Non-Cancelable, Guaranteed Renewable:
Special language that protects the insurance that protects your income
LISTEN: Audio mp3 (22:42 min)
Disability income insurance policies can vary greatly as to contract language. Unlike life insurance in which death is easy to define, disability insurance contains different definitions of disability, and the definition plays a large role in determining how and when benefits are paid. Besides the definition of disability, one other feature is unique to disability insurance: The renewability feature. While life insurance premiums are based on set premiums for specified periods of time, not all disability policies have the same premium structure. There are basically three types of renewability clauses for disability insurance: renewable at the option of the insurer, guaranteed renewable, and non-cancelable guaranteed renewable. Renewable at the option of the insurer allows the insurance company to change rates, contract language, and even cancel the plan. Many group and association disability insurance programs, such as those offered through employers, are renewable at the option of the insurance company. If claims are too high or some other factors make the coverage unprofitable, the insurance company can revoke the coverage. With a guaranteed renewable contract the insurance company is obligated to renew the contract but does not have to guarantee the premium structure. This format allows you to keep the coverage as long as premiums are paid, but you run the risk of eventually being priced out of the protection. This is what one disability expert calls the “Vicious Circle of Disability Coverage:” Premiums are set; claims exceed expectations, so premiums must be adjusted upward. Healthy people leave the plan, new members do not sign up, leaving only older and less healthy people in the group. Claims exceed expectations; premiums must be adjusted upward again. A non-cancelable guaranteed renewable disability policy means the insurance company cannot change the premium or the contract regardless of claims, health of the insured, changes in occupation, etc. Only the insured can make changes to the contract or cancel it. This is the standard format for most individual disability policies, and from an insurance perspective, it is the best renewability feature to have. It should be no surprise that the renewability feature in a policy has a big impact on the premium. Coverages that appear to offer the same benefits often have a substantial disparity in premium because of the non-cancelable guaranteed renewable clause. However, the end result of not having a non-cancelable guaranteed renewable feature is usually much more costly – and risky. With a non-cancelable guaranteed renewable policy, you not only have certainty about future premiums and benefits, but you also have some protection against the devaluation of premiums already paid. Consider this example:
10 years ago, you established a non-cancelable guaranteed renewable policy, paying $200/mo. for a $3,000 monthly benefit in the event of your disability. Today, the value of the $3,000 benefit has been diminished by inflation, but so has the cost of the premium, because the ratio of $200/mo-to-$3,000/mo. has stayed the same.
However, if you elected a disability contract with fluctuating premiums, it’s quite likely the ratio of premium to benefits has changed as well as has been devalued by inflation. You may continue to pay more to get less.
When you make a decision to protect your human capital, make sure your disability insurance decision is about more than price. The degree of protection hinges greatly on the soundness of the features.
