Chapter 10: Disability Income

Question 1

Disability Income Insurance

Answer 1

Sometimes referred to as “the forgotten need.”

Question 2

Types of Disability Income Insurance Policies

Answer 2

• Disability Income (Indemnity) Policy

- Pure Loss of Income (Income Replacement) Policy

Question 3

Disability Income (Indemnity) Policy

Answer 3

Pays an income benefit when the insured is unable to work due to illness or injury, even if injured on vacation.
- Benefits are paid weekly or monthly and determined as a flat benefit or a percentage of the insured’s current earnings (normally 60%-70%).

Question 4

Malingering

Answer 4

Full income is not paid in Disability Insurance to prevent this from happening. If insured received 100% income replacement, they would not be motivated to recover and return to work.

Question 5

Pure Loss of Income (Income Replacement) Policy

Answer 5

The insured will receive benefits if loss of income is due to a covered accident or sickness, even if the insured is able to work full-time doing all the same duties as before the loss occurred. Under this policy, the insured is eligible based solely on loss of income, without loss of time or duties.

Question 6

Characteristics of a Disability Income Policy

Answer 6

• Probationary Period
• Elimination Period (waiting Period)
• Benefit Period

Question 7

Probationary Period

Answer 7

To protect the insurer from immediate claims. The insurer may have a 15-30 day waiting period before losses due to a pre-existing condition. The probationary period usually does not apply to losses due to an accident.

Question 8

Elimination Period (waiting Period) 
Sometimes referred to as "time deductible"

Answer 8

The time period an individual must be disabled before benefits become payable. The waiting period for a disability due to an illness is usually longer than for an injury due to an accident.

Policyowner can select the elimination period at the time the policy is purchased. The length of the elimination period will directly affect the premium (shorter waiting period, higher premium)

Question 9

Benefit Period

Answer 9

The time period the insured is eligible to receive payments after the elimination period has been met. The policyowner can purchase a policy with a short or long benefit period. A longer period will result in a higher premium. Could be specified number of years or up to age 65.

Question 10

Qualifying for Disability Benefits

Answer 10

There are two types of disability policies (other than Workers’ Compensation insurance), which can be purchased as an individual plan or part of a group plan, that determine how a worker qualifies for benefits:

• Occupational
• Nonoccupational

Question 11

Occupational

Answer 11

The policy covers disability due to injury and sickness which occurs on or off the job.

Question 12

Nonoccupational

Answer 12

The policy covers a disability due to injury and sickness which occurs off the job only.

Question 13

Total Disability

Answer 13

Inability to perform all duties of:

• Own Occupation
• Any Occupation which is reasonably suited by education, training, or experience

Question 14

Own Occupation

Answer 14

Some policies require the insured’s inability to perform the main duties of their own occupation. The own occupation definition often applies for 2 years of a disability, then changes to any occupation. This definition is the least restrictive, and it is easier to qualify for benefits using own occupation. It is typically reserved for more skilled occupations and may result in a higher premium.

Question 15

Any Occupation

Answer 15

Some policies are stricter and require the insured to be unable to perform the duties of any occupation for which they are reasonably suited by education, training, and experience. This definition is more restrictive, making it harder to qualify for benefits.

Question 16

Permanent Disability

Answer 16

A total disability that reduces or eliminates the insured’s ability to work again.

Question 17

Temporary Disability

Answer 17

An insured is able to continue to work at reduced efficiency or reduced hours, but is expected to fully recover.

Question 18

Partial Disability

“at-work” benefit

Answer 18

Disability resulting in an inability to perform 1 or more regular duties of an occupation. The benefit usually pays up to 50% of a total disability benefit for 3 to 6 months.

Question 19

Residual Disability

“at-work” benefit

Answer 19

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.

Question 20

Recurrent Disability

Answer 20

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.

Question 21

Presumptive Disability

Answer 21

Loss is presumed to be total and permanent due to the loss of sight, hearing, speech, or the loss of 2 limbs. Benefits paid are usually paid in a Lump Sum. Lump sum payments are based on the assumption the insured will not be able to return to work.

Question 22

Transplant Donor Benefit

Answer 22

When an insured is totally disabled because of the transplant of an organ to another individual, the insurer will deem the insured to be disabled as a result of sickness.

