the life you want. Pease review our primer on disability insurance for physicians or some reasons why physicians mistakenly think they don’t need disability insurance if you’re asking this question, and make sure you really are safe to defer disability insurance..
Conclusion
The future benefit increase rider, also known as the future purchase option rider, is one of the most popular riders utilized by physicians, and for good reason. As your income goes up, you’ll have more salary that you want to insure, at least until you achieve enough financial stability that your nest egg can help supplement your disability insurance benefit to the age of 65. If you already own the rider on your disability insurance policy, make sure you review your options annually to make sure you’re doing what’s best for your financial situation.
If you need a place to buy disability insurance and/or need help navigating your options, check out our resources for disability insurance agents for physicians. You can also explore other disability insurance riders physicians should consider.