INSURANCE TO PROTECT INCOME (Chapter 2)

Question 1

A&S Terminology

Individual Disability Insurance

Answer 1

Contract between the applicant (policyholder & life insured) and insurance company where benefits payout to replace earned income in the event of disability.

Question 2

A&S Terminology

Presumptive Disability

Answer 2

When an insured suffers specified injuries or conditions which are deemed to be so severe that the person is presumed to be disabled. This includes;

• Total and permanent loss of hearing;
• Total and irreversible blindness;
• Loss of, or loss of use of, both arms or both legs or one arm and one leg.
• Total and permanent loss of speech.

[Ref. 2.2.2.8]

Question 3

A&S Terminology

Recurring / Recurrent disability

Answer 3

Disability insurance clause designed to prevent subjecting the insured to two, or more, waiting periods, without benefits.

Question 4

A&S Terminology

Medical Expense tax credit

Answer 4

• Non-refundable tax credit that you can use to reduce the tax that you paid or may have to pay.

(if you paid for healthcare expenses, you may be able to claim them as eligible medical expenses on your tax return)

Question 5

A&S Terminology

Group disability insurance

Answer 5

• Insurance policy provided to many individuals (plan members) under the umbrella of one (group) policy.
• The employer is the policyholder and the employee is the life insured and the beneficiary.

Question 6

A&S Terminology

Creditor disability insurance

Answer 6

Contract between commercial lenders (creditors) and borrowers where third-party insurance coverage payout scheduled or minimum loan payments in the event that the insured borrower should become disabled and unable to work.

Question 7

A&S Terminology

Administrative Services Only (ASO)

Answer 7

An agreement that companies use when they fund their employee benefit plan but hire an outside vendor to administer it.

Question 8

CHAPTER 2 - Insurance to protect income

What are some of the sources that allow employed & self employed insurable applicants to be eligible for disability income replacement coverage?

Answer 8

• Anyone who has “earned income” (from employment or self employment), and who is insurable medically
• Personally owned policy, acquired directly from the insurance company;
• Group insurance coverage, as an employee or as a member of a union or association offering group insurance coverage;
• Creditor insurance, including mortgage disability insurance, offered to borrowers or credit card holders dealing with major financial institutions;
• Provincial Workers’ Compensation Boards;
• Disability pensions offered through the Canada or Québec Pension Plans;
• Employment insurance (EI) from the federal government (disability benefits portion);

Question 9

TRUE OR FALSE?

Mortgage disability insurance is normally provided through the lending institution (the mortgagee) on the life of the borrower (the mortgagor) to ensure that the monthly mortgage payment will be made during a
time of disability of the borrower.

Answer 9

TRUE

Question 10

TRUE OR FALSE?

Mortgage disability insurance arranged through the lending institution is more expensive and has less stringent underwriting requirements.

Answer 10

FALSE

Mortgage disability insurance arranged through the lending institution is less expensive and has less stringent underwriting requirements.

Question 11

TRUE OR FALSE?

Premiums payable under personally owned individual DI policies are deductible for income tax purposes.

Answer 11

FALSE

Premiums payable under personally owned individual DI policies are not deductible for income tax purposes, benefits are not a taxable receipt.

[Ref. 2.1.1]

Question 12

What are the definitions of disability?

Answer 12

Own occupation
- Easiest to Claim
- Totally disabled if unable to perform all duties of his own occupation
- Most expensive; suitable for professionals
- Will be paid disability even if he works in another occupation
- Example: Surgeon is disabled, starts teaching at a college; will still get full disability

Regular Occupation
- Same as Own Occupation, except, if the client goes back to work, benefits will be reduced and could be terminated

Any Occupation
- Most difficult to claim disability
- Higher risk occupations eg taxi driver, truck drivers
- Totally disabled if unable to perform functions of any other occupation for which he is suited by education or experience.

Total Disability (CPP definition)
- Inability to perform the functions of any occupation for which the insured is suited by education and experience.
- Client will never return to work and/or expected to die from cause of the disability
- Could also be used for creditor insurance

Question 13

What are the occupational clauses for DI policies?

Answer 13

• 4A: Professionals such as doctors, lawyers, dentists and senior executives.
• 3A :Administrative office workers who face few, if any, workplace hazards, such as clerical staff.
• 2A:Supervisors in low-risk environments, salespersons and like occupations.
• A: Skilled manual workers who face few or no workplace hazards, or those
  working, for instance, as courier truck drivers.
• B:Manual labourers who work in hazardous environments, such as home
  construction workers.

Question 14

What are the features of disability policies?

