2. Insurance Planning. 7. Disability Income Insurance Flashcards
Module Introduction
Disability insurance may be thought of as earning-power insurance. When a disability occurs, life, along with all its expenses, continues on unabated. The individual’s ability to earn an income, however, ceases. Therefore, anyone who relies on income from a job needs disability insurance. In fact, for individuals between the ages of 35 and 65, chances of incurring a disability that would last at least 90 days is far greater than the likelihood of death.
Despite its importance, very few people who purchase disability insurance. This is because most people either perceive the cost of disability insurance as being too high in relation to the potential benefit, or think they are covered by an employer plan. Unfortunately, these misconceptions prevent many from exploring how a policy may fit their needs and budget.
The Disability Income Insurance module will explain the fundamental issues of disability insurance.
The online portion of this module takes the average student approximately two and a half hours to complete.
Upon completion of this module you should be able to:
* Define disability and describe the benefits under disability income policies, and
* Discuss the types of benefit arrangements.
Module Overview
The probability of a long-term disability, defined as having duration of at least three months, is substantially greater than the likelihood of death until the age of 60. The financial consequences of a disability can be substantial. In some ways, disability can be even more debilitating to a family than death, as income is reduced while expenses increase. The impact for a single person is worse than that of a married couple, as there is no second income to count on for help, nor is there a spouse who can assume the role of primary caretaker.
This module will introduce you to a fundamental understanding of the meaning and terminology of disability insurance.
To ensure that you have an understanding of disability income insurance, the following lessons will be covered in this module:
* Disability Income Insurance
* Benefit Arrangements
Section 1 – Disability Income Insurance
There are many different types of insurance: life, medical, social and disability income. Income insurance coverage is needed for maintaining one’s standard of living at an acceptable level in case of disability. Disability income policies are designed to provide monthly benefits to replace lost income when the insured is disabled as a result of sickness or injury. Disability coverage is marketed directly to individuals, as well as through group plans. More than 80% of disability coverage is sold to groups. Employers buy a group contract to cover their employees, and Associations (like a state or national CPA Association) may purchase a contract to offer to their members.
To ensure that you have an understanding of disability income insurance, the following topics will be covered in this lesson:
* Defining Disability
* Benefit Provision Components
Upon completion of this lesson, you should be able to:
* Define disability and describe available alternatives, and
* Discuss the basic components of the benefit provision.
What are the three ways Disability contracts define disability?
Disability contracts typically define disability in one of three ways:
* Own occupation definition, which is usually referred to as “own occ.”
* Modified own occupation, with a time limit (e.g. 2 years) on “own occ” protection.
* Any gainful occupation definition, which is commonly, if somewhat inaccurately, called “any occ.”
Listen in for a thorough comparison of the commonly-used definitions of disability. Audio:
* Own occupation definition - if insured can’t do regular occupation, but can do another, still qualify for benefits. Ex. surgeon is injured and can’t perform delicate surgery, but can do other things in medicine. Most expensive type of coverage. Most detailed underwritten.
* Modified own occupation - for a limited period (typically 2 years), it’s on own occupation. For the balance of the benefit period, it’s any any occupation definition.
* Any gainful occupation definition - most restrictive for the insured. If they can do any occupation, then they are not considered disabled. (Ex. surgeon would not qualify for benefits with this type)
Practitioner Advice: After ensuring that the insurer being selected is strong and reputable, the most important factor in selecting a policy is its definition of disability. What good is a “cheap” premium if the insured will never be able to collect benefits due to restrictive definitions?
Describe the Own Occupation Clause
An own occupation clause deems the insured to be totally disabled when they cannot perform the major duties of their regular occupations. This is considered the most liberal definition of disability available, and thus the best to have. Because the own occupation definition of disability is the most favorable for the insured the premium for this type of policy is higher than those policies with less restrictive definitions of disability.
A regular occupation is the one in which the insured was engaged at the time the disability began. Under this definition, the insured can be at work in some other capacity and still be entitled to policy benefits if they cannot perform the important tasks of their own occupations in the usual way.
Own Occupation Example:
Doctor Smith was a 45-year-old neurosurgeon with a successful practice. Due to a car accident, he lost the use of his right hand, thereby ending his ability to perform surgery. After a long rehabilitation period, he was offered a teaching position at a prominent medical school. He had purchased an “Own Occ” disability policy when he was 30 and had selected a benefit period that would last until age 65. Due to this “Own Occ” definition, he not only collected benefits while totally unable to work, but even after he started his teaching position.
Practitioner Advice: Own Occuption level of protection is essential for any specialist (e.g. a trial attorney, a commercial architect, or a surgeon). Policies with “own occ” definitions are harder to find than previously, and there is an increased premium for the protection provided, but it is definitely worth the costs.
