Ch 9: Disability Income and Related Insurance

1. 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 QC's a worker has earned. Anyone working in jobs covered by Social Security or operating her own business may earn up to a maximum of 4 credits for each year of work.

2. Definition of Disability

Disability, under Social Security, is defined as the inability to engage in any substantial 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.

In disability income insurance, the time between the onset of an injury or sickness and when benefits begin is known as the?

Elimination Period (waiting)

5. Other Cash Benefits

- Accidental Death and Dismemberment - Rehabilitation benefit - Medical Reimbursement Benefit (Nondisabling Injury)

Elimination vs Benefit Period

- Elimination Period is 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 work in a relatively short period of time. The elimination period found in most policies range from 30 days to 180 days. A longer elimination period translates into a lower premium for disability income insurance - Benefit Period refers to 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

Fully Insured vs Currently Insured

- Fully Insured: 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, premium free Medicare part A, and survivor benefits. If an individual is entitled to premium free Medicare part A, they are automatically eligible for Medicare Part B, but must pay a monthly premium. - Currently Insured: An individual can attain a currently insured status (for partially insured), and by that qualify for certain benefits if he has earned 6 credits (or Quarters of Coverage) during the 13 quarter. 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.

Injury vs Sickness

- Injury is 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. - 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.

Occupational vs Non-occupational Coverage

- Occupational coverage provides benefits for illness, injury or disability resulting from accidents or sickness that occur on or off the job. - non-occupational coverage, on the other hand, only covers claims that result from accidents or sickness occurring off the job. Most group plans are non-occupational only, It is assumed that accidents or injuries occurring on the job will be covered by workers compensation coverage

Accidental Death and Dismemberment

A Disability Policy may contain an ADD rider which pays for accidental losses only, and is thus considered a pure form of accident insurance. The principal sum is paid for accidental death. This amount is usually equal the amount of coverage under the insurance contract, or the face amount. A percentage of that principal sum will be paid by the policy, also referred to as the capital sum. The amount of the benefit will vary according to the severity of the injury.

3. Disability Buy-Sell Policy

A buy-sell agreement is a legal agreement prepared by an attorney. The 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 at death/disability. The policies that fund buy-selll agreements generally have an extremely long elimination period, possibly one or two years. Generally these policies funding them also provide a large lump-sum benefit to buy out business rather than monthly benefits.

Benefit Period

A period of time during which benefits are paid under the policy

1. Basic Total Disability Plan

A total disability plan protects the family or an individual against the economic loss that comes with the total disability of the wage-earner - Income Benefits (Monthly Indemnity): - Elimination vs Benefit Period: - Injury vs Sickness - Recurrent Disability - Waiver of premium feature - Probationary period

B. Individual Disability Income Insurance

An 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 - Basic Total Disability Plan - Coordination with Social Insurance and Workers Compensation - At-work benefits - Other Provisions Affecting Income Benefits - Other Cash Benefits - Refund Provisions - Exclusions

2. Coordination with Social Insurance and Workers Compensation Benefits

In order to avoid overinsurance, the insurance companies have several options to work with social security benefits. - Additional Monthly Benefit (AMB) - Social Insurance Supplement (SIS) - Occupational vs Non-occupational Coverage

2. Business Overhead Expense Policy

Business overhead expense insurance is a 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, ect 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 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 cover 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.

The rider that may be added to a Disability Income policy that allows for an increase in the benefit amount under certain conditions is called

Cost of Living (COLA) The purchasing power The purchasing power of fixed disability benefits may be eroded due to inflation and increases in the cost of living. This rider is used to protect against these trends by increasing the monthly benefits automatically once the insured has been receiving benefits for 12 months, if the cost of living increases

A. 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 companies definition of disability due to either sickness or injury. This definition of disability does vary from company to company. It is important for the applicant in the producer to be fully aware of this important benefit trigger. - Inability to Perform Duties - Pure Loss of Income (Income Replacement Contracts) - Presumptive Disability - Requirement to be Under Physician Care

Disability Income Insurance

Disability income insurance is 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 and we're on a group basis.

