The catastrophic rider is an option with most disability insurance carriers, but many insurance producers are unsure of how it actually works. The intention of the rider is to pay out additional benefits in the event of a catastrophic type disability with the assumption that there are increased costs and additional expenses in that type of situation. Most have the requirement that the insured can no longer perform two of the five activities of daily living without assistance such as bathing, continence, dressing, eating, toileting and transferring. And it should be no surprise by now that each carrier has their very own spin on how this rider should work.
Consider the following scenario:
Your client, a chiropractor earning $100,000, has a severe stroke. He is no longer able to feed or dress himself. He has a monthly base benefit of $4,000/mo, a 5-year benefit duration and the max benefit catastrophic rider on his policy. In this scenario, we are assuming no recovery. How might the total benefits for total benefit plus catastrophic benefits paid annually differ between carriers?
- White Collar Carrier 1: $499,980 total benefit, $8,333/mo. of benefit
- White Collar Carrier 2: $510,379 total benefit, $9,199/mo. of benefit for initial 12 months, $8333/mo for 48 months
- Blue Collar Carrier 1: $420,000 total benefit, $4,000/mo of benefit for first five years, $3,000/mo for five years additional
Why the disparity in benefits?
White Collar Carrier 1: This carrier will pay out the catastrophic benefit amount on top of the total benefit of $4,000/mo if the insured is unable to do two of the five activities of daily living or has a severe cognitive impairment or qualifies for presumptive disability. They will cover up to 100% of income under the catastrophic rider, so with an income of $100,000 and a benefit of $4,000/mo, the client purchased the CAT rider of $4,333/mo.
- $4,000 monthly benefit x 60 month benefit= $240,000
- $4,333 CAT monthly benefit x 60 month= $259,980
- $240,000 + $259,980= $499,980 of total benefit
White Collar Carrier 2: This carrier also pays out the catastrophic benefit amount on top of the total benefit amount. However the requirements to qualify for the benefit are quite different. They do not use the ADL’s as a qualifier. To qualify for their CAT rider, the client must either have an irreversible form of senility or dementia, be presumptively disabled, or have Aphasia, Hemiparesis, Paraplegia, or Quadriplegia. Although the qualifiers are slightly different, in many of the most common CAT scenarios, a client would qualify for benefits similarly to the other carriers. They also have a few extra advantages. For the first twelve months, they will pay 120% of the CAT benefit amount. They will also adjust the CAT benefit with COLA if that rider is included on the policy. For ease of calculation, we are assuming this client does NOT have COLA on their policy, but would likely add up to an increased CAT benefit payout over the other carriers.
- $4,000 monthly benefit x 60 month benefit= $240,000
- ($4,333 CAT monthly benefit x 1.2) x 12 months= $62,395
- $4,333 CAT monthly benefit x 48 months= $207,984
- $240,000 + $62,395 + $207,984= $510,379 of total benefit
Blue Collar Carrier #1: This carrier pays out their CAT benefit quite a bit different than the other carriers. To qualify for the CAT rider, similar to White Collar Carrier #1, the client would need to be unable to do at least two of the five activities of daily living or be cognitively impaired. Instead of paying additional benefits on top of the monthly benefit, the CAT rider pays out the base benefit only (this occupation would require a split between base and SDIR to receive the max benefit) for an extended period of time. So in this case, the client would receive the $4,000/mo of benefit for the five year benefit duration, and then $3,000/mo of continuing benefit under CAT for an additional five years.
- $3000 base + $1000 SDIR= $4000/mo benefit x 60 month benefit= $240,000
- $3000 x 60 months CAT benefit= $180,000
- $240,000 + $180,000= $420,000 of total benefit
These are generalizations, meant to illustrate the importance of contract language so please check the specific product language of the carrier you are selling. Does this all seem overwhelming and make you nervous about selling disability insurance? Good news! Your very own disability expert is just a phone call away and happy to assist you in detailed quote analysis!
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