Chapter 10 - Texas Life and Health

Elimination Period (Waiting Period)

"time deductible", is the length of time an individual must be totally disabled before benefits become payable. The waiting period to pay benefits for a disability due to an illness is usually longer than the waiting period to pay benefits for a disability due to an accidental injury. The elimination period can be selected by the policyowner at the time the policy is purchased. The length of the elimination period will directly affect the premium. A shorter waiting period will result in a higher premium.

The insurer may require the insured to undergo a physical examination, paid by the insurer, every ______ months to continue receiving benefits

6

Penelope received benefits from her disability policy and went back to work. After 30 days she found she was not able to work and began to immediately receive her disability payments. Which of following provisions made this possible? A Recurrent Disability Provision B Presumptive Disability Provision C Residual Disability Provision D Second Injury Provision

A

Nonoccupational

A policy classification providing coverage for a disability due to an injury and sickness which occurs off the job only

Occupational

A policy classification providing coverage for a disability due to injury and sickness which occurs either on or off the job

Under which business-related use of Disability Income Insurance would the premiums be tax-deductible? A Business Overhead Expense Coverage B Key Person Disability Income C Disability coverage purchased to fund an entity purchase plan D Disability coverage purchased to fund a cross purchase plan

A; Business Overhead Expense Coverage is deductible as an ordinary business expense. Any benefits received would be taxable

What type of policy pays weekly or monthly benefits for loss of income due to sickness or injury? A Disability Income B Medical Income C Subcontractors Income D Death Benefit

A; Disability income pays benefits either weekly or monthly when an insured becomes disabled and unable to perform some or all of their job duties, due to a sickness or injury

Which of the following statements is true regarding group short term disability benefits: A Elimination period may be as short as zero days for accidents B Elimination period may be waived for sickness C Characterized by minimum benefits for short periods D Will not pay benefits for disabilities lasting longer than 1 year

A; Group short-term disability income plans are chracterized by maximum benefits for short periods, such as 13, 26, or 52 weeks but will not pay benefits for disabilities lasting longer than 2 years. The elimination period may be waived for accidents and as short as 7 days for sickness.

An insured purchases a disability income policy with a 90 day elimination period. If a disability lasts 100 days, the insured would be entitled to receive benefits for ___days. A 10 B 190 C 90 D 100

A; The elimination period acts like a time deductible. The insured would be eligible to receive 10 days of benefit payments. Of the 100 days he was disabled, the first 90 are eliminated, leaving the remaining 10 days eligible for claim payment.

What type of disability income insurance pays a lump sum enabling certain businesses to cover the cost of purchasing a disabled business owner's interest in the business? A Reducing term B Business disability buyout C Business overhead expense D Key employee

B

Recurrent disability: A Requires an individual to be unable to perform all duties of any occupation B Protects an insured who becomes disabled for the same loss and does not have to meet a new waiting period C Requires an individual to meet the definition of Social Security disability before any benefits are payable D Protects an insured who is unable to perform one or more duties of any occupation

B; Recurrent Disability occurs when a second disability is suffered due to the same cause within a certain period of time (usually 6 months), the elimination period will not apply and the disability will be considered continuous.

A court reporter develops arthritis making it impossible to continue this employment. The reporter now has other employment at a reduced salary and receives a monthly benefit from an insurance contract due to which of the following policy provisions? A Recurrent Disability B Residual Disability C Partial Disability D Total Disability

B; Residual Disability recognizes one's ability to continue to work, but at a reduction of earnings.

The elimination period in a disability income insurance policy: A Describes how long the policy must be in force before claims can be considered B Serves as a time deductible before benefits are payable C Addresses where accidents and sicknesses must not occur in order for a claim to be payable D Defines what causes of loss are eliminated from potential claim payment

B; The elimination period is the period for which an insured person must be disabled before benefits begin. Benefits begin only after this time period has been satisfied

Disability Income Benefits

Based on the employee's average indexed monthly earnings, based on the Consumer Price Index, on which Social Security taxes have been paid. This is referred to as the Primary Insurance Amount (PIA). Benefits cease when the employee reaches Social Security's definition of Full Retirement Age, dies, or is no longer disabled. When Full Retirement Age is reached, the insured worker is eligible to receive retirement benefits. Social Security disability income benefits are not taxable.

Partial Disability

Benefits restore a percentage of lost wages.

