Chapter 13 Disability Income Insurance

Workers' Compensation Exclusion from Coverage:

1. Injured while participating in a voluntary "off duty" activity or social event 2. Intentional self-inflicted injuries 3. Injuries/illnesses cause do to intoxication or illegal drug use 4. Injuries caused while committing a felony or misdemeanor 5. Injuries caused by being the "aggressor" in a workplace fight 6. Non-professional athletes, injured while participating in a sporting event, whereby payment only consists of meals, lodging, transportation, etc. 7. Injuries to domestic help who work less than 52 hours or receive less than $100 over a 90-day period 8. Injuries to volunteers who work at a non-profit organization, and receive no actual wages 9. Injuries/illnesses that occur after employee has been terminated or laid off Exception-Psychological Care- if employee can prove injury/illness occurred prior to termination, benefits will be paid Specific statutes: 1. Mandatory for any employer with one or more employee 2. Seven-day waiting period for disability payments 3. Premium/rate based on "experience" of company Must be approved by state insurance department Employer Liability In addition to Workers' Compensation, an employer should also carry liability insurance Provides coverage for Common Law claims The opportunity exists that an employee may be able to sue his employer if Worker's Compensation is not provided.

DI Exclusions

1. War/ Military service 2. Intentionally self-inflicted injuries 3. Aviation-other than commercial aircraft 4. Foreign country 5. Loss of professional license DI Benefits may be paid on a limited basis (one to two years) for mental or nervous disorders.

Disability Insurance Elimination Period Example

A client has a Total Disability policy that pays $3,000 per month with a 60-day elimination period. The client is disabled for 210 days. 210-60 = 150

Guaranteed Insurability (GI) Rider

Allows insured to purchase additional amounts of life insurance, at future dates, without taking a physical exam or prove insurability May be referred to as the Additional Purchase or Future Increase Option (automatic increase provision) Future dates are typically policy anniversary dates Limited to specific age Additional Insurance based on attained (actual) age Added premium Similar to a GI rider for life insurance

Business Disability Insurance-BOE

Business Overhead Expense Pays for the usual and customary business expenses if a business owner becomes disabled Does not pay owner an income or salary pays for rent, mortgage, utilities, phone, employee salaries Premiums are tax-deductible, with benefits taxable Small employers

Disability Benefit Riders

Cost of Living Rider Increase DI benefit to offset inflation Based on an index (CPI) or flat rate (up to 5%) Social Security Benefit (Supplement) Rider Provides benefit until Social Security pays Payable for up to one year Rehabilitation Rider Assist individual in returning to work Additional benefit for professional services Rehabilitation, training program, and related expenses Return of Premium Refund of premium every five or 10 years, or age 65 50 to 80% refund of premium, minus claims paid Costly Transplant/Cosmetic Surgery Coverage Provides DI income Examples: Blood transfusion or kidney transplant Impairment (exclusion) Rider- added by insurer Excludes coverage for particular illness or injury May be temporary or permanent Eliminates pre-existing condition

Additional Disability Income Principles

DI policies are designed to protect a person's earned income by paying a monthly benefit Living death Coverage to age 65 Premiums are based on: Elimination period selected Monthly benefit Duration of benefit Age, sex, health, occupation and income Avocations/hobbies Other DI policies in force

Disability Income (DI)

Disability is defined as a person's inability to perform his normal occupation or daily duties The person must be under the care of a physcian The insurance is designed to offset the loss of income due to an accident or sickness More restrictive-the inability to perform any reasonable occupation based on education, training or experience Any occupational definition-the inability to perform any gainful occupation The more liberal the definition, the greater the premium

Proof of Loss

In order for disability benefits to be paid, the insured must be under the care and treatment of a doctor 1. Doctor must verify the disability exists and prevents insured from working 2. May require periodic re-submission of claim forms to verify disability continues to exist 3. Doctor is required to complete portion of claim form

Disability Insurance Tax Considerations

Individual Policies: Premium is non-deductible Benefit received is tax-free Group Policies: 1. non-contributory-employer paid premium Premium deductible to employer Benefit taxable to employee 2. Contributory- Employee pays all or part of premium Premium is deductible to employer, not to employee Benefit is taxable to employee, but only the portion based on employer contribution.

