Disability Insurance

Question 1

Disability income Insurance

Answer 1

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.

Question 2

Basic benefits of a disability income insurance

Answer 2

The basic benefit arrangement in the policies of the major insurers consists of a monthly benefit for total disability and a waiver-of-premium provision. Supplemental coverages include a monthly benefit for residual or partial disability; a monthly benefit paid when certain social insurance programs fail to provide benefits; a cost of living benefit; and a guarantee for purchase of additional insurance at a later date.

Question 3

Own occupation clause for disability insurance

Answer 3

An own occupation clause deems the insured to be totally disabled when they cannot perform the major duties of their regular occupations. The insured can be at work in some other capacity and still be entitled to policy benefits. This is the best definition to have.

Question 4

Modified Own Occupation for disability

Answer 4

Modified own occupation, with a time limit (e.g. two years) on “own occ” protection. The insurance company can terminate the disability insurance if there is a Modified Own Occupation clause and the person starts working in another role.

Addition of this clause can lower premium.

Question 5

Any Occupation clause for disability

Answer 5

Any gainful occupation definition, means that insureds are considered totally disabled when they cannot perform the major duties of any gainful occupation for which they are reasonably suited because of education, training or experience.

Addition of this clause can further lower premium.

Question 6

Presumptive Disability

Answer 6

It is common to include a definition of presumptive disability in policies that provide benefits for total disability. Under the presumptive disability clause, an insured is always considered totally disabled, even if he is at work, if sickness or injury results in the loss of the sight of both eyes, the hearing of both ears, the ability to speak, or the use of any two limbs.

Question 7

Elimination Period

Answer 7

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.

Elimination periods range from 30 days to one year, with three months being a common elimination period.
Premiums are lower for policies with longer elimination periods.

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.

Question 8

Benefit Period

Answer 8

The benefit period is the longest period of time for which benefits will be paid under the disability policy. Usually, the benefit period is the same for sickness and injury and is available for durations of two to five years, often to age 65.

Question 9

Recurrent Periods of Disability

Answer 9

All insurers include a provision that is related to the benefit period and that deals with consecutive or recurrent episodes of disability and identifies whether the company is dealing with a new or continuing claim. The typical provision states that the company will consider recurrent periods of disability from the same cause to be one continuous period of disability, unless each period is separated by a recovery of six months or more. Among the major insurers, use of a 12-month recurrent provision is common in policies with benefit periods to age 65 or longer.

Question 10

Monthly Indemnity

Answer 10

The amount of the monthly benefit and the length of each benefit period are selected when applying for disability insurance.

Question 11

What is the maximum percentage of income that an insurer will cover so that the total of all monthly indemnity is not exceeded?

Answer 11

60-70 percent
this can be reduced to 50% if the insured has a net worth of $3M or more

Question 12

Rehabilitation benefit

Answer 12

During a period of partial disability, a person who works part-time while recuperating may receive a residual disability benefit. However, indemnity may be reduced since the insurer pays the difference between the insured’s pre-disability income and post-disability income. This provision in a disability contract is known as a rehabilitation benefit.

Question 13

Benefit provision

Answer 13

Benefit provisions usually describe the circumstances of loss, the way in which the company will pay benefits, and at what point benefits may end.

The following is typical of the benefit provisions for total disability. When you are totally disabled, you will receive the monthly indemnity as follows:

You must become totally disabled while this policy is in force.
You must remain disabled until the end of the elimination period. No indemnity is payable during that period.
After that, monthly indemnity will be payable at the end of each month while you are totally disabled.
Monthly indemnity will stop at the end of the benefit period or, if earlier, on the date you are no longer totally disabled.

Question 14

Waiver of Premium Benefit

Answer 14

The waiver-of-premium benefit under disability income policies characteristically waives any premiums that fall due after the insured has been totally disabled for the lesser of 90 consecutive days or the elimination period, and it allows for refund of any premiums paid during this period. Further premiums are waived while the insured remains disabled, until age 65. Some insurers also waive premiums that fall due within 90 days after recovery. The waiver-of-premium feature invariably terminates when the insured attains age 65.

Question 15

What are four other benefit provisions of a disability insurance?

Answer 15

Transplant benefit
Rehabilitation benefit
Non-disabling injury benefit
Principal sum benefit

Question 16

Transplant Benefit

Answer 16

The transplant benefit provides that, if the insured is totally disabled because of the transplant of an organ from his or her body to the body of another individual, the insurer will deem him or her to be disabled as a result of sickness. This provision also includes cosmetic surgery performed to correct appearance or disfigurement.