Question 23

Permanent Total

Answer 23

Can’t work at all and not expected to get better

Question 24

Permanent Partial

Answer 24

Can do some work, but not expected to get better

Question 25

Temporary Total

Answer 25

Can’t work at all now, but is expected to get better

Question 26

Temporary Partial

Answer 26

Can do some work now and is expected to get better

Question 27

Common Exclusions

Answer 27

Individual disability income policies typically exclude coverage losses caused by:

• Aircraft, except for passengers on a regularly-scheduled flight
• War or acts of war
• Attempted suicide or self-inflicted injuries
• Normal pregnancy
• Pre-existing conditions
• Commission of a felony

Question 28

One of the Primary Underwriting Factors

Answer 28

Occupational classification. When a person works in more than one occupational class, the one which poses the greater risk of disability will determine the classification for underwriting purposes.

Question 29

Ways Insurers Deal with Substandard Risks

Answer 29

• Reducing benefits
• Increasing premiums
• Excluding or limiting coverage for known risks (pre-existing health conditions, vocational/avocational risks)

Question 30

Unique Aspects of Individual Disability Underwriting

Answer 30

• Occupation is the single most important rating factor
• Hazardous hobbies
• Age, gender and prior health history
• Amount and length of benefit
• Elimination period

Question 31

Underwriting Group Disability Plans

Answer 31

• No medical underwriting
• Field underwriter’s job is to guard against adverse selection and overinsurance
• Usually offered only on a nonoccupational basis, which will not cover work-related disabilities (Workers’ Comp covers on the job)
• Minimum number of employees required to participate
• No evidence of insurability required

Question 32

The Age Discrimination in Employment Act (ADEA)

Answer 32

Affects both short- and long-term group disability benefits for the people employed after age 65. This has some effect on premium determination by the insurer when underwriting a particular group.

Question 33

Short-Term Disability

Answer 33

Characterized by maximum benefits for periods of rather short duration, such as 13, 26, or 52 weeks. Often, benefit periods are coordinated with the employer’s “sick pay plan.” Short-term disability plans will not pay benefits for disabilities lasting longer than 2 years.

Elimination period may be as short as zero days for accident and 7 days for sickness, but is rarely more than 15 or 30 days. Benefits are typically paid weekly and range from 50% to 100% of the individual’s income.

Question 34

Long-Term Disability

Answer 34

This coverage is often characterized by benefit periods of 2 years, 5 years, to age 65, or lifetime. 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 two-year elimination period, to be used in conjunction with a short term disability policy that pays benefits for 2 years.

Benefit amounts are usually limited to typically 2/3 of the participant’s income. Benefits stated in the policy are the maximum benefit amounts and maximum period of time covered. Normally, the waiver of premium for disability applies after a period specified in the policy.

Question 35

Business Overhead Expense

Answer 35

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

Question 36

Key Employee Insurance

Answer 36

Pays a benefit to the business when a key employee becomes disabled 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.

Question 37

Buy-Sell Agreement or Disability Buyout

Answer 37

Pays a lump sum, enabling a partnership or business to buy out the totally disabled principle’s interest in the business.

A cross-purchase plan requires each partner to purchase a separate disability policy on each of the other partners.

An entity plan provides for the business to purchase a disability policy on each partner.

Question 38

Disability Reducing Term

Answer 38

Helps a small business that has long-term commitments requiring monthly or other regular payments meet their obligations. The amount of coverage remains the same monthly, but the benefit period reduces as the debt reduces.

Question 39

Disability Income Policy Riders

Answer 39

• Cost of Living Rider
• Guaranteed Purchase Option (Guaranteed Insurability, Future Increase) Rider
• Waiver of Premium Rider
• Impairment Rider
• Return of Premium Rider
• Cash Value (Surrender) Rider
• Lifetime Benefit Rider
• Annual Renewable Term Rider
• Rehabilitation Benefits Rider
• Non-Disabling Injury Rider
• Hospital Confinement Rider
• Social Insurance Supplement (SIS) Rider
• Additional Monthly Benefit (AMB) Rider

Question 40

Cost of Living Rider

Answer 40

Automatically increases monthly benefits after the onset of a disability, as the Consumer Price Index (CPI) increases. An adjustment in benefits is made on each anniversary while the disability continues and protects the insured against inflation.