Business DI-Key Employee and Buy Sell

Key Employee Compensates business due to disability of key employee Who is a key employee? Provides funds to offset loss or hire a replacemnt Third party contract Premiums are not deductible, and benefits are tax-free Disability Buy-Sell Use disability benefits to buy-out interest of disabled partner May be lump-sum or periodic Similar to Buy-Sell for Life Insurance

Occupational versus Non-Occupational

Occupational DI Policy: Provides coverage Both on and off job E.g., an individual DI policy Pays in addition to Worker's Compensation Non-Occupational DI Policy: Provides coverage Only off job Benefits are integrated with other benefits (e.g., group insurance Workers' Compensation is for on the job

Benefit Period

The maximum length of time for which an insured collects monthly income will also affect the premium charged. The most common benefit periods are 12, 24, and 30 months, 5 years, 10 years, 20 years, to age 65, or for life.

Presumptive Disability

This is a type of disability that is generally assumed to be total or of a permanent kind. It may involve the loss of use of limbs (i.e., paralysis) or the loss of sight, hearing or speech.

Accidental Death and Dismemberment (AD&D)

This rider provides for accidental loss only and is the least expensive due to its limited nature Pays a death benefit (principal sum) or dismemberment benefit (capital sum) for accidental loss only Complete and total severance of limb at or above wrist or ankle Includes hands, feet, and irrevocable loss of sight Dismemberment benefit is 50% principal sum per loss Loss must occur within 90 days. Two capital losses = principal sum Premium is non-deductible; however, the benefit is tax-free

Elimination (Waiting) Period

Period of time preceding each disability during which benefits are not paid; similar to a deductible ("Time deductible") Common elimination periods: 30, 60, 90, 180, and 365 days The longer the elimination period, the cheaper the policy.

Additional Disability Income Principles

Additional Disability Income Policy- An individual disability income policy is issued to a person based on the information recorded on the application. In other words, the insurer will decide whether to accept or reject the risk based on the underwriting information regarding the individual applicant. In addition, the applicant is also responsible for paying the policy premium. This form of health insurance protects an individual (and family) against loss of earnings or income as a result of total disability. Disability may be described as "living death.'' Once someone is unable to work and earn an income, it generally will be a living death since expenses such as a mortgage, clothing, food and other necessities continue, but the income to provide them may not. Again, disability income policies are designed to protect one's earned income. These policies provide income or monthly indemnity benefits to insureds that become totally disabled. Disability policies require that the insured be under the care and treatment of a doctor or benefits will not be forthcoming. In other words, a physician must verify that the insured is unable to engage or perform the duties of his or her occupation. This type of insurance will generally provide coverage until an insured retires and no longer earns an income. For example, if a person reaches age 65 and retires but continues to pay his/her disability income premiums and subsequently becomes disabled the next year, the policy will usually not pay any benefits. In this case, the premiums paid following the person's retirement will be refunded. However, some plans provide continuing coverage after age 65, or as long as the insured continues to work. Other characteristics of a disability income contract which involve unique aspects in relation to its underwriting include but are not limited to: Premiums- rates determined on benefit selected & additional criteria. A waiver of premium feature is generally included in a disability income policy which waives premiums if the insured is totally disabled for 90 consecutive day (6 months for life insurance). Monthly Benefit Limit- Most disability income insurers who issue individual policies permit an applicant to purchase or limit a monthly benefit jthat is 50 to 60% of their gross monthly earned income. Some insurers allow 80% of the net monthly income which actually accomplishes almost the same thing. Therefore, if the applicant's gross earned income is $3,000 per month, the insurer would allow him/her to purchase up to $1,500 to$1,800 of monthly benefit. Other forms of disability coverage, such as group coverage, permit greater percentages of monthly income (i.e., 60-70% and sometimes more).

Injury or Accident vs. Sickness-

Disability policies provide benefits if the insured has suffered a disability caused by an accident or an illness. An accident is a fortuitous event that is unexpected and unintended and results in an injury. This is generally referred to as accidental bodily injury. This may be contrasted with accidental means, a more restrictive definition of an accidental bodily injury. This may be contrasted with accidental means, a more restrictive definition of an accident, which indicates that the cause and result must be accidental or no coverage is provide. For example, if a person in anger hurls a tool across the room and it bounces off a wall and strikes that person and he is injured, there would be no coverage according to the definition of accidental means the result (i.e., injury) is accidental but the cause (i.e., throwing the tool) is not. If an individual jumps off a bus, the act of jumping is intentional even if an actual injury was accidental. Sickness or illness- also covered under disability income policies. If an insured contracts a disease or other form of illness.....