D. Group Disability Income Insurance

Disability income insurance is not only available in individual policies but also in group benefit packages provided by employers. Disability benefit payments that are attributed to employee contributions are not taxable, but benefit payments that are attributed to employer contributions are taxable to the employee. The premium is deductible to the employer. - Short Term Disability - Long Term Disability

2. 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 applicants net earned income. Most companies will set a maximum percentage of the applicants earned income, such as 65% for higher incomes or 85% for lower incomes, that the company will pay and benefits to prevent malingering and overutilization. Others use a flat amount method, in which a policy specifies a flat amount that we paid

7. Exclusions

Generally, disability income policies do not cover losses arising from war, military service, intentionally self-inflicted injuries, overseas residence, or injuries suffered while committing or attempting to commit a felony.

2. Long Term Disability

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 maybe to age 65. Lower-wage employees are usually limited to 66 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. Here are the most common differences between group and individual disability plans: - Group plans usually specify the benefits based on a percentage of the workers 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 income. Individual short-term plans have maximum benefit periods of 6 months to 2 years - Group long-term plans provide maximum benefit periods off more than two 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 non-occupational disabilities

Future Increase Option (FIO) Rider

Guaranteed insurability rider, also referred to as the future increase option, allows an insurer 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 out 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

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

Relation of Earnings to Insurance

If the total monthly amount of loss of time benefits promised under all valid coverage exceeds the monthly earnings of the insured at the time of disability, or the average monthly earnings for the previous two years (whichever is greater) the insurer will only be liable for a proportionate amount of benefits. However, under no circumstances, can the coverage be reduced below $200 or the specified sum of monthly benefits ( whichever is lesser)

3. Policy Issuance Alternatives

If the underwriter feels that the 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 at, the premium will be increased. If a policy contains an exclusion rider, then the loss related to that exclusion would not be covered.

1. Occupational Considerations

In disability income policies, the insurance occupation is a critical underwriting Factor. The more hazardous the applicant's occupation, the higher the premium the insurance company will charge.

2. Pure Loss of Income (Income Replacement Contracts)

Income replacement contracts are policies which replace a certain percentage of the insured's income lost due to a covered accident or sickness, without first requiring a period of total disability. These types of plans have lower premium costs in traditional disability policies because they take into consideration other sources of income, including income from part-time work, other disability income policies and workers compensation benefits. Typically, these contracts are written in accordance with the "any occupation" definition for disability. Many insurers are utilizing this approach to underwriting individual disability income coverage since it minimizes that overinsurance and malingering aspects of traditional non-cancelable "own occupation age 65" policies

4. Other Provisions Affecting Income Benefits

Insurance companies offer other Riders, which can affect the income benefit and be disability income policy - Cost of Living Adjustment (COLA) Rider - Future Increase Option (FIO) Rider - Relation of Earnings to Insurance

3. At-work Benefits

Insurance companies provide some benefits to help insured's that have been disabled to get back to work. - Partial Disability: is 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 she can still report to work, but is not able to perform all of the regular duties of the job. The 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 are paid any flat amount, or a residual amount. - Residual Disability: is 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 worked before becoming disabled. Helps pay for loss of earnings. If the person can only work part-time or at a lesser paying position, it will make up the difference between their present earnings and what they were earning prior to disability

Overinsurance

Insurance that exceeds in amount the actual value of the person or property insured or Insurance in a greater amount than the insured can afford

1. Short Term Disability

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

E. Business Disability Insurance

Just as individual purchases disability income Insurance to protect her ability to earn a living, a business purchases business disability insurance on its key employees to protect it from Moss when the employee becomes disabled. - Key Employee (Partner) Disability - Business Overhead Expense Policy - Disability Buy-Sell Policy

4. Requirement to be Under Physician Care

Most disability income policies require that the insured be under the care of a physician and possibly confined to the house in order to receive benefits

Income Benefits (Monthly Indemnity)

Most often, benefits are paid monthly, but could be paid weekly in some policies. The amount of the benefit is stated in the policy and is usually limited to a percentage of one's income at the time of application to prevent overinsurance

An insured is covered by a disability income policy that contains an accidental means clause. The insured exits a bus by jumping down the steps and breaks an ankle? What coverage will apply?

No coverage will apply, since the injury could have been foreseen An accidental means Laws states that if the insured meant to do whatever caused the injury, no coverage applies since the resulting injury should have been foreseen

Social Insurance Supplement Payment of Income Situations

Payment of income benefits through Social Insurance Supplement in 3 different situations: When insured is eligible for social security benefits but before the benefits begin ( there's 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") 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

1. Eligibility

To be eligible for worker's compensation benefits, the worker must work in an occupation covered by workers compensation and have had an accident or sickness that is work-related. Benefits are payable when a worker is injured by a work-related injury, regardless of fault or negligence.

