Disability Income Benefits

Disability benefits include:

-Monthly payments to the disabled worker in the amount of the worker's PIA. At the earliest, the disabled worker may be eligible to receive Social Security disability benefits upon the sixth month of disability. -Monthly payments to the disabled worker's spouse, if the spouse is caring for a child under the age of 16, or a disabled child under the age of 22 in the amount of ½ of the worker's PIA. -Monthly payments to an unmarried child under age 18 (19 if the child is a full-time high school student), or a child who became disabled before the age of 22 in the amount of ½ the worker's PIA. A disabled covered worker, regardless of age, is eligible to receive full Medicare benefits after the waiting period and two years of receiving Social Security disability benefits - after 29 months. The maximum family benefit also applies to Social Security disability benefits.

Social Security disability benefits are only available prior to the age of 65. Social Security does not pay partial disability or short-term disability benefits. The disability must be total and the following must be met:

-The covered worker cannot do the work they did prior to the disability; -The covered worker cannot do other work because of physical or mental conditions; -The disability has already lasted or will last for at least 12 full months, or the disability is expected to result in death.

Disability Insured

A covered worker who qualifies for Social Security disability benefits based on the number of quarters of credit earned.

Disability Buy-sell (buy-out) Policy

A disability buy-sell (buy-out) policy is used to establish how ownership in a business is transferred upon an owner's disability. Important facts: -The business owns the policy, pays premiums and receives the benefits. -The benefit is used by the business to purchase the disabled owner's share in the business. -The elimination period in buy-sell policies is one to two years. -The benefits may be paid in monthly periodic payments or in a lump sum.

Disability Reducing Term Insurance

A disability reducing term policy pays a monthly benefit to pay off a business' loan if the business owner becomes disabled. This protects the business from losing assets if loans are in default. The business owns the policy, pays the premiums, and receives the benefit. The business owner is the insured.

Covered Worker

A worker who is covered by Social Security.

Quarters of Coverage

Basis for determining Social Security insured status. A maximum of 4 quarters can be earned in one year. Synonymous with quarters of credit.

Business Overhead Expense (BOE)

Business overhead expense (BOE) policies were created to help small business owners pay overhead expenses and keep the business operating when the owner becomes disabled. The business owner owns the policy and pays the premiums, but the benefits are used to pay the business' expenses such as rent, utility bills, and employee salaries. The BOE policy does not pay the owner's salary. BOE policies have elimination periods of 30 days or less and benefit periods of one to two years.

Group Versus Individual Plans

Disability income policies may be offered individually or through group plans. Individual disability income policies are purchased and applied for by an individual. In group disability income policies, the employer, association or organization sponsors and owns the group contract. Group plans are generally designed to prevent "over insurance." An employer wants its employees at work as much as possible. Paying employees more to be off is counter-productive. That is why the benefit is usually a maximum of payroll, not to exceed a total amount, such as 60% of pay, not to exceed $7,500 per month. Group policies do not usually require individual underwriting. Depending on the type of renewal provision, the insurance company may have the right to increase premiums on an entire class of insureds.

Workers Compensation

In order for an employee to be eligible for Workers' Compensation benefits, they must work for an employer that has Workers' Compensation insurance, and the employee must incur an accidental injury or sickness that occurs as a result of employment. -Medical benefits are provided to an employee until the condition is completely treated or cured. -Disability income benefits are relatively small, but are paid after the employee undergoes a waiting period called an elimination period. If the disability extends beyond the elimination period, then disability income benefits will be paid in an amount of 66 2/3% of weekly wages for a permanent total or temporary total disability. For partially disabled employees, the weekly benefit is equivalent to the percentage of wages lost due to inability to work. -Death benefits include a one-time burial payment and weekly income in an amount of 66 2/3% of the deceased employee's weekly wage for a dependent spouse and children. Each state has a maximum time and amount limit for weekly income benefits. -Rehabilitation benefits include physical and occupational therapy, medical equipment, and cost of living expenses while the employee is being rehabilitated. -Premiums for Workers' Compensation vary by industry classification and actual employer experience.

