What Is a Future Purchase Option in Disability Insurance?

Disability insurance protects your income if you become unable to work due to illness or injury. However, as earnings grow, initial coverage may become insufficient. A future purchase option (FPO) lets policyholders increase coverage later without additional medical underwriting.

This feature benefits those anticipating salary growth by allowing them to adjust benefits to match their financial needs.

Policy Provision Mechanics

An FPO is a rider that permits policyholders to expand coverage at set intervals, typically annually or biennially. Some insurers also allow increases after major life events, such as a promotion or significant salary boost. The additional coverage is usually capped as a percentage of the original benefit or a fixed dollar amount to manage the insurer’s risk.

When exercised, the new coverage is priced based on the insured’s age at the time of the increase. While medical underwriting is waived, the cost reflects the policyholder’s current age, often leading to higher premiums. Some policies limit how frequently the option can be used to prevent excessive increases over a short period.

Eligibility Requirements

Insurers impose criteria for including an FPO in a disability insurance plan. Many restrict eligibility to individuals under a certain age, often 50 or 55, to focus on those in earlier career stages when income growth is more likely. Policyholders must also be actively employed at the time of purchase, as the provision is meant to accommodate future earnings rather than retroactively increase coverage.

Financial underwriting determines whether future increases are justified based on current income. If earnings do not support a higher benefit, the policyholder may be ineligible to exercise the option. Some policies require a minimum income threshold to qualify, ensuring a reasonable expectation of salary growth.

Exercising the Option

To activate an FPO, policyholders must submit a formal request within a designated time frame. Many policies specify an annual or biennial window, while others allow increases following a documented income change. Missing deadlines can delay the opportunity to expand coverage.

Insurers typically require proof of income, such as pay stubs, tax returns, or employer verification of a salary increase. If documentation does not support the requested benefit increase, the insurer may limit or deny the adjustment. The base policy must also be in good standing, meaning lapses in premium payments or prior coverage reductions could affect eligibility.

Premium Adjustments

The cost of additional coverage is based on the policyholder’s age at the time of the increase. Since premiums rise with age, each increase results in a new pricing tier reflecting the insured’s current risk profile. Unlike the original policy, which may have locked in a lower rate, new coverage segments are priced separately, leading to a higher overall premium over time.

Some insurers use a blended premium approach, averaging the existing premium with the new coverage cost to create a single rate. Others maintain separate premium amounts for each increase, resulting in a tiered cost structure. A blended approach smooths price jumps, while a tiered structure makes future adjustments progressively more expensive.

Tax Consequences

The tax treatment of disability insurance benefits and premiums depends on how the policy is structured. If a policyholder pays premiums with after-tax dollars, benefits received from a claim are generally tax-free. However, if an employer pays for the policy and does not include the premium cost as taxable income, benefits are considered taxable income.

For policies with an FPO, tax implications remain consistent with the original policy. If the base policy was purchased with after-tax dollars, additional coverage acquired through the FPO will also result in tax-free benefits. Conversely, if the original policy was employer-paid and taxable, the increased coverage follows the same tax treatment. While disability insurance premiums are generally not tax-deductible for individuals, self-employed individuals may deduct premiums if the policy is structured as a business expense. Consulting a tax professional can help optimize tax efficiency.

Coordination with Other Policies

An FPO should be considered alongside other disability insurance policies to prevent over-insurance or coverage gaps. Many professionals, particularly high-income earners, have both individual and employer-sponsored disability insurance. Employer-provided plans often cover a percentage of salary but may have benefit caps or taxable payouts, making supplemental individual coverage necessary.

When exercising an FPO, policyholders should review total disability benefits to ensure they do not exceed the insurer’s maximum allowable coverage, typically 60-70% of pre-disability earnings. Some policies include offset provisions, meaning benefits from one policy may reduce payouts from another. This is especially relevant when coordinating private disability insurance with Social Security Disability Insurance (SSDI) or workers’ compensation. Understanding how different policies interact helps prevent unexpected reductions in benefits and ensures the FPO maintains adequate income protection.