3. Presumptive Disability

Presumptive disability is a 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. This provides a benefit for dismemberment, the loss of use of any two limbs, total and permanent blindness, or loss of speech and hearing.

What is the initial period of tim specified in a disability income policy that must pass, after the policy is in force, before a loss can be covered?

Probationary Period Probationary period is the period of time after a policy is in effect before claims arising out of an illness are covered. This is to prevent adverse selection, persons waiting until they have been exposed to a cause of loss before purchasing coverage

Probationary period

Probationary Period is 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. A waiting period often 10 to 30 days from the policy issue date during which benefits will not be paid for illness related disabilities. 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.

Recurrent Disability

Recurrent Disability is 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 disabling condition will not be considered to be a new period of disability so that the insured is not subjected to another elimination period

F. Social Security Disability

Social Security, also referred to as Old Age Survivors Disability Insurance- OASDI, is a federal program enacted in 1935, which is designated to provide protection for eligible workers and their dependents against Financial loss due to old age, disability, or death. With a few exceptions, almost all individuals are covered by Social Security. In some aspects, Social Security plays a role of federal life and health insurance, which is important to consider when determining an individual's need for life insurance. - Qualification for Disability Benefits - Definition of Disability - Waiting Period - Disability Income benefits

6. Refund Provisions

Some insurance companies offer an incentive for low play music by offering a refund under the proper conditions. - Return of Premium: Some insurance companies offer an incentive for low play music by offering a refund under the proper conditions. - Cash Surrender Value: 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.

Additional Monthly Benefit (AMB)

Some insurance companies offer the Additional Monthly Benefit rider in the approximate amount Social Security would pay. The benefit is only provided for one year. It is then anticipated that Social Security benefits would commence at the end of 1 year.

3. 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 the beginning of the disability

4. Disability Income benefits

The amount of Social Security Disability Benefits is based upon the workers primary Insurance amount (PIA), which is calculated from their average indexed monthly earnings over their highest 35 years. The lowest 5 years of income may be deleted from calculation. Social Security Disability Benefits will continue for 3 months when a person returns to work making more than $850 per month. This is an incentive to get people back to work.

Social Insurance Supplement (SIS)

The insurance company may offer a social insurance supplement Rider (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 Riders are used to supplement or replace benefits that might be payable under Social Security 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 it is not disabled

1. Inability to Perform Duties

To pay benefits, a disability income policy will require for the insured to not be able to perform any duties of her occupation. The benefits will also depend on the definition chosen for the policy. - Own Occupation: An own occupation policy would provide benefits when the insured is unable to perform any duties of her own occupation because of sickness or accident. This definition is usually limited to the first 24 months after a loss. It allows insured (claimants) to receive benefits if, because of the 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 her 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 insurers liability because it is very likely that claimants can find something they can do for financial gain. - Any Occupation: The policy that has 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

C. Unique Aspects of Individual Disability Underwriting

Underwriting for disability income is unique due to the type of risk that is involved. - Occupational Considerations - Benefit Limits - Policy Issuance Alternatives

Waiver of premium feature

Waiver of Premium is usually included in a basic disability income policy. This benefit allows the insured, when disabled, to forego paying the premiums once he 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.

Basic principles of disability income coverage benefit limits

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 the benefit may not exceed the amount earned by the insured prior to disability

G. Workers Compensation

Workers compensation is a benefit offered and regulated by the states, and will vary to some degree from state-to-state. - Eligibility - Benefits

2. Benefits

Workers compensation law provides four types of benefits medical benefits; income benefits; Death benefits; and Rehabilitation benefits

Capital Sum

a portion of the principal sum of a health insurance policy; paid for accidental dismemberment or loss of sight in one eye

Tax Deductible

a qualified expense that may reduce the amount of income subject to taxation

Social Security Disability Insured Status

fully insured or currently insured, depending on the number of coverage credits earned

Total Disability

inability of the insured to perform any occupation for which he or she is reasonably suited by reason of education, training or experience

1. Key Employee (Partner) 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.

Waiver

relinquishment of a right or interest

Earned Income

salary, wages, or commissions; but not income from Investments unemployment benefits and similar sources of income

Principal Sum

the amount of coverage paid for an accidental death under a health insurance policy

Cost of Living Adjustment (COLA) Rider

the purchasing power of disability benefits can be eroded by inflation. The Cost of Living Adjustment Rider will 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 1 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 Investments