To qualify for Social Security disability, an individual must be unable to: A Sit, stand, or lie down for extended periods of time B Perform more than 50% of one's customary duties C Perform any substantial gainful activity D Qualify for benefits under any personal or state-sponsored disability insurance plan

C

An evaluation of Simon's past earnings reveals his average earned monthly income to be about $4,000. The greatest amount of benefit that Simon will likely be able to purchase under a Disability Income Policy, in order to reduce malingering in the event of a claim, is: A $1,000 monthly B $4,000 monthly C $2,500 monthly D $2,000 monthly

C, Benefits are usually determined as a percentage of the insured's current earnings, normally 60 to 70%. Simon would be unlikely to obtain 100% of his income as a disability benefit.

A Business Overhead Expense policy, as a form of disability insurance, provides payments for all of the following, EXCEPT: A Employee wages B Raw materials used to manufacture goods sold C Owner's income D Taxes, utilities, rent

C; A Business Overhead Expense policy will not pay the wages of the business owner. By paying the other expenses of the business, the business can remain financially stable until the owner is able to return to work.

Under a Key Employee Disability Income Policy, the employer is all of the following, except: A Recipient of the proceeds B Policyowner C Insured D Premium payor

C; As in Key Employee or Key Person life insurance (Chapter 1), the employer is the owner, premium payor, and recipient of the proceeds. The key employee or person is the insured. basically, the company buys insurance on one of their key employees

All of the following are characteristics of group disability income plans, except: A Coverage can be offered based on short-term or long-term disability benefits B Premiums are paid based on a contributory or noncontributory basis C Benefits are based on a percentage of the employee's income at the time the policy was issued D Issued as nonoccupational

C; Group policies are issued as nonoccupational, premiums are paid based on either contributory or noncontributory, and benefits can be offered based on short-term or long-term disability. The employee's benefits are based on a percentage of salary at the time of loss, not the time the policy was issued.

When an individual pays the full cost of individual disability income insurance, the disabled insured's benefit will be _____________. A Nontaxable up to 60% of the employee's pretax wage B Taxable in part, up to 60% of the employee's pretax wage C Nontaxable in full, regardless of the employee's wage D Taxable in full, regardless of the employee's wage

C; Since the entire premium is paid by the individual and is not tax-deductible, the entire benefit is nontaxable

A group disability plan is issued on a contributory basis and the employer pays 80% of the premium. If an employee is eligible to receive a weekly benefit of $1,000, how much is taxable? A $1,000 B $200 C $800 D $0

C; Since the plan is written on a contributory basis, the percentage of premium the employer pays is the percentage of the benefit that is taxable. The employer pays 80% of the premium, therefore 80% of $1,000 is taxable, or $800.

Which of the following plans could generate a taxable event to the recipient? A Medical expense policy owned by a sole proprietor B Key person disability income C Business overhead expense D Disability buy-sell

C; Since the premiums are deductible, the benefit is taxable.

When disabled, which of the following would ensure payment for the wages of a business owner's employees? A Business expenditures B Presumptive disability C Business overhead D Disability buyout

C; The Business overhead expense policy will provide income to the business to cover losses such as employee's wages if the owner becomes disabled.

Which statement is false concerning Social Security disability benefits? A To be fully insured for disability benefits, the employee must be either fully or currently insured under the Social Security system B Benefits may only start after 5 full calendar months of disability, and are not retroactive to the date of disablement C The employee must only be unable to engage in his/her own occupation to be considered disabled D The amount of the benefit is based on the employee's Primary Insurance Amount

C; The employee must be unable to engage in any kind of gainful employment, not just his/her own occupation

When a disability buyout is funded by the partners, the premiums are: A Tax deductible and the value of the benefit is taxable as income B Tax deductible and the value of the benefit is not taxable C Not deductible and the value of the benefit is not taxable as income D Not tax deductible and the value of the benefit is taxable as income

C; Under a disability buyout, the premiums paid by each partner are not tax-deductible and the benefit is not taxable.

All of the following are correct concerning partial disability, except: A Partial disability benefits are typically paid for 3 to 6 months B Partial disability benefits are referred to as "at-work" benefits C Partial disability is an inability to perform one or more of the regular duties of an occupation D Partial disability payments are usually 75% of the total disability benefit

D; Partial disability is an inability to perform one or more of the regular duties of an occupation. Partial disability benefits are referred to as "at-work" benefits, since the insured is still able to work and receive benefits. The benefit usually pays up to 50% of a total disability benefit for a period of 3 to 6 months.

