Disability Income and Related Insurance

Lifetime Extension Rider

A lifetime extension rider is a provision in a disability income policy that extends benefits for the lifetime of the insured if the disability is caused by injury, as opposed to sickness.

Disability Buy-sell Polic

A buy-sell agreement is a legal agreement prepared by an attorney. The buy-sell agreement specifies how the business will pass between owners when one of the owners dies or becomes disabled. It is common for the business to purchase insurance to provide the cash to accomplish the buyout when the owner either dies or becomes disabled. The policies that fund buy-sell agreements generally have an extremely long elimination period, possibly one or two years. Generally, these policies funding buy-sell agreements also provide a large lump-sum benefit to buy out the business rather than monthly benefits.

Hospital Confinement Benefit (HCB)

A hospitalization confinement benefit may be added for the payment of an additional premium. It pays supplemental income benefits during the time the insured is hospitalized. Benefits are typically written to provide a specific dollar amount with a policy maximum

Any Occupation

A policy that has an "any occupation" provision will only provide benefits when the insured is unable to perform any of the duties of the occupation for which they are suited by reason of education, training, or experience. "Own occupation" is the more liberal definition and therefore provides a better benefit for the insured. Although some companies still utilize the two-tier approach by combining both definitions in a single disability income policy, from an underwriting standpoint, it is much easier for an insurance company to justify the "any occupation" definition when agreeing to issue a policy.

Elimination period

A waiting period that is imposed on the insured from the onset of disability until benefit payments commence. It is a deductible measured in days, instead of dollars. The purpose of the elimination period is to eliminate coverage for short-term disabilities in which the insured will be able to return to work in a relatively short period of time. The elimination periods found in most policies range from 30 days to 180 days. Just as a higher deductible amount results in lower premiums for medical expense insurance, a longer elimination period translates into a lower premium for disability income insurance. An important consideration in selecting the elimination period is that payments are made in arrears. Therefore, if the insured selects a 90-day elimination period, the insured will be eligible for benefits on the 91st day, but payments will not begin until the 121st day. The insured must determine how long he or she can go without benefit payments following disability in selecting the duration of the elimination period

Definition of Disability

Assuming that one qualifies for Social Security disability benefits by being fully insured or partially insured, one must then meet Social Security's definition of disability. Disability, under Social Security, is defined as the inability to engage in any substantially gainful activity by reason of a medically determinable physical or mental impairment that has lasted or is expected to last 12 months or result in an early death. This definition is not as liberal as most definitions of disability found in policies marketed through insurance companies.

Benefit Limits

Disability Income policies are valued contracts (or stated amount contracts). The amount of benefit that the insurance company will issue is based upon the applicant's net earned income. Most companies will set a maximum percentage of the applicant's earned income, such as 65% for higher incomes or 85% for lower incomes, that the company will pay in benefits to prevent malingering and overutilization. Others use a flat-amount method, in which a policy specifies a flat amount that will be paid. While the amount of disability income coverage benefit may vary from company to company, the following basic principles must apply to all of them: The benefit must be large enough to allow the insured to maintain a lifestyle similar to that prior to the disability, and The benefit may not exceed the amount earned by the insured prior to the disability.

Qualifying for Disability Benefits

Disability income benefits are limited to a percentage of earned income. The insurer wants a claimant to have a financial incentive to return to work. A person becomes eligible for regular disability benefits when they meet the insurance company's definition of disability due to either a sickness or an injury. This definition of disability does vary from company to company. It is important for the applicant and the producer to be fully aware of this important benefit trigger.

Inability to Perform Duties

For the first 24 months after a loss, the term "total disability" will be defined as the inability of the insured to perform all the duties of his regular occupation. After these 24 months, total disability will be defined as the inability of the insured to perform all the duties of any occupation for which he or she is suited. Such total disability may not be based solely on the ability of an individual to -Perform "any occupation whatsoever" or "any occupational duty" or -Engage in any training or rehabilitation program. The definition of total disability may require regular care by a physician, and that the disability be continuous for a specified time period.

Business Disability Insurance

Just as an individual purchases disability income insurance to protect his/her ability to earn a living, a business purchases business disability insurance on its key employees to protect it from loss when the employee becomes disabled.

