Typically, Long-Term Disability (LTD) policies are “non-cancelable and guaranteed renewable” and therefore, when purchasing an LTD policy (or to better understand an already purchased LTD policy) it is important to comprehend what benefit this provision imports upon the policy.
A “non-cancelable and guaranteed renewable” LTD policy provides two substantial protections for the purchaser. The first is that so long as the insured pays the premiums (up to the maximum age stated in the policy), the policy cannot be canceled and its provisions cannot be modified.
The “guaranteed renewable” aspect provides that renewal of the policy is guaranteed, so long as the premiums are paid. This is important because it ensures that the policy will not have any provisions added or removed over time at the unilateral decision of the insurance carrier. It should also be noted that there are ways to modify a LTD policy even if non-cancellable and guaranteed. For example, riders and amendments can be purchased by the insured which will modify the insurance policy.
With respect to premiums, the insurance carrier may not raise the premiums over time; they are “locked-in” when the policy is purchased. This is a very important provision, for as a person ages, the risk of sustaining a disabling injury or of developing a disabling disease increases. As the risk of disability increases, an insurance carrier would obviously prefer to charge a higher premium based upon the higher level of risk. With a non-cancellable and guaranteed renewable LTD policy that is not permitted and the insured receives the same level of protection at the same cost throughout the duration of the policy.
One exception to the above involves provisions in the original policy allowing the insured to increase the amount of coverage in exchange for an increase in the premium. It is very important for the insured to keep track of any opportunities to increase their coverage. This is so for two reasons. First, over the passage of time inflation reduces the value of the original benefits contracted for and second, over time, policyholder expenses increase. An amount of coverage that may have seemed adequate for an unmarried person just starting out would likely not be sufficient for that same person with a mortgage payment and a family to support. It is important for an insured to periodically reevaluate their LTD policy to ensure that they have as much protection as they would need in the event of a disability.
Please be aware that the explanation laid out above is a generalization; each and every LTD policy will have some wrinkles of its own and any analysis of a policy’s language should be taken on a policy by policy basis. Likewise, this is just one of the many different provisions that may be included in a LTD policy regarding the renewability of the policy or the circumstances under which benefits or premiums may be increased, there are many others as well.