Workers' Compensation

Employer's "Absolute" responsibility 100% employer funded "Exclusive Remedy" for employee injuries/illnesses Protects against third-party lawsuits Coverage obtained through: Individual insurer, refferred to as "voluntary market" State assigned risk plan or High Risk Pool, referred to as the "involuntary market" State assigned risk plan or high risk pool, referred to as the "involuntary market" State Compensation Insurance fund or Self-insuring State compensation Insurance Fund-makes coverage available to all employers: administered by state Coverage is provided for injuries and illnesses that occur "on the job" (compensable) Provides five benefits: 1. Unlimited medical benefits (no time or dollar limits) 2. Survivor Income Replacent 3. Funeral (up to $5,000) 4. Disability Benefits-66 2/3 % 5. Rehabilitation

Additional Monthly Benefit AMB/ Guaranteed Insurability

It ''guarantees'' that the insured, at various specified option dates in the future, can purchase additional amounts of disability income insurance without taking a medical exam. In other words, it allows an insured to purchase additional amounts of disability income in the future-guaranteed issue. An extra premium is required before this rider can be added. As long as the insured's income has increased over the years, the additional amounts may be purchased without proving insurability. It may also be refferred to as the Additional Purchase Option (APO) or the Future Increase Option (FIO). The death benefit paid under accidental death coverage is called the principal sum. The severance benefit paid under accidental dismemberment is called the capital sum and is usually one-half of the principal sum. AD & D coverage is sometimes referred to as multiple indemnity coverage. The cost of this coverage, because it is limited to accidental causes, is the least expensive type of death protection when comparing it to individual policies such as whole life and term life insurance. A dismemberment involves the loss of a limb as a result of an accident. The loss of use of a lim (i.e., paralysis) may also qualify as a dismemberment loss unde rsome policies. The loss of a toes or finger does not qualify. Some policies also pay dismemberment benefits for presumptive types of disability such as loss of sight, hearing or speech. Therefore, if an accidental death benefit of $20,000 was purchased and the insured suffers a loss of hearing, the policy would pay (a capital) sum of $10,000 (i.e., 50% of the principal sum). The principal sum may be paid when an insured loses any combination of limbs, such as a hand and a foot an arm and a foot or both eyes. The premium and benefit are not tax deductible not even to the beneficiary.

Residual Disability

Like partial disability, this involves a person who is able to perform some but not all of his or her duties. The benefit provided by a residual disability rider is paid if the loss of income is a residual effect of the disability. This type of disability rider is paid if the loss of income is a residual effect of the disability. This type of disability rider pays a percentage of lost income which usually exceeds the flat 50% paid by partial disability. Partial and residual disability riders may not be added to the same policy. Again, residual disability will reimburse an insured based on his or her percentage of lost income due to a covered disability. If the insured is residual disabled and is losing 65% of his income per month, the rider will pay him 65% of his monthly total disability benefit. Sometimes these benefits are referreed to as "at-work'' benefits. Both of these riders provide an "at work" type of disability benefit since the insured is able to perform some but not all his or her duties. This means that the insured is still able to continue working in some capacity but is also able to receive partial or residual benefits from the disability policy.

Limitations on Benefits Provided

Limitations are placed upon benefits provided by disability income policies in order to reduce or prevent adverse selection. For example, if Bob makes $5,000 per month, he will not be allowed to purchase a disability income policy paying him $5,000 per month if he becomes disabled. This increases adverse selection since Bob can become "disabled", collect $5,000 per month and there is no reason why he should return to work. His policy is paying him what he would earn at his job and he doesn't have to work! There must be a relation of earnings to the disability income amount desired. Policy limits- These are the stated income limits that will be paid to the insured if he or she is disabled. These limits are subject to limitations, reductions or other provisions listed in the policy.

