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
Key Employee Insurance
Pays a benefit to the business when a key employee becomes disabled by helping pay for a replacement, training, loss of revenue, etc.
Buy-Sell Agreement
Pays a lump sum, enabling a partnership or business to buy out the totally disabled party’s interest in the business. Premiums are not tax deductible, but Policy Proceeds are tax-free.
Disability Reducing Term
Designed to help a business that has long-term commitments requiring monthly or other regular payments meet their obligations in the even the owner or a key employee were to be totally disabled. The policy is in effect for a fixed term, the length of the loan or other commitment, with the amount of coverage gradually reducing or decreasing each year as the amount due is paid off.
Disability Riders
COLA - Automatic increase in monthly benefits after disability due to CPI. Two ways of accounting, simple vs. compounded. Compunded costs more, lifetime cap, others don’t.
G.P.O. - Guaranteed Purchase Option, specified events, or intervals. Expire at age 40, still underwrite 60%, rating at issue will be used for health.
Waiver of Premium -
Impairment Rider
Hospital confinement rider
Return of Premium
Lifetime Benefit Rider - extends for life, with maximum age.
Social Insurance Supplement - additional money. Once SS kicks in, it stops.
AMB - Additional Monthly Benefit - duration is 6-12 months, to unofficially coordinate with SS. Doesn’t consider SS from Government.
Disability Policy Riders
Cost of Living Rider Guaranteed Purchase Option (Guaranteed Insurability) Waiver of Premium Impairment Rider Return of Premium Rider Life Time Benefit Rider Non-Disability Injury Rider Hospital Confinement Rider Social Insurance Supplement Rider Additional Monthly Benefit Rider
Cost of Living Rider
Automatically increases monthly benefits after the onset of a disability, as the Consumer Price Index increases. Some insurance companies use a simple interest method while others use a more generous compounding method. Typically, this increase occurs after the insured has received benefits for a 12 month period. Following this 12 month period, an adjustment in benefits is made on each anniversary while the disability continues. The cost of Living Adjustment (COLA) for the client is no cap with a compounded adjustments.
Guaranteed Purchase Option
Guaranteed Insurability Rider - 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).
Waiver of Premium Rider
In the event of total disability continues beyond a specified period, future premiums will be waived by the insurer for the duration of the disability. usually after 6 months of disability. Will not reduce benefit by outstanding premium owed.
Impairment Rider
Eliminates coverage for pre-existing conditions, such as back injuries. The use of this rider may make insurance obtainable for an uninsurable person.
Return of Premium Rider
This provides for a refund for the entire or some part of the premium based upon favorable claims activity over a specified period of time. If the funds are not used, the insurer pays interest upon the accumulation which may be cash surrendered at the end of the policy period or at any time the owner so chooses. It may also pay if the insured becomes disabled.
Life Time Benefit Rider
Extends the benefits for the 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.
Non-Disability Benefit Rider
Does not pay disability income, but pays the medical expenses that are related to an injury that does not result in total disability. It is a form of medical expense coverage added to a disability income policy.
Hospital Confinement Rider
Waives the elimination period if insured is hospitalized during the period of elimination and only pays when being treated as an inpatient.
Social Insurance Supplement (SIS) Rider
Pays in addition to regular disability policies until Workers’ Compensation or Social Security payments begin. If either benefit stops, the SIS will pay benefits. The SIS is normally written for a specified period of time. Developed by private insurers to reduce over insurance by matching Social Security as closely as possible.
Additional Monthly Benefit (AMB) Rider
Many insurance companies offer a short-term additional benefit in the form of a rider. The rider normally covers 6-12 months of a disability period. Some insurers refer to the rider as a Social Security Rider as it pays benefits while the insured is awaiting Social Security benefits. The rider however, is not related to Social Security and therefore, AMB is used to define the benefit. The short term benefit could supplement either a government or private benefit plan. Unlike the SIS, this rider (AMB) does not consider the amount of a Social Security Benefit. It is strictly in addition to all other disability benefits.
California State Disability Insurance (SDI)
Employers in California must participate in the SDI program unless a voluntary plan has been approved by the Employment Development Division. Voluntary Plans require a total deposit from the employer and the majority of the employees must agree to the plan.
The SDI programs are state-mandated and funded through employee payroll deductions. SDI provides affordable, short-term benefits to eligible workers. Workers covered by SDI are covered by two programs: Disability Insurance and Paid Family Leave.
