CH. 14 DISABILITY INCOME INSURANCE

Sick-leave plans

(often called salary continuation plans) are usually uninsured and generally fully replace lost income for a limited period of time, starting on the first day of disability. In contrast, shorter disability income insurance plans usually provide benefits that replace only a portion of an employee's lost income and often contain a waiting period before benefits start, particularly for sickness.

* Increased Predisability coverage

* Ways to Keep Up with Inflation Before Becoming Disabled * • Purchase new policies periodically (requires evidence of insurability). * • Purchase a guaranteed insurability (guaranteed purchase) option. * • Purchase a rider that automatically increases the benefit amount periodically.

* OTHER RIDERS:

* return-of-premium rider. It refunds all or a portion of the premium paid if the insured's claim experience is favorable. * pension supplement completion rider. It provides an additional benefit to fund retirement income for the applicant. Many persons allocate a part of their income to retirement funding. When they are disabled, this income may no longer be available and can be replaced by the rider. * catastrophic benefit rider. It provides an additional benefit in certain situations in which in insured is so severely disabled that he or she is likely to incur significant extra expenses because of the disability. * mental and nervous disorder riders. Some disability income policies limit the duration of disability benefits for mental or nervous disorders unless the insured is in a mental hospital or institution. Insurers who issue such polices may offer a rider that deletes the exclusion and treats such disabilities like any other disability. * long-term care purchase option rider. A few insurers have a rider that permits the insured to purchase long-term care insurance at specified future dates without evidence of insurability. There is an additional premium for the rider, but it is modest because the rider is usually made available only to relatively young applicants.

Sources of Disability Income Coverage

* • Workers' compensation programs * • State temporary disability laws * • Social Security * • Employer-provided sick-leave plans * • Employer-provided short-term disability income insurance plans * • Employer-provided long-term disability income insurance plans * • Individual disability income insurance policies

Own-occupation definition of disability:

A few long-term disability income contracts use the same liberal definition of disability that is commonly used in short-term contracts, but the term material duties often replaces the term each and every duty

DEDUCTIBILITY OF CONTRIBUTIONS:

Employer contributions for an employee's disability income insurance are fully deductible to the employer as an ordinary and necessary business expense. Contributions by an individual employee are considered payments for personal disability income insurance and are not tax deductible.

FEDERAL INCOME TAX LIABILITY OF EMPLOYEES:

Employer contributions for disability income insurance result in no taxable income to an employee. Receipt of benefits under an insured plan or sick-leave plan may or may not result in the receipt of taxable income. To make this determination, it is necessary to look at whether the plan is fully contributory, noncontributory, or partially contributory.

Paid time off (PTO) program:

In recent years, a few employers have combined their sick-leave plans with other types of payments for time not worked, such as vacations, holidays, and personal leave into a single THIS. One rationale for such programs is that many employees view sick days as a right and will take the maximum number of days available, whether sick or not. With a paid time off program, an employee is given a specified bank of days off with full pay and can take this paid time off for any reason

Buy-up plan (or supplemental plan):

It is becoming increasingly common to find group long-term disability income plans that provide employees with a base of employer-paid benefits and that allow each covered employee to purchase additional coverage at his or her own expense under THIS

Long-term plans:

Long-term disability income plans have waiting periods of 3 to 6 months; 6 months is more common.

Presumptive disability provision:

Many disability income policies include provisions setting forth specific losses that qualify for permanent total-disability status; the individual is presumed to be totally disabled even if he or she is able to return to work or gain employment in a new occupation.

Recurring disability:

Most disability policies have provisions setting forth a specified period of recovery (usually measured by return to work) that automatically separates one disability from another. This period is typically either 6 or 12 months.

Modified own-occupation:

One variation is to terminate benefits at any time that the insured returns to work in any gainful employment position for which he or she is suited by education, training or experience. However, partial or residual disability income benefits may become payable at this time.

Cost-of-living adjustment (COLA) Riders:

Provisions dealing with increasing benefits during periods of disability; or provision for inflation protection

Dual (or split) definition of disability:

The majority of long-term disability contracts use a dual (or split) definition of disability under which benefits are paid for some period of time (usually 24 or 36 months) as long as an employee is unable to perform his or her regular occupation

Any occupation:

The narrowest and most strict definition of total disability is the inability to perform the duties of any occupation because of injury or sickness. Fortunately, private disability income policies no longer use such a definition.