Coordination of Benefits

In the event the insured is covered by more than one policy for the same condition or benefit, the coordination of benefits provision defines the method for determining which insurance company is the primary insurer and which insurance company is the secondary insurer. In order to protect against a disabled person receiving greater income by being disabled than they can earn by working, most group disability plans offset policy benefits with wage continuation plans, Social Security, and Workers' Compensation. By using the coordination of benefits provisions, all these policies coordinate together in order to prevent duplication of benefits.

Which of the following policies pays for a loss of income without regard to performing work duties?

Income replacement contract benefits are not dependent on the insured's inability to perform work duties. Instead, income replacement contracts replace a portion of the insured's lost income due to a covered accidental injury or sickness. The correct answer is: Income replacement

Eligibility

Individuals eligible for Social Security disability must be fully insured and disability insured at the time of disability with at least 40 quarters of coverage or 10 years of work. Up to four quarters can be earned in one year. Individuals must also be totally and permanently disabled for at least five months, and the disability must be expected to last at least 12 months or result in death. Disability income benefits are paid to a covered worker in the amount of the primary insurance amount (PIA) after a five-month waiting period.

Key Person Disability Insurance

Key person disability income pays periodic income benefits to businesses when a key employee is disabled. The purpose of the coverage is to allow the business to hire additional help while the employee is disabled. Key persons include: -Business owners, -Stockholders, and -Executive managers who are active in the company. The amount of the disability income benefit is based on the key person's economic value to the business - the loss of income that would occur from reduced sales and hiring a replacement employee while the key person is disabled. Benefits may be paid as monthly periodic benefits, or in a lump sum. The business owns the policy, pays the premiums, and receives the benefits. The key person is the insured individual, who must sign the application, consenting to the coverage.

Disability Income Benefit

Life insurance rider in which periodic income payments are paid by the insurer in the event that the policyowner becomes totally and permanently disabled.

Long-term Disability

Long-term disability income policies provide long benefit periods of two years or more, or until the insured reaches age 65. The benefit amount is 60% - 80% of the insured's income. The elimination period ranges from 30 to 180 days. Long-term disability income policies may be issued as occupational or nonoccupational coverages. Long-term disability income policies may coordinate benefits with an employer plan, Workers' Compensation or Social Security.

Disability Income Insurance

Pays periodic benefits when an insured cannot work because of accident or injury.

Short Term Disability

Provides short benefit periods of less than two years. Short-term disability income policies provide short benefit periods of less than two years. Group disability income policies are usually short-term disability policies. The benefit amount is 60% - 80% of the insured's income and benefits are generally paid on a weekly basis. Benefits can be stated as a flat amount, such as $300 weekly, or as a percent of income such as 66 2/3% of base salary. The elimination period is typically no more than 30 days. Short-term disability income policies may be issued as occupational or nonoccupational coverages.

Social Security Disability

Social Security, also referred to as Old Age Survivors Disability Income Insurance (OASDI), is a federal program that protects workers against the risk of financial loss due to death, disability and old age. Social Security disability benefits are only available to covered workers who are fully insured at the time of disability. Social Security is financed by equal contributions from employers and employees.

Primary Insurance Amount (PIA)

The average monthly wage of an individual used in determining the amount of the individual's Social Security retirement benefits.

Maximum Family Benefit

The maximum monthly amount a covered worker and his family can receive from Social Security.

Coordination of Benefits Example

Tim averages $4,000 / month income at his job. He had two disability policies when he became disabled. Each policy provided for payments up to $2,400 / month. If neither policy contains a coordination of benefits provision, he could conceivably make more than he would if he was working ($2,400 + $2,400 = $4,800). Also, because disability income payments are tax-free (if Tim paid the premium with after-tax dollars), he could make quite a profit on his disability income. In this example the two policies would pay a combined maximum limit so Tim does not make a profit from his disability. Remember - the main idea behind coordination of benefits is that the insured cannot be reimbursed or receive benefits totaling more than 100% of his/her loss.

Lump Sum

While most disability income policies are paid in monthly installments, benefits may also be paid as a lump sum. If a benefit is paid in a lump sum, it must be paid immediately after written proof of loss. If the benefit is paid in periodic payments, it must be paid no less than monthly.