By virtually any measure, disability insurance coverage is an essential part of a fully developed financial protection program.

However, advisors need to consider many potential disability scenarios when determining the structure of the coverage for each client.

That is where riders come in. The extent to which the disability policy will provide benefits in any given situation may be determined by the riders added to the base contract. Consider the following examples:

Partial Disabilities and Residual Riders. Many disabilities involve a period of total disability followed by a gradual recovery that may include a return to work on a part-time basis.

In these situations, there are two parts to disability recovery: medical and financial. If the medical recovery means that a person only can return to work on a part-time basis, there is likely to be a financial loss resulting from part-time pay. Residual riders pay benefits for partial disabilities that result in a loss of income.

The best residual riders will pay benefits even if a claimant is working full time, as long as he or she can demonstrate that a loss of income is a residual effect of the disability.

This type of coverage is most important to fee-for-service professionals whose income may recover more slowly than their health. This happens when a claimant returns to full-time work, but payments for the services he or she performs lag months behind the point at which the service was provided.

Extraordinary Medical Expenses and Catastrophic Disabilities Riders. Every disability presents a financial challenge. The most severe disabilities can create a large financial burden. When a person is disabled to the degree that he or she is unable to perform the normal activities of daily living–such as getting out of bed, taking a bath and self-feeding–there may be a need for care and assistance that is not covered by medical insurance or even social insurance programs. The result can be a set of extraordinary expenses that are piled on top of the regular expenses of daily living–food, clothing, shelter and other necessities.

The catastrophic disability benefit riders provide additional monthly benefits to help cover these expenses.

In general, these riders pay benefits when an insured has a disability that leaves the person unable to perform two or more activities of daily living without the assistance of another person. Benefits are also payable if the insured is cognitively impaired. The benefit trigger for catastrophic disability benefits is virtually the same as that in long term care insurance. However, most catastrophic riders pay a flat monthly indemnity amount and do not require a plan of care or proof of any care expenses being incurred.

Pension Contributions and Retirement Protection Riders. While certain employer-sponsored programs (such as health insurance and group LTD coverage) may continue during a period of disability, employer contributions to a qualified retirement plan will stop. Disabled employees cannot continue personal 401(k) contributions, either. Future retirement benefits are likely to be reduced due to the interruption or complete termination of qualified plan contributions.

Retirement protection riders are an innovative form of coverage now available with some individual disability policies. The amount of coverage available under these riders is based on annual contributions to qualified retirement programs.

At time of disability, the benefits are usually paid to an irrevocable trust rather than to the insured. While the insured does not receive the benefits directly, he or she can direct the investment of the trust assets. At normal retirement age, the accumulated value of the trust is paid out to the insured.

Each of the above riders covers a distinct risk associated with disability. A basic disability policy that addresses only a total disability scenario is a great starting point for most clients. But by adding one or more of the riders, the advisor can expand the scope of protection to address a range of disability scenarios and financial problems a particular client might have.

Mark R. Ameigh, CLU, is manager of the multi-life case management unit at Berkshire Life Insurance Company of America, Pittsfield, Mass., a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, N.Y. His e-mail is mark_ameigh@berkshirelife.com.

If a disabled insured only can return to work on a part-time basis, there is likely to be a financial loss resulting from part-time pay

Some Choices

üPartial disabilities and residual riders

üExtraordinary medical expenses and catastrophic disabilities riders

üPension contributions and retirement protection riders

Source: Mark R. Ameigh, Berkshire Life Insurance Company, Pittsfield, Mass.