Dr. Keats, a trauma surgeon, purchased disability income insurance several years ago. The policy had an any occupation definitiion of disability. As a result of a mountain bike accident, Dr. Keats was unable to conduct her normal surgery work and the disability policy benefit began to payout after 60-days.
Three months later, Dr. Keats was still recovering from her accident and was hired to teach modern surgical techniques at a medical school.
Upon Dr. Keats hiring at the medical school, her disability benefit would __ ____??____ __.
* stop completely
* continue until she resumes trauma surgery
* continue with a prorated payout
* be replaced by any group disability policy at the medical school
stop completely
* Work at teaching at the medical school is considered gainful employment for which Dr. Keats is reasonably suited to perform based upon her training and education.
* As a result, the disability benefit on her policy would stop completely.
* The reason is the ‘any gainful occupation’ clause.
Match the terms with the correct descriptions.
Own occupation
Presumptive disability
Any occupation
* The insured is always considered totally disabled, even if she is at work, if sickness or injury results in the loss of any body parts.
* The insured is considered totally disabled when unable to perform the major duties of any gainful occupation for which they are reasonably suited because of education, training or experience.
* The insured is unable to perform the major duties of his or her regular occupation.
- Own occupation - The insured is unable to perform the major duties of his or her regular occupation.
- Presumptive disability - The insured is always considered totally disabled, even if she is at work, if sickness or injury results in the loss of any body parts.
- Any occupation - The insured is considered totally disabled when unable to perform the major duties of any gainful occupation for which they are reasonably suited because of education, training or experience.
List the 3 Benefit Provision Components
The three basic components that establish the premium and define the payment of benefits under disability income policies are:
* The elimination period,
* The benefit period, and
* The amount of monthly indemnity.
All other parts of the policy relate to these common elements and are used to limit or expand their value in meeting the specific needs of the insured at the time of loss. The strength of a particular disability income plan lies in how liberally the insurance company permits these elements to operate within the policy provisions and through its own administrative practices.
Exam Tip: The elimination period, benefit period, and amount of monthly indemnity function as ‘dials’ that can be adjusted to secure a specific level of coverage and establish the premium amount. Listen in for additional facts about disability income insurance benefit provisions.
Audio:
3 main components (variables) in a disability policy. They impact the level of benefits and premiums. They’re like dials that can be turned up or down to tailor it to the client’s circumstances or needs. Or can change it over time.
* The elimination period,
* The benefit period (how long the benefits go to), and
* The amount of monthly indemnity.
Or can change it over time. Ex. Client picked up policy and now have enough funds to increase from 30 day to 180 day elimination period (would reduce the premium). Could then use the savings to increase the benefit period or monthly payment amount. Or could go somewhere else (umbrella ins).
Describe the Elimination Period
The elimination period, sometimes called the waiting period, refers to the number of days at the start of disability during which no benefits are paid. It is a limitation on benefits that is somewhat like a deductible in medical expense and property insurance policies. It is meant to exclude the inconsequential illness or injury that disables the insured for only a few days and that is more economically met from personal funds.
The major insurers allow for a temporary break in the elimination period so that the insured will not be penalized for any brief attempt to return to work before the elimination period has expired at the start of disability. The brief recovery is generally limited to six months or, if less, to the length of the elimination period. If the insured is then again disabled because of the same or a different cause after the interruption, the insurer combines the two periods of disability to satisfy the elimination period.
Practitioner Advice: Remember, deductibles, and elimination periods are forms of risk retention on the part of the insured. The more risk retained by the insured helps to reduce the premium charged. When a need exists and affordability is important, choosing a less than optimal elimination period, monthly benefit amount, or benefit period can be a good decision.
Select the maximum percentage of income that insurer will cover to ensure that the total of all monthly indemnity is not exceeded.
* 50% to 60%
* 70% to 80%
* 60% to 70%
60% to 70%
* Insurers limit the amount of disability income coverage they will sell to an applicant so that the total of all monthly indemnity will not exceed about 70% of income for insureds with low incomes, grading downward to about 60% or less for those individuals in the highest income brackets.
Describe Taxation of Disability Benefits
As with group health insurance, premiums paid by an employer for disability income insurance for employees are generally tax deductible by the employer as a business expense and are not considered taxable income to the employee. Employee contributions, on the other hand, are not tax-deductible by the employee.
Consistent with these two rules, the payment of benefits under an insured plan or a non-insured salary continuation plan result in taxable income to the employee to the extent that benefits received are attributable to employer contributions. Thus, under a non-contributory plan, the benefits are included in an employee’s gross income. Under a partially contributory plan, benefits attributable to employee contributions are received free of federal income taxation and benefits attributable to employer contributions are included in gross income. A tax credit may be available to persons who are totally and permanently disabled.
