Chapter 11 Flashcards
Disability Income
Morbidity Vs. Mortality - likelihood of becoming disabled vs. chances of dying at each age.
Amount is 60-70% of income
Elimination Period - cannot be used to earn a benefit. No credit for the first 30 days, day 31 to 60. The longer the elimination period, the lower the premium.
Benefit Period - amount of length the benefit will be paid. The longer, the higher the premium. Most will resolve within 4-5 years.
Absolute Assignment
Disability Income Insurance (Characteristics)
Disability not only eliminates income, but it also may increase expenses. Because of the extra expense, the financial impact of disability may be greater than that of premature death.
Morbidity and Mortality - the following charge shows the incidence of disability as compared to a premature death at various ages.
Morbidity vs. Mortality
Morbidity is an unhealthy or diseased condition that can include disability. Mortality is the fatal outcome of morbidity.
Disability Income (Loss of Income or Time) Policy
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 percentage of the insured’s past earnings normally 60-70%.
The full income is not paid to reduce malingering.
The insurer considers any other sources of disability income the insured may have while underwriting the policy and is referred to as benefit integration. The purpose is to prevent overinsurance that could cause a moral hazard or fraudulent claims.
Benefit Periods written are commonly 2, 3, and 5 years, age 65 or lifetime, and written with an elimination period.
Pure Loss of Income (Income replacement) Policy
A relatively new alternative to traditional disability income policies under which the insured will receive benefits if he/she loses income due to a covered accident or sickness, even if the insured is working full-time doing all the same duties he/she did before. With traditional disability income policies, there hast to be a loss of time or duties to trigger coverage, but under the Pure Loss of Income policy if the insured can do everything that he/she should do before, but loses 50% of his/her income because he/she cannot do it as well, he/she will still receive benefits.
Elimination Period (Sickness vs. Injury)
The elimination Period is normally different for a disability due to an illness than for an injury. The benefit payment as well as the specific elimination periods for these disability classifications will be stated in the policy. A policy may state 6 months elimination period for sickness and immediate coverage or as little as 7 days in case of an accident. Neither party to the contract can alter the elimination period on a disability income policy during the benefit period.
An insured may transfer rights of ownership of a disability policy using an absolute assignment.
Definitions and Provisions
Occupational - pay for injury on or off job
Nonoccupational - most common off the job. Workers’ Compensation
Total Disability - one’s own or all occupations
Partial Disability - go back to work and receive 50% while working on a part time job.
Residual Disability - 100% disabled and goes back to work at reduced basis. Wean their way back to the force. Decreasing
Recurrent Disability - elimination period 90 days, goes back to work is entitled to 30 days benefits, and reinjury , doesn’t need to satisfy new elimination period.
Presumptive - total and permanent, no continued proof.
Permanent - Entire life
Temporary Disability - full recovery is expected
Lump Sum Benefits - will not pay monthly income,
Rehabilitation - if insured is total disabled, insurer company will continue to receive benefits.
Transplant - donor will be considered disabled and entitled to benefit.
Frequency of Loss
The Financial Loss relating to a certain group of people over a certain period of time.
Total Disability
Some policies require the insured’s inability to perform duties of his/her own occupation. The own occupation often applies for the first 2 years, the insured might be employed in a different occupation and continue receiving full benefits for the remaining portion of the 2 year period. Some policies are stricter and require the insured to be unable to perform the duties of any occupation for which he/she is reasonably suited by education, training and experience.
Partial Disability
Disability resulting in an inability to perform one or more of the regular duties of an occupation. The benefit usually pays up to 50% of a total disability benefit for up to 3-6 months.
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.
Recurrent Disability
When a second disability is suffered due to the same cause within a set period of time (usually 6 months), the elimination period may not apply the second time. The benefit period will be considered as a continuous period of disability.
Presumptive Disability
Loss is presumed to be total and permanent due to the loss of sight, hearing, speech, or the loss of 2 limbs. The insurer doesn’t require the insured to submit to periodic examinations to prove continued disability.
Permanent Disability
Total disability that reduces or eliminates the insured’s ability to work for the rest of his/her life.
Temporary Disability
When an insured continues to work at a reduced efficiency or is unable to work at all for a period of time, but is expected to fully recover, such as broken limbs, surgery etc.
Lump Sum Benefits
Usually paid under presumptive disability or under special policies covering business buy-sell agreements.
Rehabilitation
Paid while totally disabled and receiving benefits, if the insured elects to participate in some 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.