Long-term Disability (LTD)

Group long-term disability plans are often reserved for management employees. The elimination period will usually coincide with the benefit period of the short-term disability plan. The benefit period may be to age 65. Lower-wage employees are usually limited to 66 and 2/3 % of monthly wage, while higher-wage employees are limited to 50% of monthly wage.

Group vs. Individual Plans

Group plans differ from individual plans in a variety of ways. Listed below are the most common differences between group and individual disability plans: -Group plans usually specify the benefits based on a percentage of the worker's income, while individual policies usually specify a flat amount. -Short-term group plans usually provide maximum benefit periods of 13 to 26 weeks, with weekly benefits of 50% to 100% of the individual's income. Individual short-term plans have maximum benefit periods of 6 months to 2 years. -Group long-term plans provide maximum benefit periods of more than 2 years, with monthly benefits usually limited to 60% of the individual's income. -Group disability plans also have minimum participation requirements. Usually, the employee must have worked for 30 to 90 days before becoming eligible for coverage. -Group plans usually make benefits supplemental to any benefits received under workers compensation. Some group disability plans limit coverage to only nonoccupational disabilities.

Rehabilitation Benefit

If the insured has been totally disabled, it is possible that rehabilitation will be necessary to help get the insured back to work, either in their old occupation or in another occupation. The rehabilitation benefit will cover a portion of the cost for the insured to enroll in a formal retraining program that will help the insured to return to work. This benefit usually offers a specified sum (several times of the monthly indemnity) to cover costs not paid by other insurance.

Policy Issuance Alternatives

If the underwriter feels that applicant is too great of a risk, the applicant could be declined. However, if the risk is more than standard but less than a decline, the underwriter could offer the policy on a rated-up basis or issue the contract with an exclusion rider. If the policy is rated up, the premium will be increased. If a policy contains an exclusion rider, then the loss related to that exclusion would not be covered.

Occupational Considerations

In disability income policies, the insured's occupation is a critical underwriting factor. The more hazardous the applicant's occupation, the higher the premium the insurance company will charge. Professionals like attorneys and doctors pay the lowest premiums and get the superior definitions of disability. More hazardous occupations, like construction workers, pay higher premiums and receive poorer definitions of disability because of a greater risk of disability.

Coordination with Social Security and Workers Compensation Benefits

In order to avoid overinsurance, the insurance companies have several options to work with Social Security benefits.

Individual Disability

Income policy is applied for and paid for by the individual rather than through the employer as for group disability income. Individual Disability Income premiums are paid with after-tax dollars, and benefits are not income taxable.

Short-term Disability (STD)

It is not uncommon for an employer to provide short-term disability benefits for all of the company's employees. The elimination period could be as short as 0 days and the benefit period not longer than 2 years, but the benefit period could be 6 months or 1 year.

Key Person Disability

Key person disability is purchased by the employer on the life of a key employee. The key person's economic value to the business is determined in terms of the potential loss of business income which could occur as well as the expense of hiring and training a replacement for the key person. The contract is owned by the business, the premium is paid by the business, and the business is the beneficiary. The person is the insured, and the business must have the key person's consent to be insured in writing.

Social Insurance Supplement (SIS)

Note: this is a rider, and not a separate plan, which will pay a benefit in the approximate amount that Social Security would pay, but if Social Security does in fact pay, the Social Insurance Supplement benefit is reduced dollar for dollar by the Social Security benefit payment. Social Insurance Supplement (SIS) riders are used to supplement or replace benefits that might be payable under Social Security Disability. These provide for the payment of income benefits generally in 3 different situations: When the insured is eligible for Social Security benefits but before the benefits begin (There is a usually a 5-month waiting period for Social Security benefits, with the payment of benefits beginning on the 6th month); If the insured has been denied coverage under Social Security (Roughly 75% of the people who apply for Social Security benefits are denied coverage because of their rigid definition of "total disability"); or When the amount payable under Social Security is less than the amount payable under the rider. (In this case, only the difference will be paid.)