Question 41

Guaranteed Purchase Option (Guaranteed Insurability, Future Increase) Rider

Answer 41

Guarantees that on specified dates, ages, or occurrences, such as marriage, birth of a child, etc., the insured may purchase additional monthly benefits, if income justifies it, without proof of insurability. Rates are based on attained age. Some insurers refer to this as a Future Increase Option (FIO).

Question 42

Waiver of Premium Rider

Answer 42

In the event total disability continues beyond a specified period, future premiums will be waived by the insurer for the duration of the disability.

Question 43

Impairment Rider

Answer 43

Eliminates coverage for preexisting conditions, such as back injuries. Attaching this rider excludes coverage for a condition that would otherwise be covered. The use of this rider may make insurance obtainable for an otherwise uninsurable person.

Question 44

Return of Premium Rider

Answer 44

At specified policy years (typically after 10 years) the insurer will provide a refund of 80% of premiums paid in to that point, less any dollar amounts paid out in claims. This optional rider has a premium requirement which can be an additional 40-60% of the base policy’s premium.

Question 45

Cash Value (Surrender) Rider

Answer 45

This form of a return of premium begins building values equal to a percentage of premiums paid for a disability policy. The values start building around the third year and build to 100 percent at age 65, which can be returned to the insured at that time, less any claims.

Question 46

Lifetime Benefit Rider

Answer 46

Extends the benefits for life if total disability begins before a specified age. If disability begins when the insured is older than the age specified, the rider is not in effect.

Question 47

Annual Renewable Term Rider

Answer 47

Some companies will allow an insured to add a life insurance rider to a disability income policy in the form of annual renewable term. This provides additional death benefits if the insured dies due to a disability.

Question 48

Rehabilitation Benefits

Answer 48

Paid while the insured is totally disabled and receiving benefits if the insured elects to participate in come form of vocational rehabilitation approved by the insurer. Total disability benefits will be continued as long as the insured is actively participating in the training program and remains totally disabled.

Question 49

Non-Disabling Injury Rider

Answer 49

Does not pay disability income, but pays the medical expenses that are related to an injury that does not result in total disability, such as Emergency Room, x-rays, and durable medical equipment. It is a limited form of medical expense coverage added to a disability income policy.

Question 50

Hospital Confinement Rider

Answer 50

Waives the elimination period if the insured is hospitalized during the period of elimination, but only pays when they are being treated as an inpatient.

Question 51

Social Insurance Supplement (SIS) Rider

Answer 51

Pays in addition to regular disability policies until Workers’ Compensation or Social Security payments begin. Also designed to provide benefits if social security is declined. If either benefit stops, the SIS will pay benefits.

The SIS, which was developed by private insurers to reduce overinsurance by matching Social Security as closely as possible, is normally written for a specified period of time.

Question 52

Additional Monthly Benefit (AMB) Rider

Answer 52

Many insurance companies offer a short-term additional benefit in the form of a rider. This rider normally covers the first 6 to 12 months of disability. Some insurers refer to the rider as a Social Security Rider as it pays benefits while the insured is awaiting Social Security Benefits. This rider is not related to Social Security and, therefore, an AMB Rider is used to define the benefit. The short-term benefit could supplement either a government or private benefit plan.

Unlike the SIS, this rider does not consider the amount of a Social Security Benefit. It is strictly in addition to all other disability benefits.

Question 53

State Workers’ Compensation Benefits

Answer 53

Workers’ Compensation is the primary payor if an injured worker qualifies and coverage applies to bodily injury and/or occupational diseases that rise from employment. There are 4 statutory claims for benefits under most states’ Workers’ Compensation laws:

• Disability Income
• Rehabilitation (job retraining)
• Medical Expenses
• Survivors’ Income (which includes a burial benefit)

Question 54

Social Security Disability Insurance - Part of OASDI

Answer 54

Qualification is contingent upon having the proper insured status, either fully insured (40 credits), disability insured (20 of which were earned in the last 10 years), or currently insured (a sliding scale based on age, beginning with 6 credits in the past 13 quarters for persons age 21-24), and satisfying the waiting period.

Question 55

Definition of Disability (Social Security)

Answer 55

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

Question 56

Waiting Period (5 full month) - Social Security

Answer 56

Benefits start with the 6th full calendar month of disability and are not retroactive to the date of disablement.

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).

Question 57

Disability Income Benefits (Social Security)