Answer 14

• Presumptive disability
• Survivor benefits
• Waiver of premium

Question 15

CHAPTER 2 - Insurance to protect income

What are the 5 types of Individual (DI) policies?

Answer 15

• Non-cancellable policies;
• Guaranteed renewable policies;
• Cancellable policies;
• Guaranteed issue policies;
• Non-traditional disability insurance plans

Question 16

Name some key points of Non-Cancellable policies

Answer 16

• Highest level of guarantees
• Cannot be cancelled unilaterally by the insurance company
• The policy premiums cannot be increased
• Policy benefits cannot be reduced or modified
• Renewable until the age of 65
• “Own occupation” policy
• Once the policyholder turns 65, he typically has the option to convert the policy, without medical
  evidence, to a “guaranteed renewable” contract (up to age 72 or 75) with a shortened benefit period.

Question 17

Name some key points of Guaranteed renewable policy (name at least 3)

Answer 17

• Binds the insurer to renew the coverage each year until the maturity date of the policy (usually at age 65)
• insurer has the right to modify premiums
• Alterations must apply to the entire class of policies, impacting all lives insured under that contract type
• “Any occupation” policy
• Any changes to the contract must be communicated to the policyholders (usually 30 days before a change or cancellation takes effect).

Question 18

Name some key points of Cancellable policy

Answer 18

• Can be modified by the insurer without the life insured’s consent
• The insurer may change the benefits
  and premiums, based on the claim experience of a given group of insureds or type of insured
• Changes and alterations apply without the insureds’ consent, to all the insureds of that group or type
• “Any occupation” policy
• Premiums for cancellable contracts are lower than guaranteed renewable and non-cancellable policies
• issued to higher-risk occupational classes, such as labourers, truck drivers or taxi drivers.

Question 19

Name some key points of Guaranteed issue policy

Answer 19

• Alternative to traditional long-term disability (LTD) group insurance coverage
• Available to groups in the low-risk occupational classes of executives and professionals. (lawyers, doctors, accountants, etc…)
• “Own occupation” policy
• They are subject to a number of possible
  restrictions (Such as size, Occupational class, of the group etc…)
• Higher premiums

Question 20

CHAPTER 2 - Insurance to protect income

Guaranteed issue plans are generally available in two forms, what are they?

Answer 20

• Guaranteed standard risk;
• Guaranteed-to-issue.

Question 21

What’s the difference between guaranteed standard risk and guaranteed-to-issue?

Answer 21

Guaranteed standard risk

• Will issue the policy without any coverage restrictions or premium ratings.

Guaranteed-to-issue

• Guarantee to issue some form of coverage, but not exactly the coverage applied for
• Insurer requires full medical underwriting

Question 22

Simplify Non-traditional disability insurance plans

Answer 22

Disability Insurance coverage for contractors, caregivers and self employed workers.

[Ref. 2.2.1.5]

Question 23

Name a risk that the insurance company will face when benefits are being paid out under disability insurance policy.

Answer 23

• One of the risks is that an insured will act differently because insurance is in place.
• By being or claiming to be disabled, or to still be disabled, an insured individual could potentially “earn” an “income” without having to work

[Ref. 2.2.2.1]

Question 24

TRUE OR FALSE?

Personally owned DI policies don’t pay a tax-free disability benefit.

Answer 24

FALSE

Personally owned DI policies normally pay a tax-free disability benefit.

Question 25

FILL IN THE BLANK

Allowing for income tax and other benefits normally applicable to income from business or employment, many insurers will not issue coverage that would pay the disabled life insured more than ________ of their net pre-tax, pre-disability income.

a) 40 - 50%

b) 45 - 55%

c) 60 - 66%

d) 50 - 97%

Answer 25

Many insurers will not issue coverage that would pay the disabled life insured more than 60 to 66.66% of their net pre-tax, pre-disability income.

[Ref. 2.2.2.1]

Question 26

Illustrate an example of personally owned DI with a disability benefit payable to the insured

Answer 26

• Heinrich is a sole proprietor, working as a consulting computer technician.
• Most years, he earns $70,000 in consulting fees and has about $12,000 in business expenses which are only incurred if he is working.
• After allowing for income taxes annually, he gets to keep roughly $38,000 of the $70,000 that he earns.
• Based on his pre-tax income of $70,000, less $12,000 of deductible business expenses, an insurance company would offer him maximum DI coverage of about $34,800 ([$70,000 - $12,000] × 60%).
• This is close to the $38,000 that he gets to keep, after-tax, while he is working.
• He is financially neither advantaged nor disadvantaged if he is on a disability claim, minimizing the chances that he would submit a false claim or artificially prolong a valid claim in order to continue receiving an income without working.