Partial disability

Often defined as the inability to perform one or more of the regular duties of one's own occupation or the inability to work on a full-time basis, which results in a decrease in the individual's income. The purpose of the partial disability benefit is to cover a partial loss of income when the insured is disabled to the point that he or she can still report to work, but is not able to perform all of the regular duties of the job. The partial disability benefit is typically 50% of the total disability benefit, and is limited to a certain period of time, as noted in the policy. The benefits paid on a partial disability policy are paid in a flat amount, or a residual amount.

Own Occupation

Provide benefits when the insured is unable to perform any duties of his/her own occupation because of sickness or accident. This definition is usually limited to the first 24 months after a loss. It allows insureds (claimants) to receive benefits if, because of disablement, they cannot perform the duties of their normal occupation even though they might be able to earn income from a different occupation. After 24 months, if the insured is still unable to perform the duties of his or her own occupation, the definition of disability narrows to mean the inability to perform any occupation for which the insured is reasonably suited by education, training, or experience. This is a dramatic reduction in the insurer's liability because it is very likely that claimants can find something they can do for financial gain. The "own occ" definition is generally used for highly trained, skilled occupations such as surgeons, trial attorneys, etc.

Qualification for Disability Benefits

Social Security uses the Quarter of Coverage (QC) system to determine whether or not an individual is qualified for Social Security benefits. The type and amount of benefits are determined by the amount of credits or QCs a worker has earned. Anyone working in jobs covered by Social Security or operating his/her own business may earn up to a maximum of 4 credits for each year of work. The term fully insured refers to someone who has earned 40 quarters of coverage (the equivalent of 10 years of work), and is therefore entitled to receive Social Security retirement, Medicare, and survivor benefits. An individual can attain a currently insured status (or partially insured), and by that qualify for certain benefits if he or she has earned 6 credits (or quarters of coverage) during the 13-quarter period ending with the quarter in which the insured: Dies; Becomes entitled to disability insurance benefits; or Becomes entitled to old-age insurance benefits. For younger workers, the number of quarters required to qualify for the benefits differs by age according to a table established by Social Security.

Cash Surrender

The cash surrender rider creates a cash value of around 70% of the premiums paid in excess of claims. This cash value is often only available to the owner at the termination of the contract.

Benefit period

The length of time over which the monthly disability benefit payments will last for each disability after the elimination period has been satisfied. Most policies offer benefit periods of 1 year, 2 years, 5 years, and to age 65. Some plans offer lifetime benefits. The longer the benefit period, the higher the premium will be.

Return of Premium

The return of premium rider provides a refund of a percentage of premiums at certain times. For example, at the end of the tenth year, the insurance company may offer to refund 80% of the excess of premiums paid over claims.

Waiting Period

The waiting, or elimination period for Social Security disability benefits is 5 months. Benefits begin at the beginning of the 6th month and are not retroactive to the beginning of the disability.

Medical Reimbursement Benefit (Nondisabling Injury)

This benefit provides for the payment of medical expenses incurred due to an accidental bodily injury when the insured is not disabled.

Continuing Coverage after Age 65

Typically, disability income policies are renewable until the insured's age 65. The continuation of coverage rider provides that the insured can renew the policy after age 65 as long as they are actively and gainfully working full-time.

Waiver of Premium Feature

Usually included in a basic disability income policy. This benefit allows the insured, when disabled, to forego paying the premiums once he/she qualifies for benefits. Premiums that were paid by the insured during the elimination period are usually refunded once the insured qualifies to begin receiving benefits.

Future Increase Option (Guaranteed)

allows an insured to increase the benefit level to a specific predetermined amount at certain times or on certain occasions without proof of insurability. The times when the benefit may be increased are generally at ages 25, 28, 31, 34, 37 and 40. An increase may also be taken at one's marriage or the birth of a child. In order to exercise this rider, the insured must qualify from an income standpoint to prevent overinsurance.

relation of earnings to insurance

allows the insurance company to limit the insured's benefits to his/her average income over the last 24 months. If the total monthly amount of loss-of-time benefits promised under all valid coverages exceeds the monthly earnings of the insured at the time of disability, or the average monthly earnings for the previous 2 years (whichever is greater), the insurer will only be liable for a proportionate amount of benefits. If necessary, the benefits are reduced on a pro-rata basis.