Taxation of Disability Benefits
Individual
Group
Franchise/Association
Taxation of Individual Disability Benefits
If the individual pays the policy premiums with after tax dollars, then the benefits are not taxable. If the premiums are paid by the employer in full or in part, then the benefits to the beneficiary are taxable in proportion to the percentage of the premium paid by the employer. If the employer pays the full premium, then all the benefits received by the employee are taxable as income.
Taxation of Group Disability Benefits
Premiums paid by an employer for a group disability plan are a deductible business expense. Benefits received by the employees are counted as taxable income.
Franchise/Association
Taxation follows the same principles as with individual or group. If the franchise is paying the premiums, the benefits to the employee/member are taxable as income. If the member pays the premiums, the premiums are not deductible bu t the benefits are tax free.
Notice of Claim
The claimant must submit a notice of claim to the insurer within 20 days of the event that caused the injury and subsequent disability. For disability policies under the California State Disability Insurance Program, the notice of claim will depend on which plan is used. Under the State Plan, the claimant must notify the insurer by mail no earlier than 9 days or later than 49 days after becoming disabled.
Benefit Integration
In California, Disability Insurance/Paid Family Leave benefits may be integrated with an employee’s wages so that the employee may potentially receive up to 100% of this normal gross weekly wages.
It is the responsibility of the employer and employee to ensure the employee is not receiving more than 100% of his normal gross wages when receiving coordinated/integrated wages from the employer in conjunction with the DI or PFL weekly benefit amount. May use reduced amount.
When the integration/coordination process is used, and the Employment Development Division EDD has so confirmed, it will pay the employee the full DI or PFL benefits. This reduces follow up contacts to the employer for further wage information.
Limits and Exclusions
Under California’s SDI Program, the following exclusions are allowed:
You are not suffering a loss of wages.
You are claiming or receiving Unemployment Insurance or Paid Family Leave Benefits.
You become disabled while committing a crime resulting in a felony conviction.
You are in jail, prison, recovery home, or any other place because you were convicted of a crime.
You are receiving Workers’ Compensation benefits at a weekly rate equal to or greater than the DI rate.
You failed to have an independent medical examination when requested to do so.
Other Exclusions on Disability Income Private Insurers
Preexisting Conditions Two year maximum for Mental & Nervous Disorders Act of War Self-Inflicted Injuries Active duty military service Foreign Travel
Preexisting Conditions
Usually 12 months prior to your coverage effective date. Most times you will not be able to purchase disability insurance, unless you can establish the condition is temporary.
Two Year Maximum for Mental & Nervous Disorders
Most common exclusion within a disability insurance policy, though not every company has this exclusion. There are companies that put no limits for claims caused by mental and nervous disabilities. Basically, if you own a contract with the 2 year mental and nervous exclusion and your disability is caused by stress, anxiety, depression, Dementia, or any other mental-nervous disorder, you may very well be limited to a 2 year benefit period.
Act of War
There are some disability insurance policies on the marketplace that do not pay claims for disabilities that are a result of an act of war. This is not extremely common, but it does exist in some contracts.
Self Inflicted Injuries
While mentally competent
Active Duty Military Service
As a person on active military service is covered y Tri-Care, disability policies are likely to exclude injuries or illness occurring during such service.
Foreign Travel
Some disability policies exclude illness or injury occurring while outside of the United States.
California Workers’ Compensation
The Policy
Part One
Part Two
Workers’ Compensation
Workers’ Compensation coverage applies to bodily injury and occupational diseases that arise out of and in the course of employment.
Compensation Laws impose absolute liability on the employer without regard to fault or negligence.
The premium is paid by the employer.
The Workers’ Compensation Program is Administered by the Division of Workers’ Compensation.
Part One Workers’ Compensation
Pays benefits described under the heading California’s Workers’ Compensation Benefits.
Protects the insured (employer) against statutory claims.
Does not cover operation at any workplace not described in the Declarations, if the insured has other insurance for such operations, or is self-insured. It doesn’t cover pain, suffering or the flu.
Part Two Employers’ Liability Insurance
Designed to fill gaps in compensation coverage and to cover claims that are not subject to compensation laws (loss of consortium, third party over actions).
Protects the insured (employer) against common law claims.
