Health Insurance - Disability Insurance

Question 1

Individual Disability Income (DI) Insurance

Answer 1

Policy that covers a person who cannot work because of a disabling injury or illness

Question 2

Occupational Disabilities

Answer 2

Disabilities that arise at work. Many DI policies do not cover these because they are usually covered through worker’s compensation plans.

Question 3

Nonoccupational Disabilities

Answer 3

Disabilities that arise outside of work. Usually covered by DI policies.

Question 4

Two basic rules of DI benefit eligibility.

Answer 4

1. ) No DI policy will be issued with a benefit level in excess of the insured’s earnings.
2. ) No DI benefits will be paid if the insured is not under the regular care of a physician and does not provide periodic proof of loss. (This requirement does not apply if the disability is deemed total and permanent.)

Question 5

Definition of Disability

Answer 5

How a DI policy defines disability is extremely important in determining when benefits will be paid. Disabilities can either be total or partial, with variations of each available.

Question 6

Types of Total Disability

Answer 6

1. ) Own Occupation;
2. ) Any Occupation;
3. ) Presumptive Total Disability

Question 7

Own Occupation (Own Occ)

Answer 7

Under the own occ definition, policy benefits are payable if the insured cannot perform the duties of his or her own occupation due to injury or sickness. Thus, even if the insured could perform some other form of work (and receive income), benefits would be payable if the insured could not perform his or her own job.

Some own occ DI policies require that the insured be unable to perform all the duties of his or her regular occupation to qualify for benefits while others require only that the insured be unable to perform the substantial and material duties of his or her regular occupation.

Question 8

Any Occupation (Any Occ)

Answer 8

The any occ definition requires that the insured be unable to engage in any occupation for pay or profit for which he or she is reasonably suited through education, training, or experience.

Question 9

Presumptive Total Disability

Answer 9

Under this provision, the insured automatically qualifies for the policy’s full benefit if he or she suffers a specified loss that, by definition, is deemed total and permanently disabling. Insureds that qualify for presumptive disability benefits are not required to remain under the ongoing care of a physician, nor are they required to periodically furnish proof of loss to the insurer.

Question 10

(Standard) Partial Disability Benefit (Recovery Benefit)

Answer 10

Some policies continue to pay a reduced, partial disability benefit to insureds that have been on total disability and are returning to work on a partial basis in order to discourage malingering and to encourage returning to work.

Partial disability income benefits are described as a percentage of the full benefit amount. The calculation compares the reduced income being earned upon the return to work against the pre-disability earnings. The reduced-earnings ratio is then applied to the total disability benefit to determine the partial disability benefit.

Question 11

Malingering

Answer 11

Prolonging a disability to continue receiving income benefits.

Question 12

Flat Benefit Partial Disability

Answer 12

A variation of partial disability benefits that pays a flat benefit that is less than the total disability benefit.

Question 13

Residual Disability Benefit

Answer 13

Payable if the insured suffers a less-than-total disability that forces him or her to cut back employment (and earnings). It is intended to supplement the residual income the insured continues to earn.

The residual benefit requirements may differ among insurers, though most require that the insured continue to sustain a loss of at least 20 percent of income because of the injury or sickness. When the insured’s income loss drops below 20 percent, residual disability benefits normally end. As a result, residual benefits are calculated monthly and are subject to change if and when the insured’s residual income increases or decreases. Residual disability benefits can continue for as long as the policy’s definition of “maximum benefit period” allows.

Question 14

Two additional forms of individual disability income insurance.

Answer 14

1. ) Pure loss of income (income replacement) contracts; and

2. ) Individual credit disability insurance.

Question 15

Pure Loss of Income (Income Replacement) Contracts

Answer 15

Income replacement policies are a variation of the traditional DI policy. They provide a benefit if the insured

1. ) Becomes disabled, and
2. ) Cannot perform the duties of his or her occupation, and
3. ) Works at another (less demanding) job, and
4. ) suffers a reduction in income.

If an insured qualifies as totally disabled under the income replacement policy but chooses to work in another occupation, the policy will provide a benefit based on the amount of income the insured lost by working at another job.

Question 16

Individual Credit Disability Insurance

Answer 16

Another variation of the traditional DI policy is credit disability insurance. Typically purchased by credit companies for the benefit of the creditor, credit DI covers the risk of the creditor becoming disabled and unable to pay off a loan. Owned by the credit company (who receives benefit payments), the policy is written so that its benefit period is the same as the loan period. The benefits payable are matched to the decreasing loan balance. If the insured becomes disabled during the policy period, the policy pays benefits equal to the loan payments that come due during the period the insured remains disabled.