Question 17

Rehabilitation Benefit

Answer 17

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.

Question 18

Principal Sum Benefit

Answer 18

The principal sum benefit is a lump-sum amount payable if the insured dies accidentally. This provision requires that death be caused directly and independently by injury and that it occur within a specified number of days, usually 90 or 180, following the date of the accident.

The principal sum amount benefit also pays a single sum, usually 12 times the sum of the monthly indemnity and any supplemental indemnities, if sickness or injury results in dismemberment or loss of sight and the insured survives the loss for 30 days. The lump sum is in addition to any other indemnity payable under the policy, and it is payable for two such losses in the insured’s lifetime. The principal sum benefit usually is limited to the irrecoverable loss of the sight of one eye or the complete loss of a hand or foot through severance above the wrist or ankle.

Question 19

Exclusions and Limitations

Answer 19

All insurance contracts have a list of losses not covered and losses with limited coverage. This is referred to as Exclusions and Limitations.

Question 20

Supplemental Benefits

Answer 20

Among the leading insurers, the most common optional or supplemental benefits are:

residual disability benefit,
partial disability benefit,
social insurance supplement,
inflation-protection benefit,
increased future benefit, and
guaranteed insurability option.

Question 21

Residual Disability Benefit

Answer 21

The residual disability benefit provides reduced monthly indemnity in proportion to the insured’s loss of income when he or she has returned to work at reduced earnings.

Question 22

Benefit Formula

Answer 22

Most insurers do not require that an insured sustain a prior period of total disability before claiming residual benefits. A residual claim can start from the date of loss (illness or injury), and the reduced benefit amount will be payable once the elimination period is satisfied.

From a practical standpoint, the vast majority of residual claims follow some period of total disability. Residual claims make up only a small portion of all disability claims, whether from occurrence date or as continuation following prior total disability.

Question 23

Residual Disability Calculation

Answer 23

(Loss of income / Prior Income) * indemnity amount

Question 24

Partial Disability Benefit

Answer 24

The residual concept generally has replaced the partial disability benefit for most professional occupations. Many insurers, however, provide a partial disability provision as an optional benefit for their less-favorable occupational risks. The typical partial disability benefit is 50 percent of the monthly indemnity for total disability and is payable for up to six months or, if less, for the remainder of the policy benefit period when the insured has returned to work on a limited basis after a period of compensable total disability.

Question 25

Increased Future Benefit

Answer 25

Often referred to as Automatic Benefit Increases, this optional rider means that at stated intervals, usually early in contract, the insurer offers to increase the monthly benefit.

Question 26

Guaranteed Insurability Option

Answer 26

Another approach to increasing disability coverage is to purchase the Guaranteed Insurability Option (GIO) rider. This allows for a larger monthly benefit increase, (e.g. $500 a month). This benefit is especially important for people who are starting careers with the expectation of higher incomes, such as doctors, dentists, or new business owners.

Question 27

Business Disability Insurance

Answer 27

The disability of a closely held business owner or key employee can be devastating to the successful continuation of a business. Family members or other employees may not have the skills or manpower to compensate for the loss of the disabled employee until a permanent or temporary replacement can be found. Some types of disability insurance policies for businesses are designed to replace lost revenue or to shift ownership and control of the business to other employees. These policies include business overhead policies, which cover operational costs of the business while the owner is disabled, key person insurance and business continuation agreements.

Question 28

Social Security Disability

Answer 28

Individuals who become disabled may be entitled to receive Social Security disability benefits (SSDI). A person must be insured under the Social Security program before benefits can be paid to the individual and his family.

Question 29

Group Disability Insurance

Answer 29

Group long-term disability insurance is an employer-sponsored program to provide disability income to employees who are disabled (unable to work) beyond a period specified in the plan, usually six months.

Question 30

Taxation of group benefits

Answer 30

If an employer provides payment of the entire premium, disability benefits received by the employee are fully taxable as ordinary income. However, if an employee pays a portion of the premium, the amount that is taxable is the percentage of the premium paid by the employer.

Question 31

Benefits for disability related to emotional disorder

Answer 31

Benefits for disabilities related to mental/emotional disorders are paid for only 2 years.