Does not cover operations at any workplace not described in the Declarations, if the insured has other insurance for such operations, or is self-insured. It also doesn’t cover liability assumed under contract, or persons hired in violation of the law (with the insured’s knowledge).
California Workers’ Compensation Benefits (Determined by State Law)
Medical Benefits
Income Benefits
Death Benefits
Rehabilitation Benefits
Workers’ Compensation CA
Medical Benefits - unlimited, not time or dollar limits.
Income Benefits - or Disability Benefits
Total Disability - Benefits begin after a 3-day waiting period. Retroactive benefits are later paid back to the initial date if disability lasts beyond 14 days. The benefit amount is 66 or 2/3 of wages, subject to maximum and weekly benefits.
Partial Disability - Benefits restore a percentage of lost wages.
Scheduled Injury - There is a schedule of benefits for specific permanent partial injuries (a specific amount for the loss of an aye, a specific amount for loss of a hand, etc.)
Death Benefits
A statutory maximum amount of $5,000 is provided as a burial allowance. Income benefits of 66% of a deceased’s worker’s wages are provided for a surviving spouse subject to maximums and minimums. Dependent children are eligible for benefits until age 18. Generally, the maximum benefit is $160,000, though additional benefits are payable if there continues to be any dependent children after the basic benefit has been paid.
Rehabilitation Benefits
California provides necessary living expenses plus a maintenance allowance, or temporary disability benefits may be provided. An employee who fails to cooperate with the rehabilitation plan will lose the maintenance allowance for the days of non-cooperation.
Does not include extra income benefits.
California State Compensation Insurance Fund
A public insurer (sponsored and controlled by the State) that competes with private insurers in the class of Workers’ Compensation Insurance.
If an employer wishes to secure coverage from the State Fund, an application similar to that made to a private insurer must be made to the Fund.
The State Fund issues a policy similar to those used by private insurers. it must conform to the Workers’ Compensation laws of the state.
24-Hour Care Coverage
Accident & Health Agent or
Fire and Casualty Broker-Agent to transact 24-Hour Care Coverage.
24-Hour Care Coverage
Defined as the joint issuance of a Workers’ Compensation policy with a disability insurance policy, health care service plan contract, or other medical insurance coverage for nonoccupational injuries or illnesses. This product shall not include a life insurance policy.
The main feature of 24 hour care coverage is to lower the cost of Workers’ Compensation and health insurance coverage for employers in California. This is accomplished through insurers combining their claims database for both types of coverage, and causing the same sort of cost controls common on the non-occupational side to be utilized in Workers’ Compensation. Combining the coverage would also allow more managed care programs to be used for Workers’ Compensation.
The accident & health agent who sells 24-hour care coverage is required to obtain 4 hours of CEC in Workers’ Compensation.
Second Injury Fund
An employer who operates within the provisions of Workers’ Compensation and knowingly employs a handicapped employee shall be relieved of liability for compensation awarded to an apportionment of the benefits that might be expected had there not been a prior injury. California’s Second Injury Fund is designed to pay the additional compensation from a Second Injury.
Social Security - The Old Age and Survivors Disability and Health Insurance OASDHI
Qualifications - 20 of the last 40 quarters (10 years) subject to social security (5 of last 10) years.
Unable to engage in any kind of gainful employment for at least 12 months.
Waiting period is 5 months. Income is similar to projected retirement income.
Qualification for Social Security
Having 20 of the last 40 quarters of social security coverage is considered fully insured, and satisfying the waiting period.
Definition of Disability
An employee must be unable to engage in any kind of gainful employment 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
Waiting period
5 months. If approved, benefits will commence on the 6th calendar month and disability benefits are not retrospective.
Disability Income Benefits
Are based on the employee’s average indexed monthly earnings on which Social Security Taxes have been paid, this is referred to as the Primary Insurance Amount (PIA).
When an employee age 31 or older has been credited with at least 20 of the 40 quarters required, under Social Security, the employee is considered fully insured. This requirement reduces for employees under age 31.
Higher average earnings will result in a larger absolute benefit and lower-paid workers will receive a greater percentage of their pre-disability income than the higher-paid workers.
A disabled employee who has been earning the minimum wage can expect a Social Security Benefit of approximately 57% of earned income.
A disabled employee who has been paying the maximum Social Security tax can expect a benefit of approximately 30% of earned income. Benefits cease at death, no longer disabled, or until 65. Benefit is computed using the PIA.