Disability Income Benefits

Monthly Benefit Limit- Individual Plans: 50 to 60% of Gross income or 70 to 80% of Net Income Prevents Malingering Group Plans- generally a higher percentage-why? Group Disability Plans: Short Term-13 to 52 weeks maximum Long Term- more than 52 weeks

Permanent and Temporary disability

Permanent disability involves the inability of the insured to perform work ever again. This means that he insured is unable to perform the duties of his or her occupation for an entire period (i.e., life). This loss of a leg is considered to be a permanent disability. Most presumptive forms are permanent. Temporary disability is a form of disability which reduces the ability to work on a temporary or limited period basis. A minor back injury may keep an individual out of work for two weeks. Therefore, he or she was temporarily disabled. Both permanent and temporary labels may be associated with total or partial disability (i.e., permanent total vs. temporary partial). Whenever an insured is eligible to receive monthly benefits from a disability income policy, a general requirement exists which states that the insured must be under the care of a doctor. If benefits continue, periodic confirmation by the doctor must be provided which verifies the continuation of disability.

Tax Considerations

Premiums paid on an individual disability income policy are not tax-deductible. Benefits received from this policy, however, are tax-free without limitations. For instance, assume Joe has a disability income policy paying him $1,000 per month if he is disabled. The policy has a 30-day waiting period. Joe is then disabled for 12 months. His policy would pay him $11,000 during that period tax free. Non-contributory group disability premiums are tax-deductible to the employer (i.e., business expense) and monthly benefits paid to the disabled employee are considered to be ordinary income. Lump sum or single sums may be paid out for presumptive types of disability such as loss of sight.

Disability Insurance (DI) Concepts

Presumptive Disability A type of total and permanent disability based on loss of sight, hearing, speech, or limb use Paid even though insured is still working Los of Earnings Test Disability insurance is based on earned income Earned income Commissions Bonuses Salary/wage Unearned income not counted towards disability Investment income Rental income Interest Partial Disability Defined as a person's inability to perform some, but not all, of his daily duties Follows a period of total disability Added as a rider Pays 50% of total disability benefit Pays up to six months Residual Disability Considered another form of partial disability Based on a percentage of lost income Fluctuates monthly and may exceed 50% both partial and residual disability cannot be in the same contract Permanent versus Temporary Injury/ Accident versus Sickness/Illness Recurrent Disability If the same disability reappears within six months after supposed recovery, the disability will be considered a recurrence or continuation of the original disability No new Elimination (90 day waiting) Period If disability is initiated

Occupational Vs. Non-Occupational Policies

Some disability income policies do not cover losses arising out of the occupation of the insured. In other words, such policies do not provide coverage if the insured will also collect from Workers' compensation or other social insurance plans. This type of disability income contract is called non-occupational. Group disability insurance is an example of non-occupational coverage. If the policy pays a monthly income in addition to any benefits received by Workers' Compensation or other social insurance plans, it is referred to as an occupational policy. An example of an occupational plan is an individual disability income policy. Group policies (non-occupational) provide limited at-work coverage since anything collected from Worker's Compensation insurance offsets benefits provided by a group disability policy. Therefore, gaps in coverage may exist. Some insurers now offer 24-hour coverage policies which combines occupational and non-occupational disability coverage with medical expense benefit in a single contract. Disability benefits are provided for all of an employee's injuries or illnesses whether work related or not while medical benefits are provided only for work-related injuries and illnesses. This means that the disability protection is provided on a 24 hour basis whereas the medical coverage is occupational only.

Partial Disability

Someone who is unable to perform one or some but not all of his or her duties is partially disabled. If a person is partially disabled and has added a partial disability benefit rider to his or her plan, he will collect 50% of the monthly income benefit while partially disabled. Partial disability benefits are payable for a maximum of six months.

Loss of Earnings Test

This test is utilized to determine if an income loss has actually occurred. Income or earnings include wages, salary, commissions, fees or compensation for services performed (i.e., work). Earned income does not include: (1) rental income from real estate; (2) interest on savings plans; or (3) dividends paid on stocks, bonds or other like investments.

Waiver of Premium

Waives an insured's obligation to pay premium in the event he becomes disabled for 90 days (six months for life insurance) Premiums paid during the first 90 days (six months for life insurance) Premiums paid during the first 90 days will be returned to the policyowner Premium is waived for the remainder of the disability or to age 65

Hospital Confinement Benefit

When this benefit is included in a disability income policy, an additional benefit is paid over and above the regular monthly total disability benefit while the insured is confined to a hospital. Generally benefits are payable from the first day of confinement for periods of up to six months. This is an indemnity type rider and not one of reimbursement.