Question 17

Probationary Period Provision

Answer 17

This is the time that must pass after the policy is issued before illness-related disabilities will be covered. The probationary period is typically short—15 to 30 days. Accidents, by definition, cannot be anticipated. Therefore, accident-related disabilities are not subject to the probationary period and are covered from the moment the policy is issued.

Question 18

Elimination Period (Waiting Period) Provision

Answer 18

The period of time that must elapse after the start of any disability before benefits commence. Acting much like a policy deductible, its purpose is to avoid claims for short-term disabilities that presumably the insured can absorb This helps the insurer keep its costs—and, therefore, its premiums—down.

A DI policy’s elimination period can be of almost any length. Some insurers don’t even impose an elimination period. In this case, the policy’s benefits are payable immediately after a disability starts. On the other hand, DI policies used in some business situations typically have very long elimination periods. However, the more common elimination periods are:

• 30 days
• 60 days
• 90 days
• 180 days

The shorter the policy’s elimination period, the higher the premium is for otherwise identical coverage. Therefore, an applicant who wants to keep health insurance premiums as low as possible would choose a longer elimination period.

Question 19

Benefit Period Provision

Answer 19

The benefit period is the duration of time during which benefits will be paid. It begins at the end of the waiting period and is usually expressed in the contract as the maximum period of time benefits will be paid for a single disability.

The benefit period ends when the insured’s disability ends or at the end of the maximum benefit period—whichever comes first.

The maximum benefit period is determined at the time the policy is applied for and issued. The maximum benefit period can be for as short as one or two years or as long as the insured’s entire life. The longer the maximum benefit period is, the higher the policy premium normally is for otherwise identical coverage. Common benefit periods in disability income insurance policies are:

• two years
• five years
• to the insured’s age 65
• to the insured’s age 67 (i.e., Social Security full retirement age)
• for the insured’s lifetime

While two years is the shortest benefit period for standard DI policies, some insurers sell a type of DI that has a benefit period ranging from several months to two years. It is called short-term disability insurance (STD). Policies with benefit periods of two years or more are sometimes called long-term disability (LTD) policies.

When it comes to maximum benefit periods, some DI policies differentiate between illness-related disabilities and accident-related disabilities.

Question 20

Maximum Benefit Provision

Answer 20

Disability income policies typically include a maximum benefit amount and a minimum benefit amount.

The maximum benefit amount places a cap on the total monthly benefit payable, regardless of the insured’s monthly wage and benefit percentage. For example, consider a DI policy that provides a benefit of 60 percent of earnings but also has a $5,000 maximum monthly benefit limit. An insured who earns up to $8,333 per month would qualify for a monthly benefit of the full 60 percent of earnings. However, one who earns anything more than that would be limited to the $5,000 monthly benefit (since $8,333 × 60% = $5,000).

Question 21

Minimum Benefit Provision

Answer 21

The minimum monthly benefit is usually a very small amount (perhaps $100) that is payable if the insured also qualifies for disability coverage from other sources (e.g., workers’ compensation) which might otherwise reduce policy benefits to a lesser amount.

Question 22

Recurrent Disability Provision

Answer 22

If the insured recovers from a disability and later becomes disabled again, a separate waiting period and benefit period may be applied. However, if the subsequent disability is closely related to the first, it may be treated as a recurrence or continuation of the first disability. As a recurrent disability, no new elimination period would be required nor would a new maximum benefit period apply.

The standard recurrent disability provision defines a recurrent disability as one that

• Is from the same or related cause as an earlier period of disability for which the elimination period was satisfied; and
• Begins within six months from the end of the earlier, related disability (assuming the policy remains in force).

Question 23

Relation-to-Earnings (Participation Limit) Provision

Answer 23

Included in many disability income policies is a relation-to-earnings provision, which limits the amount of benefits the insurer will pay if there is more than one policy involved. The total amount of disability benefits from all policies the insured owns cannot exceed the insured’s usual earnings. For instance, Carol owns a personal disability income policy. She is also covered under a group DI policy offered by her employer. Under the terms of the relation-to-earnings provision, her individual DI policy will reduce its benefits so that the combined benefits do not exceed a specified percentage of her current gross earnings.