Probationary Period

another type of waiting period that is imposed under some disability income policies. It does not replace the elimination period, but is in addition to it. The probationary period is a waiting period, often 10 to 30 days, from the policy issue date during which benefits will not be paid for illness-related disabilities. The probationary period applies to only sickness, not accidents or injury. The purpose for the probationary period is to reduce the chances of adverse selection against the insurer. This helps the insurer guard against those individuals who would purchase a disability income policy shortly after developing a disease or other health condition that warrants immediate attention.

Injury

defined using either the accidental bodily injury definition, or the accidental means definition. Accidental bodily injury means the damage to the body is unexpected and unintended. Accidental means indicates that the cause of the accident must be unexpected and unintended. A policy that uses the accidental bodily injury definition will provide broader coverage than a policy that uses the accidental means definition.

Disability income insurance

designed to replace lost income in the event of this contingency, and is a vital component of a comprehensive insurance program. It may be purchased individually or through an employer on a group basis

Recurrent Disability

generally expressed in a policy provision that specifies the period of time (usually within 3-6 months), during which the recurrence of an injury or illness will be considered as a continuation of a prior period of disability. The significance of this feature is that recurrence of a disabling condition will not be considered to be a new period of disability so that the insured is not subjected to another elimination period.

Cost of Living Adjustment (COLA) Rider

help protect against inflation. Under this rider the insured's monthly benefit will be increased automatically, once claim payments have begun. Generally, the first increase would be at the end of one year to be followed by annual increases for as long as the insured remains on the claim. Some of these riders provide for compound interest adjustments while others provide simple interest adjustments.

Nonoccupational coverage

on the other hand, only covers claims that result from accidents or sicknesses occurring off the job.

Sickness

or illness is defined as either a sickness or disease contracted after the policy has been in force at least 30 days; or a sickness or disease that first manifests itself after the policy is in force.

total disability

protects the family or an individual against the economic loss that comes with the total disability of the wage earner.

Occupational coverage

provides benefits for illness, injury or disability resulting from accidents or sicknesses that occur on or off the job.

Change of Occupation

provides for a benefit or premium reduction if the insured changes his/her occupation. If the insured changes to a more hazardous occupation and then has a disability claim, the insurance company will calculate how much disability benefit that the premium would have purchased at the insured's more hazardous occupation. If, on the other hand, the insured changed to a less hazardous occupation, the insured can request a premium reduction.

Presumptive Disability

provision that is found in most disability income policies which specifies the conditions that will automatically qualify the insured for full disability benefits. Some disability policies provide a benefit when people simply meet certain qualifications, regardless of their ability to work. The presumptive disability benefit provides a benefit for dismemberment (the loss of use of any two limbs), total and permanent blindness, or loss of speech or hearing. Some policies require actual severance of limbs rather than loss of use.

Additional Monthly Benefit

rider in the approximate amount that Social Security would pay. The benefit only is provided for one year. It is then anticipated that Social Security benefits would commence at the end of one year.

Residual disability

the type of disability income policy that provides benefits for loss of income when a person returns to work after a total disability, but is still not able to work as long or at the same level he/she worked before becoming disabled. Many companies have replaced partial disability with residual disability. Residual disability will help pay for loss of earnings. If the person can only work part-time or at a lesser paying position, residual disability will make up the difference between their present earnings and what they were earning prior to disability.

Business Overhead Expense Policy

unique type of policy that is sold to small business owners who must continue to meet overhead expenses such as rent, utilities, employee salaries, installment purchases, leased equipment, etc., following a disability. The business overhead expense policy reimburses the business owner for the actual overhead expenses that are incurred while the business owner is totally disabled. This policy does not reimburse the business owner for his or her salary, compensation, or other form of income that is lost as a result of disability. There is usually an elimination period of 15 to 30 days and benefit payments are usually limited to one or two years. The benefits are usually limited to covered expenses incurred or the maximum monthly benefit stated in the policy. The premiums paid for BOE insurance are tax deductible to the business as a business expense. However, the benefits received are taxable to the business as received.