Transplant
When an insured is totally disabled because of the transplant of his/her organ another individual, the company will deem his/her to be disabled as a result of sickness.
Cash Surrender Value
Individual Disability income policies may in the form of a:
Provision that offers premium refunds at stated intervals while the policy is in effect if no claims have been made.
Pay back the policy-owner, if no claims have been made, the premiums paid may be returned to the policy-owner similar to the cash value payment of a surrendered life policy.
Change of Occupation
Could result in a change of benefits depending on the new occupation, or the insurer could change the amount of premium to fit the occupational rating for the current level of benefit. The more hazardous the occupation, the less benefit and the higher the premium.
Unique Aspects of Individual Disability Underwriter
Multiple Claims
Occupation - greatest role in determining premium. Class 5 risk, will pay more than class 1 risk. Risk 1 is supervisory, Class 5 may be reserved for steel worker in sky scrappers.
Hobbies - Rock Climbing, bungee jumping.
Length of Benefit Period - the longer the benefit period, the greater the premium.
Length of Elimination Period
Reducing Risk in Substandard Case
Change Extra Premium Increase the Elimination Period Shorten the Benefit Period Reduce Amount of Benefit Full Exclusion Rider
Disability Underwriting
In underwriting Disability Income, the insured’s occupation is the single most important rating factor. Insurance companies writing disability income generally have an occupational classification system based on considerations, such as job duties, claims history of the occupation, and stability of the industry. Consideration is also given to any hazardous hobbies, such as bull riding, skydiving, bungee jumping. Greater benefits to the professionals.
Other Factors in writing Disability Insurance
Age - cheaper for the younger.
Gender - men are typically charged more. Narrows with age.
Health - The healthier the person, the lower the risk, and thus the lower the premium.
Avocation - Side occupation or hobby. Avocation includes:
Frequency of accidents that can lead to bodily injury.
The exposure to the elements and their extremes, such as altitude (sky diving) or depth diving.
Person’s age, maturity, and experience with the avocation.
Time spent on avocation.
Unique Aspects of Group Underwriting
No medical Underwriting - based on average age and prior claims. Exclude benefits on the job (Workers’ Compensation)
Minimum Participation Rate
Adverse Selection
No age discrimination for employers with 20 or more employees.
Underwriting Group Disability Income Plans
No medical underwriting. Field Underwriter’s job is to guard against adverse selection and over=insurance.
Usually offered on a non-occupational basis, which will not cover work-related disabilities.
Most insurers require that a minimum number of employees participate in a group plan. Without evidence of insurability.
Age Discrimination in Employment Act (ADEA) affects both the short term and long term group disability benefits for the people employed after age 65. This in turn will have some effect on premium determination by the insurer when underwriting a particular group.
Short-Term Disability (STD)
Short-Term Disability Income plans are characterized by maximum benefits for periods of rather short-duration, such as 13, 26, or 52 weeks. Often benefits, are coordinated with the employer’s “sick pay plan.” This disability plan is usually less than 2 years.
Elimination Period may be as short as zero days for accident and 7 days for sickness but is rarely more than 15-30 days.
Benefits are typically paid weekly and range from 50% to 100% of the individual’s income.
Due to the ruling of the ADEA any employer with 20 or more employees covered by a short term group disability plan must pay the same level of benefits to those employees age 65 or over as those under 65.
Long Term Disability
This coverage is characterized by benefit periods of either 2 years, 5 years, or to age 65.
The elimination period will most commonly be either 30, 60, 90, or 180 days.
Benefit amounts are usually limited to 60% of the participant’s income. Normally the waiver of premium for disability applies after a prolonged period specified in the policy.
Long Term Disability Protection carried by an employer of 20 or more employees must continue coverage past the age of 65. Must conform to ADEA.
Disability Income Special Uses
Business Uses
Business Overhead Expenses (sole proprietor) deduct the premium. Proceeds are taxable, tax-deductible contributions.
Key Employee Insurance -
Buy-Sell Agreement - disability buy out and pay out until qualifying period lump sum.
Disability Reducing Term - amortize the loan. Once paid off, it will stop.
Disability Income Special Uses
Business Overhead Expense
Key Employee Insurance
Buy-Sell Agreement
Disability Reducing Term
Business Overhead Expense
Provides the funds to cover the overhead expenses of a business when the owner becomes disabled, such as office rent, employee labor. Business tax-deductible expenses. Proceeds are fully taxable