Question 24

Nondisabling Injury Provision

Answer 24

Under this provision, a DI policy pays for medical expenses or medical treatment that the insured incurs because of accidental injuries. The policy pays the benefit even if the injury does not produce a sustained disability or a loss of income. The amount payable for medical treatment is usually specified as some percentage of the monthly income benefit that would be paid as a result of disability.

Question 25

Rehabilitation (Return-to-Work) Provision

Answer 25

Under this provision, the insurer pays for occupational therapy, training, or modifications to the insured’s workplace. This is done to assist him or her in returning to work. This provision is not standard; it may or may not be included in any given policy.

Question 26

Common Disability Insurance Exclusions

Answer 26

Disability income policies typically have certain exclusions. No coverage is provided and no claims are paid for disabilities involving the specified exclusions. Common DI policy exclusions include

• Acts of war,
• Self-inflicted injuries, and
• Pre-existing conditions.

Question 27

Waiver of Premium Rider

Answer 27

A waiver of premium rider excuses the insured from paying the policy’s premium during periods of total disability. Typically, the insured is required to pay the premium during the elimination period or for some period—such as six months during disability—before premiums are waived. If, after that period, the insured remains disabled, then the waiver will be effective back to the first day of disability. Any premiums paid during the elimination period are refunded to the owner. Future premiums are waived as long as the disability continues.

Though older policies provided premium waivers only if added as a rider, most policies today include a waiver of premium provision in the policy itself. No additional premium is required for this benefit.

Question 28

Cost-of-Living Adjustment Rider

Answer 28

The COLA rider adjusts the benefit payments according to changes in the consumer price index (CPI). During times of inflation, the adjustment increases the payments. If the CPI is negative, indicating that inflation has reversed, then the monthly income is adjusted downward. However, the monthly income for total disability will never be lower than the initial disability income amount stated in the policy.

When the disability ends, the insured can usually choose to keep the same amount of benefit the policy is paying at that time. He or she does so by paying a premium that is adjusted (higher or lower) to match the benefit level that the policy paid when the disability ended.

Question 29

Social Insurance Supplement Rider (AKA Social Security Rider or Additional Monthly Benefit Rider)

Answer 29

Rider on a DI policy that provides an additional monthly benefit before social insurance program benefits begin. (Social insurance programs include Social Security and workers’ compensation.) This program has a 5 month elimination period.

Question 30

Future Increase Option (Guaranteed Insurability) Rider

Answer 30

A DI rider that allows the insured to buy extra coverage under the policy without proving evidence of insurability. The option to buy extra insurance under this rider usually has to be chosen by a specified age, and the policyowner is given a narrow window of time—typically 30 days or less—within which to exercise the option to increase benefits. At the end of the option window, the ability to increase benefits is suspended until the next option date.

Question 31

Return of Premium (Refund) Rider

Answer 31

A return of premium rider enables the insured to get back part of his or her premium payment if he or she has no DI benefit claims against the policy. Likewise, if the insured’s claims are below a certain level, he or she can get back part of the premium.

With the typical return of premium rider, the policyowner pays a premium in addition to that required for the disability benefit. That additional premium plus the interest the insurer pays and credits to the additional premium creates a cash value. This cash value is payable to the policyowner on dates specified in the policy. The total of any claims previously paid are deducted from the cash value.

Question 32

Annually Renewable Term Life Rider

Answer 32

DI rider that allows applicants to add annual reneweable term life insurance to the policy. Its purpose is to provide a death benefit in the event of the insured’s death. It is not necessary for the insured to have been disabled at the time of death for the death benefit to be payable.

Question 33

Key Person Disability Income Policy

Answer 33

Businesses can buy disability income policies on their key employees or on a partner or working shareholder. The business is the policyowner, and if the insured becomes disabled, the benefits are paid to the business.

Question 34

Key Person Disability Income Policy

Answer 34

Businesses can buy disability income policies on their key employees or on a partner or working shareholder. The business is the policyowner, and if the insured becomes disabled, the benefits are paid to the business.

Question 35

Disability Buy-Out Policy

Answer 35

A business disability buy-out policy is a form of DI policy used for the same reason life insurance is used to fund a buy-sell plan: to provide surviving owners with the funds needed to execute the agreement. If an insured business owner were to become totally disabled, the buy-out policy would provide the funds necessary to buy out the owner’s interest in the business.

The elimination period of a buy-out policy is generally much longer than with any other type of DI policy. In fact, the elimination period of a disability buy-out policy typically ranges anywhere from 18 or 24 months, or longer.