Nathan is insured under a group disability plan which requires that he pay 1/3 of the premium. Nathan is currently drawing a $6,000 monthly benefit from the plan. How much of the $6,000 is subject to income tax? A Zero B $2,000 C $6,000 D $4,000

D; Since the employer pays 2/3 of the monthly premium, then 2/3 of the monthly benefit ($4,000) would be taxable as income to Nathan.

An insured took out a disability income policy while working in a low hazardous occupation. When filing a claim for disability income benefits, the insurance company discovered the insured changed jobs 2 years prior to the loss. If the new job would have been classified as more hazardous, the insurance company will most likely: A Pay the benefit as contracted for since the policy is over 2 years old B Reduce the benefit payment dollar for dollar to account for the premium underpayment C Pay no benefit since the insured failed to inform the insurance company on a timely basis of the change in occupation D Reduce the benefit to an amount the actual premium paid would have purchased under the proper job classification

D; The insurer will pay only the amount of benefit that the insured would have been able to purchase, with the premium already paid, for the more hazardous job, so his benefit will be reduced accordingly.

Which of the following is a state-mandated benefit? A Social Security B Subrogation C Group Disability D Workers' Compensation

D; The only state-mandated benefit listed is Workers' Compensation. Social security is a federal program for those that qualify.

Key Employee Policy

If a key employee becomes disabled, this policy pays a benefit by helping pay for a replacement, train a new employee, or replace loss of revenue due to the disabled employee's lack of ability to work.

5 month waiting period

In general, benefits start with the 6th full calendar month of disability and are not retroactive to the date of disablement. In no event are benefits retroactive prior to the date of application for disability determination. Accordingly, a person should apply for SSDI benefits as soon as possible following their disabling event. To be considered a "full" month of disability, the individual must be disabled prior to the first day of a month and remain disabled through the last day of a month (a person first disabled after midnight on the first day of a month will not begin a full month of disability until the first day of the following month).

Taxation for business disability buyout

Premiums are not tax deductible The benefits received are not taxable

Noncontributory Plan

Premiums are paid entirely by the employer and are tax deductible to the employer 100% of the disability benefit proceeds received by the employee are taxable to the employee

Taxation for business disability

Premiums paid by the business are tax deductible Benefits received are taxable to the business owner and must be reported as income

Disability Income Benefits

Provide for loss of income based on the following benefits (following 3 terms) with limits set by each state. Benefits paid from workers' compensation are not taxable as income.

Business Disability Buyout

Provides a lump sum benefit to nondisabled business partners to fund the buyout of a disabled partner's share of the business

Residual disability

Provides benefits for loss of income after an insured returns to work following a total disability if he/she has reduced earnings as a result of the disability

Residual Disability

Provides benefits for loss of income after the insured returns to work, usually following a total disability. Benefits are based on the reduction of earnings as a result of the disability. Both partial and residual disability benefits are referred to as "at-work" benefits since the insured is able to work and continue to receive benefits. All other disability benefits are considered "24 hour" benefits.

Business Overhead Expense

Provides the funds to cover the expenses of running a business when the owner becomes disabled

True or False: you can have benefits of both types of disabilities - the short term during the elimination period of the long term

TRUE!!

Total Disability

The benefit amount is subject to maximum and minimum weekly limits.

Benefit period

The length of time the insured is eligible to receive payments after the elimination period has been satisfied

Tax Treatment of Individual Disability Income Premiums and Proceeds

The premiums paid for individual disability income insurance are not tax deductible Disability income benefits received from an individual policy are not taxable as income

Subrogation

The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss. - prevents insured collecting twice

Social Security Disability Insurance

The qualification for Social Security disability benefits is contingent upon the employee having a "fully" insured (40 quarters or credits) status. The employee must meet other very strict requirements by meeting the definition of disabled and the elimination period to be eligible to receive benefits.

Probationary period

The time period that must expire before losses due to a preexisting condition will be covered

Scheduled Injury

There is a schedule of benefits for specific permanent partial injuries, such as a specific amount for loss of an eye or a specific amount for loss of a hand.

Business Overhead Expense

This policy provides the funds to cover the overhead expenses of a business when the owner becomes disabled. The benefits include expenses such as office rent, utilities, and employee labor. However, the owner cannot collect for loss of income under this policy.

Definition of Disability

To collect Social Security disability benefits, an employee must be unable to engage in any substantial gainful activity due to a medically determined physical or mental condition that has lasted or is expected to last at least 12 months or result in an early death.