Less-Than-Total Disability:

These approaches, which are usually in the form of a rider to a basic disability income policy for total disability, include partial disability benefits and residual disability benefits

Catastrophic Benefits rider:

These make additional benefits available if the insured suffers a severe disability that includes cognitive impairment or the inability to perform two or more of six activities of daily living (ADLs). These are the same criteria that trigger benefits in long-term care policies.

CAPITAL SUM:

This is a lump sum payable if the insured suffers a serious injury, such as the loss of sight in one eye with no possibility of recovery or the severance of a hand or foot above the wrist or ankle. It is payable if the insured survives the loss for a certain period, such as 30 days. The amount of the capital sum is typically either 6 or 12 times the policy's basic monthly disability benefit.

Rehabilitation benefits:

This provision is often rather general and states that the insurer, at the insured's request, will consider joining in a program of rehabilitation. The insurer's role is determined by a written agreement with the insured, and the insurer pays benefits in accordance with this agreement.

Rehabilitation:

This provision permits the employee to enter a trial work period of 1 or 2 years in rehabilitative employment.

Own occupation:

an insured is considered totally disabled if he or she is unable to perform the substantial and material duties of his or her regular occupation at the time of disability. disability. Even if the person returns to work in another occupation, the insurer will still pay the full disability income benefits as long as the insured can no longer perform the duties of the former regular occupation.

PARTIALLY CONTRIBUTORY PLAN:

benefits attributable to employee contributions are received free of income taxation. Benefits attributable to employer contributions are includible in gross income, but employees may be eligible for the tax credit described previously.

TRANSITION BENEFIT:

benefits continue to survivors for a short period after an insured's death. The insured must have been receiving disability benefits at the time of death for a minimum period, often 24 months. The duration of the transition benefit is usually in the range of 3 to 6 months.

residual disability:

defined as a disability that results in the insured's inability to perform some of the duties of his or her own occupation, resulting in a loss of income. It is typically coupled with an own-occupation definition of total disability. Residual benefits focus on the loss of income rather than on the physical limitations of the disability.

partial disability:

defined as the inability to do some of the specific duties relating to a job. Its purpose is to pay limited benefits to an insured who is attempting to return to work after a minimum specified period of total disability

Short-term disability income plans:

provide benefits for a limited period of time, usually 6 months or less. Benefits may be available under sick-leave plans, which are often uninsured, or underinsured short-term disability income plans

Carve-out plans:

provide benefits for certain employees, typically key executives. For example, an employer might design one plan to cover most of its employees, but it might cover top executives with another group plan that provides enhanced benefits in the form of a larger percentage of earnings and a more liberal definition of disability.

Long-term disability income insurance:

provides extended benefits (possibly for life) after an employee has been disabled for a period of time, frequently 6 months.

SOCIAL SECURITY OFFSET RIDER:

requires a separate extra premium to cover additional benefits payable when the individual is disabled under the base policy but does not qualify for Social Security disability benefits. The supplemental benefit is paid over and above the base disability benefit of the underlying policy.

INCONTESTABILITY:

specifies that the policy will remain contestable for 2 years after the date of issue during the lifetime of the individual insured. Some insurance companies, however, include a provision that extends the contestable period for any disabilities that occur during the first 2 years of coverage.

NONCONTRIBUTORY PLAN:

the employer pays the entire cost, and benefits are included in an employee's gross income. Some persons who are permanently and totally disabled may be eligible for a tax credit, but this credit is relatively modest

FULLY CONTRIBUTORY PLAN:

the entire cost of an employee's coverage is paid by after-tax employee contributions, and benefits are received free of income taxation.

Short-Term Plan; Waiting (elimination) period:

the length of time for which an employee must be disabled before benefits begin. The typical short-term contract has no waiting period for disabilities resulting from accidents, but a waiting period of 1 to 7 days is used for disabilities resulting from sicknesses

Termination:

the same in other group contracts except a conversion privilege is rarely included

DEFINITION OF DISABILITY:

the total inability of the employee to perform each and every duty of his or her regular occupation

Any occupation (or any-icc) definition of disability:

total disability is defined as a condition that prevents a person from performing the duties of any occupation for which that person is reasonably suited by education, training, and experience.

total Disability:

two broad categories: any occupation and own occupation.