Chapter 13 - Disability Insurance Flashcards
Describe Disability Income Insurance.
Provides benefits as periodic payments for those unable to work due to sickness or injury.
Describe the 2 types of coverage for Disability Income Insurance.
- Group coverage: Typically broader and less expensive than individual coverage.
- Individual coverage.
Describe the differences between short-term disability, and long-term disability, when it comes to Disability Income Insurance.
Short-term: Coverage up to two years.
Long-term: Benefits for two or more years, often until age 65.
Explain the need for disability insurance (4 things).
Income Replacement: Essential for replacing lost income due to disability.
Financial Hardship: Disabilities can cause significant financial hardship, potentially more than premature death.
Likelihood: Disabilities are more likely to occur than premature death.
Workers’ Compensation: Covers work-related accidents or illnesses.
Regarding Disability Contracts, describe the policy elements.
Definition of disability, elimination period, benefit amount or percentage, benefit term, and coverage specifics.
Regarding Disability Contracts, describe the Coverage Limits (3 things).
Short-term: Up to 60% of weekly wages.
Long-term: Typically 50%-60% of monthly gross wages (up to 75%-80% in some policies).
Social Security disability benefits may reduce policy benefits.
Regarding Disability Contracts, describe the Benefit Period, as well as the Elimination Period.
Benefit Period: Varies and affects premiums.
Elimination Period: Acts as a deductible; common periods: 30, 60, 90, 180, or 365 days.
Regarding Disability Contracts, provide the types of disability definitions (5 types).
Own Occupation (Own Occ): Inability to perform one’s own occupation (most expensive).
Modified Own Occupation: Benefits if unable to perform specific duties but ends if gainfully employed in another field.
Any Occupation (Any Occ): Inability to perform any occupation for which one is qualified.
Social Security Definition: Impairment preventing substantial gainful employment for at least 12 months or resulting in death.
Hybrid Forms: Combination of own occupation and any occupation definitions.
Regarding Disability Contracts, define Injury and Sickness.
Injury: Accidental bodily injury or injury by accidental means.
Sickness: Contracted and beginning after policy effectivity, often with a probationary period.
Regarding Disability Contracts, describe the Residual or Partial Disability Riders.
Residual Rider: Pays the difference between former and current pay if returning to work at lesser pay.
Partial Disability Rider: Pays benefits if unable to perform some, but not all, duties of own occupation.
Regarding the Taxation of Disability Benefits, describe the 3 types of policies.
Employer-Provided Policies: If employer pays premiums, benefits are taxable as income.
Personally Paid Policies: Benefits are tax-free if premiums are paid by the individual.
Partially Employer-Paid Policies: Benefits are taxable proportionate to the employer’s share of premiums.
Example - Earl has a long-term disability plan where he pays 25% of the premium, and his employer pays 75%. If Earl receives $21,000 in benefits, 75% ($15,750) is taxable.
When it comes to Evaluating Long-Term Disability Coverage, 9 things should be considered.
- Appropriate Benefit Amount: Ensure the benefit replaces income adequately.
- Benefit Term: Should match work-life expectancy.
- Coverage: Should cover both sickness and accidents.
- Elimination Period: Should align with emergency fund duration plus 30 days.
- Tax Considerations: After-tax cash flows should replace lost income.
- Definition of Disability: Should match the occupation (e.g., “own occupation” for a professor).
- Policy Type: Noncancelable or guaranteed renewable.
- Premium: Should be competitive.
- Social Security Offset: Consider if the policy has a Social Security disability benefits offset.
Regarding Business Uses of Disability Income Insurance, describe Business Overhead Expense (BOE) Insurance (3 things).
Covers usual and necessary business expenses if the owner is disabled.
Premiums deductible, benefits taxable.
Maximum benefit: 1-2 years, covers employee compensation but not owner’s salary.
Regarding Business Uses of Disability Income Insurance, describe Disability Buyout Policies (2 things).
Covers the value of the individual’s interest in the business if disabled.
Taxed as capital gains to the extent amount exceeds the tax basis.
Regarding Business Uses of Disability Income Insurance, describe Key Person Disability Insurance (4 things).
Provides continued income to key employees if disabled.
Employer-paid premiums.
Employer contributions are not taxable to the employee, and premiums are deductible if the employee is the beneficiary.
Benefits are tax-free to the employer if they are the beneficiary, and taxable to the employee if they are the beneficiary.