It should be noted that disability buy-out policies provide a benefit only if the insured becomes totally disabled. Partial disability does not qualify for a benefit payment under a disability buy-out policy.

Question 36

Business Overhead Expense Policy

Answer 36

A type of business DI policy that covers scheduled overhead costs, such as rent, utility bills, insurance, and taxes that can destroy a small business if the owner becomes disabled and unable to run it. Even the salaries of the owner’s employees can be covered. Only the owner’s salary cannot be covered with a BOE policy; the owner would need his or her own DI policy for that purpose.

BOE policies have brief elimination periods (e.g., 15 to 60 days). They also have short benefit periods, usually one to two years.

BOE policy benefits are normally paid on a reimbursement basis. Using this method, the business owner files a report monthly with the insurer. This report shows the amount and type of overhead expenses paid. The insurer then pays eligible overhead expenses up to the maximum monthly benefit amount. Any paid eligible overhead expenses over the policy’s maximum monthly benefit amount are carried over. They can be paid in future months if the insured’s disability continues.

Question 37

Professional Overhead Expense Policy

Answer 37

A variation of the standard BOE policy is the professional overhead expense policy. Professional overhead expense policies normally cover employee wages and other costs.

Question 38

Disability Reducing Term Insurance

Answer 38

Another form of disability insurance designed for businesses is disability reducing term. The purpose of this insurance is to cover any outstanding loans the business might have if and when the business owner becomes disabled.

A business owner typically buys a disability reducing term policy to cover the term of his or her loan. Then, if he or she becomes disabled during this term, the policy makes monthly loan payments as they come due during the continuation of disability. The policy’s benefit payments are tied to the reducing balance on the loan. Therefore, the benefit payment decreases over the policy’s term.

Question 39

Disability Reducing Term Insurance

Answer 39

Another form of disability insurance designed for businesses is disability reducing term. The purpose of this insurance is to cover any outstanding loans the business might have if and when the business owner becomes disabled.

A business owner typically buys a disability reducing term policy to cover the term of his or her loan. Then, if he or she becomes disabled during this term, the policy makes monthly loan payments as they come due during the continuation of disability. The policy’s benefit payments are tied to the reducing balance on the loan. Therefore, the benefit payment decreases over the policy’s term.

Question 40

Social Security DI Requirements

Answer 40

Coverage for Social Security disability benefits requires that a worker be fully insured. This means that the person has collected the required number of credits under Social Security. These credits reflect the number of years and the amount of money he or she has paid into the program. For most people, Social Security fully insured status requires 40 credits, which represents about ten years of work.

To qualify for disability benefits under Social Security, a person must meet the program’s definition of totally disabled, requiring that the person be unable to work in any gainful occupation. In addition, the disability must be expected to last at least one year or to result in the person’s death.

A worker is subject to a five-month waiting period before Social Security disability benefits become payable. This waiting period begins at the start of a disability. Benefits commence at the end of the waiting period and are not paid retroactively for the waiting period.

Question 41

Primary Insurance Amount (PIA)

Answer 41

The amount a disabled person can expect to receive from Social Security is based on his or her primary insurance amount (PIA) at the time the disability occurred. The PIA is the amount of the worker’s monthly retirement benefit at full retirement age. It is also the amount payable upon disability.

A worker’s PIA is based on

• The amount the person earned over his or her working year; and
• An index to determine the person’s average monthly earnings adjusted for inflation.

Question 42

Workers’ Compensation

Answer 42

Mandated by the federal government but administered by each state (much like Medicaid), workers’ compensation programs protect workers who are injured or become sick on the job. Though the laws vary by state, most employers are required to contribute to the state program. Or, they may be required to buy workers’ compensation coverage from commercial insurers.

If a worker chooses to sue the employer for work-related losses rather than receiving the automatic workers’ compensation benefits, then workers’ compensation benefits are not payable and the injured worker must rely on the court judgment to determine the benefits he or she will receive.

Each state’s program offers:

• Financial compensation to the worker’s spouse and dependents if the worker dies in an industrial accident (that is, on the job, or as a result of an injury suffered on the job);
• Financial compensation for work-related disabilities, paid weekly or monthly, for which the employer (if self-insured) or insurance carrier pays without regard to the employer’s fault in causing the disability; and
• Workers’ compensation insurance at no cost to the employee, with the employer funding the plan (if self-insured) or paying the insurance premiums for the plan.