Contributory Plan

Under a contributory plan, premiums paid by the employer are tax deductible to the employer and premiums paid by the employee are made with after-tax dollars Disability benefits received by the employee as a result of employer contributions are taxable as income to the employee based on the percentage of the premium paid by the employer

Elimination period

Waiting period during which an individual must be totally disabled before benefits become payable

Partial Disability

When a person cannot perform 1 or more of the regular duties of his/her occupation, but is not totally disabled, a partial disability benefit may provide up to 50% of the total disability benefit for 3 to 6 months.

Recurrent Disability

When a subsequent disability is suffered due to the same cause within a certain period of time (usually 6 months), the elimination period will not apply and the disability will be considered continuous.

Taxation for key employment disability

When an employer purchases a disability income policy on a key employee and is also the beneficiary, the premiums are not tax deductible to the business Benefits received are not taxable

SSDI benefits are secondary to

Workers' Compensation and any other public insurance benefits

Workers' Compensation Benefits

a liability (casualty) insurance policy, not a health insurance policy, which provides coverage for bodily injury, occupational diseases (sickness), disability, and death that arise from and in the course of employment. Employers must pay the entire premium.

Long-Term Disability

characterized by benefit periods of at least 2 years and as long as the lifetime of the insured. The elimination period will most commonly be either 30, 60, 90, or 180 days. It may be possible to obtain a LTD policy with a 2-year elimination period to be used in conjunction with a short term disability policy that pays benefits for 2 years.

Short-Term Disability

characterized by maximum benefits for short periods, such as 13, 26, or 52 weeks. Ultimately, short term disability plans will not pay benefits for disabilities lasting longer than 2 years. elimination period may be 0 for accidents and 7 for sickness

Occupational policy

covers a disability due to injury and sickness which occurs either on or off the job. Higher premium - available for individuals who may not have coverage through an employer's workers' compensation plan

Nonoccupational policy

covers a disability due to injury and sickness which occurs off the job only. Most group insurance plans are nonoccupational, since employees are covered for work-related losses under workers' compensation.

The change of occupation provision in a disability income policy could result in

either a reduction of benefits, if the new occupation is a higher risk, or the insurer could reduce the amount of premium to fit a lower occupational rating for the current level of benefit

Contributory

employee pays part of the premium

Any Occupation

more strict and require the insured to be unable to perform the duties of not just his/her own job, but the duties of any occupation for which the individual is reasonably suited by education, training, and experience restrictive - hard to receive benefits

Premiums are

paid based on either a contributory or noncontributory basis

Business Disability Buyout

pays a lump sum benefit if a partner becomes disabled, providing funds for the nondisabled partner to buy out the totally disabled partner's interest in the business. This plan is set up as a buy-sell agreement that requires each partner to name themselves as the beneficiary of each separate disability policy on the other partners. This plan does not provide death benefits in the event of death of a partner.

Individual Disability Income Policy

pays an income benefit when the insured is unable to work due to a covered illness or injury. Benefits are typically paid monthly and determined as either a flat dollar amount or a percentage, usually 60% to 70% of the insured's current net earnings as reported at the time of application

Because Workers' Compensation benefits are mandated by state law, they are

primary to any other insurance benefits.

Own Occupation

requires that the insured be unable to perform the main duties of his/her own occupation to qualify as being totally disabled. The own occupation definition often applies for the first 2 years of a disability, then changes to any occupation least restrictive - skilled occupations - higher premium

If the total of SSDI, Workers' Compensation, and other public disability benefits exceeds 80% of the worker's pre-disability earnings,

the SSDI benefit will be reduced dollar-for-dollar until the 80% limitation is reached.

Benefit Period

the length of time the insured is eligible to receive payments after the elimination period has been met. The benefit period may be written for a specified number of years (i.e., 2, 5, or 10 years), to a specific age (i.e., 65 or 70), or for life. The policyowner can purchase a policy with a short or long benefit period. A longer benefit period will result in a higher premium.

insured expects that the insurer will never know that

they now have a more hazardous job - aka their premiums would go up if the insurer found out about their new job

In order to receive benefits, an individual must meet the definition of

total disability

Medical Benefits for bodily injury and sickness are

unlimited as to time, but dollar amounts payable may be limited by law.

Group disability income insurance

usually offered only on a nonoccupational basis, which will not cover work-related disabilities. Group disability plans pay benefits based on a percentage of the employee's salary at the time of the loss, as opposed to the time of application.