[Explain using your own words and examples]

Question 27

TRUE OR FALSE?

Insurers treat the ongoing, non-earned income source as if it were part of the disability benefit and reduce the coverage offered accordingly.

Answer 27

TRUE

[Ref. 2.2.2.1]

Question 28

Waiting Period is also called…

Answer 28

Elimination period (which is a
time frame between the onset of disability and the commencement of benefits under the policy.)

Question 29

What is the purpose of the elimination period?

Answer 29

To eliminate the need for the insurance companies to process claims of very short duration.

Question 30

TRUE OR FALSE?

Policies with long waiting periods usually charge higher insurance premiums.

Answer 30

FALSE

Policies with a longer waiting period will charge lower insurance premiums.

[Ref.2.2.2.2]

Question 31

Simplify Death benefit period under a disability Insurance

Answer 31

The maximum duration for which benefits will be payable.

Question 32

TRUE OR FALSE?

The benefit period starts once the waiting period has expired and benefits run until the insured is well and able to return to work full-time or the benefit period has expired.

Answer 32

TRUE

[Ref.2.2.2.2]

Question 33

TRUE OR FALSE?

A policy with a two-year benefit period, the insured might be disabled more than once over the life of the policy and could claim up to two years of benefits for each disability.

Answer 33

TRUE

• Each instance of disability is treated individually and the full benefit period could apply to each disability.

[Ref.2.2.2.2]

Question 34

The most common benefit periods for long-term individual disability income replacement policies are…

Answer 34

• 2 years;
• 5 years;
• 10 years;
• To age 65.
• Some insurers offer coverage
  up to age 75 on an accident-only basis

[Ref.2.2.2.2]

Question 35

TRUE OR FALSE?

Short-term disability (STD) insurance policies don’t have a benefit period.

Answer 35

FALSE

Short-term disability (STD) insurance policies are more likely to have a benefit period of only 10 to 26 weeks, but this period may be longer in certain cases.

Question 36

TRUE OR FALSE?

The longer the benefit period, the greater the amount of claim the insurer is at risk of paying and the greater the policy premium will be.

Answer 36

TRUE

Question 37

Almost all policies contain provisions for standard, common exclusions: causes of disability for
which no benefits will be payable.

Name some the most common exclusions?

Answer 37

• War, whether declared or not;
• Terrorist acts;
• Self-inflicted injuries;
• Attempted suicide;
• Participating in illegal activities;
• Normal pregnancy and delivery.

[Ref. 2.2.2.4]

Question 38

A life insured covered under a DI can cause the underwriting company to limit a payout. What are some of the limitations that an insured with an unusual risk might impose to the underwriting departments?

Answer 38

• Reduction of the amount of monthly benefit;
• Reduction of the length of the benefit period;
• Increase in the length of the waiting period.

[Ref. 2.2.2.4]

Question 39

A number of circumstances may arise where a claim is denied and no benefits are paid.

What are some of the reasons for a denial of benefits? (name at least three)

Answer 39

• Misstatement of a material fact on the insurance application;
• Fraud;
• Absence of loss;
• Absence of proof;
• Delay in filing a claim.

[Ref. 2.2.2.4]

Question 40

TRUE OR FALSE?

If the insured was unemployed at the time of occurrence of the disability or was earning considerably less than the amount he had been insured for, benefits might be reduced or denied entirely.

Answer 40

TRUE

[Ref. 2.2.2.4]

Question 41

TRUE OR FALSE?

A policy may be voided if, within a year of the date of policy issue, it is discovered that the insured made a false statement on the application or failed to disclose information that was material to the underwriting process.

Answer 41

FALSE

A policy may be voided if, within two years of the date of policy issue, it is discovered that the insured made a false statement on the application or failed to disclose
information that was material to the underwriting process.

[Ref. 2.2.2.5]

Question 42

TRUE OR FALSE?

A material misrepresentation is one involving a fact that would/could have impacted the underwriting decision (such as disclosure of a previous back injury).

Answer 42

TRUE

Question 43

TRUE OR FALSE?

While filling out an application, If a misrepresentation results in the applicant forgetting about a health factor or honestly thought it not to be important, it is considered a misdemeanor which results in the policy being void with a return of premium.

Answer 43

FALSE

• While filling out an application, If the misrepresentation was accidental (the applicant forgot about a health factor or honestly thought it not to be important), then no fraud is deemed to have taken place.
• However, If the applicant purposely misstated information or failed to disclose information with the intent of trying to deceive the insurance company to issue a policy it might otherwise not issue, then a fraud
  against the insurer has occurred and the insurer has the right to void the policy at any time.