The benefits received from a disability income policy purchased individually with after-tax dollars are not subject to federal income tax and the premiums paid for the policy are not tax-deductible. If an employer pays the premiums for an individual policy insuring an employee and reports the premiums as compensation under IRC Section 162 the employee pays taxes on the premiums paid but the disability insurance benefits are then tax-free when paid.
Exam Tip: When determining disability benefit taxation, remember that the IRS will always get their share. Focus on the party that pays the premium and determine if the premium is paid with pretax or after-tax dollars.
Tax-deductions for premiums paid are only available to an employer as a business expense. Individually-purchased policies are not eligible for a deduction.
Audio:
* Taxation of disability insurance. Will most likely have a scenario on exam that employer is paying premiums (not includable in income to insured) and/or scenario with insured also has a privately paid disability policy that they pay with after tax dollars.
* Question - how much is the taxable portion of the benefits?
* Question - how much is tax free?
* Look to see who was paying the premiums and if it was pre or post-tax
* If employer paid benefit - no contribution from insured - benefit would be taxable to insured
* For private policy paid with after tax dollars - benefits received tax free
Section 1 – Disability Income Insurance Summary
Disability income insurance coverage is as important as life and health insurance. Disability income insurance takes care of the financial needs of the insured and their dependents at a time of loss of income.
In this lesson, we have covered the following:
- The definition of disability specifies policy-related conditions were presented that determine benefit payout. Common types include own occupation (“own occ”) and any occupation (“any occ”).
- The benefit provisions help in establishing the premium and define the payment of benefits under disability income policies. There are three basic types: the elimination period, the benefit period, and the amount of monthly indemnity.
Why is individual disability income insurance also referred to as loss-of-time insurance?
I. Due to occupational definitions used to qualify the insured as disabled.
II. Definitions are not premised on the inability of the insured to perform certain occupational tasks.
III. Policies presume that the disabled suffers loss of income, as he cannot work.
IV. Policies do not presume hazardous jobs.
* I and III
* II and IV
* I and II
* III and IV
I and III
* Traditionally, individual disability income policies have been called loss-of-time insurance because of the occupational definitions used to qualify the insured as disabled.
* A disabled person under these types of policies is presumed to have suffered a loss of income because he or she cannot work.
* The definitions of total disability and partial disability are premised on the inability of the insured to perform certain occupational tasks.
Section 2 – Benefit Arrangements
The basic benefit arrangements of disability income policies consist of a benefit for total disability and a benefit for waiver of premium. These two components are common to all insurers, regardless of any additional coverage that may be included directly in the policy form.
To ensure that you have an understanding of benefit arrangements, the following topics will be covered in this lesson:
* Benefit Provisions
* Supplemental Benefits
Upon completion of this lesson, you should be able to:
* Identify the different benefit provisions, and
* Identify optional or supplemental benefits.
John works as a field engineer for one of the major automotive manufacturers. Recently he had a minor accident that has left him unable to make site visits. However, he is able to work part time at a desk job in a surveyor’s office during his disability period. John is entitled to policy benefits. Which type of clause did John have on his policy?
* Own occupation
* Any occupation
* Residual disability
* Partial disability
Own occupation
* An own occupation clause deems insured to be totally disabled when they cannot perform the major duties of their regular occupations. Under this definition, insured can be at work in some other capacity and still be entitled to policy benefits if they cannot perform the important tasks of their own occupations in the usual way.
Describe the Rehabilitation Benefit
The rehabilitation benefit generally allows a specific sum, often 12 times the sum of the monthly indemnity and any supplemental indemnities, to cover costs not paid by other insurance or public funding when the insured enrolls in a formal retraining program that will help him or her return to work.
Practitioner Advice: Some disability plans will cover the cost of the retraining program, and some group disability plans will even pay for daycare so the parent can go to training.
The purpose of the rehabilitation benefit is to support one’s recovery and return to work without the fear of being punished by having benefits reduced.
* False
* True
True
* The purpose of this benefit is to support one’s recovery and return to work without the fear of being punished by having benefits reduced.
* While the rehabilitation benefit costs the insurer, in the long run it helps people to reduce the cost of long-term claims.
Match the term with the correct description.
Transplant Benefit
Rehabilitation Benefit
Non-disabling Injury Benefit
Principal Sum Benefit
* Provides lump-sum amount payable if the insured dies accidentally.
* Provides a specific sum to cover costs not paid by other insurance or public funding.
* Provides a specific sum to reimburse medical expenses incurred for treatment of an injury.
* Provides benefit due to transplant of an organ or for cosmetic surgery.
- Transplant Benefit - Provides benefit due to transplant of an organ or for cosmetic surgery.
- Rehabilitation Benefit - Provides a specific sum to cover costs not paid by other insurance or public funding.
- Non-disabling Injury Benefit - Provides a specific sum to reimburse medical expenses incurred for treatment of an injury.
- Principal Sum Benefit - Provides lump-sum amount payable if the insured dies accidentally.
