Non-cancellable and guaranteed renewable long term disability insurance

Looking into long-term disability insurance? Along with life insurance, it’s among the most important components of a family's financial confidence: disability insurance protects your ability to earn an income — one of your most valuable assets. A lot of people underestimate their chances of disability, but the reality is that 1 in 4 workers will become disabled during their working years.¹ And when it happens, disability can last longer than you might think: the average length of a disability insurance claim is 34.6 months.² Long-term disability insurance (or LTD) helps ensure that if you're unable to work due to an extended disability, your policy will replace a portion of your income. That money can be used to cover medical bills and monthly expenses, help you and your family to maintain your lifestyle.

Why you should look for a non-cancellable and guaranteed renewable policy

An individual LTD policy is a contract between you and an insurance policy to pay benefits if you become disabled, according to the terms you both agree to in writing. Like any legal document, it’s important to ensure you understand what all those terms and provisions mean but this article will focus on these two specific terms: what they mean, why having both is beneficial, alternative options, and the implications of having — or not having — a non-cancellable and guaranteed renewable policy.

What does "non-cancellable" mean?

A non-cancellable policy is a type of insurance policy that remains in effect as long as required premiums are paid. This provision guarantees that the insurance company cannot cancel or modify the policy terms, for example, by raising premiums or reducing the payout, until a specific age (typically retirement age); or until you decide to terminate the policy voluntarily. As long as premiums are paid on time, you have the assurance of knowing that a non-cancellable policy cannot be canceled, and the terms, costs, and benefits cannot be unilaterally altered by the insurance company.

What does "guaranteed renewable" actually mean?

Simply put, a guaranteed renewable policy gives you the right to renew coverage for your long-term disability insurance each year (or multi-year term) without any additional medical exams; however, the insurance company can increase premiums, for example, due to changes in your heath. Even so, as long as you pay your premiums on time, the insurance company is obligated to renew your guaranteed renewable policy, even if there’s a change in your health or disability status.

The benefits of having both

A non-cancellable and guaranteed renewable long-term disability insurance policy offers two significant benefits:

1. First, it helps ensure you can maintain your coverage no matter what changes occur in your health or when disability strikes. So, for example, if you’re diagnosed with cancer or heart disease that is treatable but may result in a disability, the insurer can’t cancel or change the policy even though your level of risk has increased. And if you file a claim, your monthly benefits will continue according to the terms of the policy, which can’t be changed or cancelled unilaterally by the insurer. So these features are key to providing confidence.

2. Having both also protects you from premium increases due to changes in your health. As people get older, their risk of disability inherently increases. Without these provisions, an insurance company may raise your premiums. However, with non-cancellable and guaranteed renewable policies, insurers are obligated to keep premiums steady even if there’s a claim or change in health.

With a non-cancellable and guaranteed renewable long-term disability insurance policy, your coverage and costs won't change until the expiration date of the policy. You won't have to worry about premiums becoming suddenly unaffordable or benefits being lowered due to a change in your health. Even if you file a claim, your premiums and policy terms remain stable, with monthly benefits that are guaranteed as long as the policy is in force and paid up. So you have a reliable source of financial protection if disability strikes unexpectedly.

It’s important to note that some policies are only guaranteed renewable but not non-cancellable. With guaranteed renewable disability insurance, the insurer guarantees to renew the policy at the end of the term but has a limited right to change premiums, typically on a class basis. In other words, if you were assigned to a certain health category or "risk class," the insurer could increase premiums by a certain amount for all members of that class — but cannot raise premiums solely for you based on a change in health.

The alternatives: conditionally and optionally renewable policies

These policies provide fewer guarantees to the policyholder and may allow the insurance company to review your policy and make changes to the terms or premiums upon renewal.

• A conditionally renewable policy provision allows you to renew your policy and continue coverage — but with conditions. The insurer can refuse to renew the policy or raise rates under certain conditions spelled out in the contract. For example, there could be a condition that states that you can't change your current occupation to a more hazardous one. However, as long as you meet the conditions of renewability and pay your premiums on time, the insurer guarantees not to cancel a conditionally renewable policy. These policies may cost less but may offer significantly less protection from the unexpected.

• Relatively few policies are “optionally renewable,” and for good reason: This type of insurance coverage provides few guarantees that your coverage will be there when needed, and most insurance companies have moved away from this type of coverage. With this provision, the insurer can increase premiums or lower benefits on a class basis or even cancel an individual disability insurance policy altogether when the term ends on a policy anniversary.

Cost considerations

Guaranteed renewable and non-cancellable policies guarantee that your premiums and policy terms cannot be changed by the insurer. With fixed premiums and long-term cost predictability, this can be a significant advantage compared to conditionally or optionally renewable policies.

Of course, these features can affect the cost of a long-term policy, but other factors such as your age, occupation, health status, benefit amount, and benefit period (how long disability payments last) generally have a much higher impact on premiums. An individual policy may also have higher premiums compared to a group plan. Generally speaking, non-cancellable and guaranteed renewable policies may have slightly higher premiums than other types of policies without those features. However, when you consider the confidence offered — and the devastating impact an unexpected disability could have on your family's financial well-being — you'll likely agree that they are a worthwhile investment.

How to get the disability protection that best suits your needs

While your employer may offer short-term disability insurance, it's a limited source of protection that typically only lasts for a maximum of 6 months or a year. Individual long-term disability insurance is a very different, lasting source of financial protection that's highly customized to your needs. If you're looking to get a policy, you should speak with a financial professional who is familiar with the specifics of purchasing an individual disability insurance policy.

Tell your financial professional as much as you can about your financial situation and concerns so that they can start looking into the plans and options that meet your needs. Discuss different coverage scenarios: What happens if an illness takes you out of the workforce for a few years? What if you have a physical impairment that limits your productivity but still allows you to practice your profession? And don't shy away from asking questions, especially about any disability terms and phrases you’re unfamiliar with.