Question 44

TRUE OR FALSE?

The disability that is at the heart of the claim must be proven medically.

Answer 44

TRUE

Question 45

Retraining and rehabilitative services for which the insurer will pay to the insured include…

Answer 45

• Physiotherapy treatment;
• Occupational training (retraining);
• Specialized medical treatment;
• Job placement;
• Psychotherapy.

[Ref. 2.2.2.6]

Question 46

There are 3 types of benefits for recuring disabilities, what are they?

Answer 46

• Recurring disability with two waiting periods
• Recurring disability with a single waiting period
• Recurring disability with extended benefit period

Question 47

TRUE OR FALSE?

The waiting period under a presumptive disability are waived (benefits start immediately) and full total disability benefits are payable for the life of the benefit period.

Answer 47

TRUE

• Even if the insured is able to return to work full-time and even if he can now fulfill all of the duties of his previous employment at full salary.

Question 48

How do you qualify for a presumptive disability ?

Answer 48

The insured does not have to prove a loss of income due to the disability, only that the qualifying “disability” exists.

Question 49

Explain the survivor benefit under DI with some key points

Answer 49

• Available to some DI policies
• Payable to the insured’s estate, should the insured die while on disability claim
• Requires a qualification period (only payable provided the insured had been disabled for a minimum period prior to his death, such as 12 months)
• Benefit is paid out in a tax-free lump sum and upon proof of death
• Usually equal to three times the monthly total disability benefit (e.g., if the monthly benefit was $3,000, the survivor benefit would be a lump sum of $9,000)

Question 50

Name some factors that affect the premiums under a Disability Insurance.

Answer 50

• Age of the insured;
• Gender of the insured;
• Health of the insured;
• Smoker or non-smoker status;
• Occupation;
• Definition of disability used;
• Claims history of the insured;
• Length of waiting and benefit periods for the policy.

Question 51

TRUE OR FALSE?

Women are likely to pay lower DI premiums than males of the same age for the same coverage and older males will likely be faced with higher premiums than younger females.

Answer 51

FALSE

Women are likely to pay higher DI premiums than males of the same age for the same coverage
and older applicants will likely be faced with higher premiums than young ones.

[Ref. 2.2.2.8]

Question 52

TRUE OR FALSE?

If the applicant has had health issues in the past, or is currently ill or injured, he may be uninsurable, or would at least be subject to premium ratings or exclusion of coverage for specified causes of disability.

Answer 52

TRUE

• (For example, if the applicant consulted a health care specialist within one year prior to the application, the condition that led to that claim could be classified as a “pre-existing condition.” Insurers will usually issue DI policies with a one-year exclusion rider from the date of policy issue for claims relating to a pre-existing condition).

Question 53

Insurers gather relevant medical and health information on prospective insureds from a variety of sources, name at least three

Answer 53

• Non-medical form on the application;
• Attending physician’s statements (APS) from the applicant’s doctor;
• Paramedical exam from a nurse, if required;
• Full doctor’s medical exam if required;
• Blood, saliva and urine samples;
• Data from the Medical Information Bureau (MIB);
• Inspection report from an investigator for lifestyle issue.

Question 54

What are some of the riders associated with DI policies?

Answer 54

• Future Purchase Option (FPO) AKA Guaranteed Insurability Benefit (GIB), or Guaranteed insurability option (GIO) or Future Income Option (FIO)
• Cost of Living Adjustment (COLA)
• Accidental Death & Dismemberment (AD&D)
• Partial & Residual Disability
• Return of Premium
• Ratings and Exclusions Rider
• Hospitalization Benefit

Question 55

What are some key points of Future Purchase Option (FPO) rider on a DI policy?

Answer 55

• Also known as Guaranteed Insurability Benefit (GIB), or
  Guaranteed insurability option (GIO) or Future Income Option (FIO)
• Can purchase additional coverage in the future, regardless of life insured health
• Usually offered every 1-2 years for increase in benefit.
• There is a maximum limit that can be obtained (eg up to 20% of base coverage, max $1500)
• Client must prove that his income has increased (paystub, NOA, etc)
• After increase in coverage, premium for policy also increases

Example:
- $60,000 income, disability at 60% = $36,000 = $3000/month
- FPO = 20% of $3000 = (up to) $600/month
- Income increases to $66,000, disability at 60% = $39,600 = $3300/month
- Eligible FPO = $3300 - $3000 = $300 based on his income increase

Question 56

Name some key points of the Cost of Living Adjustment (COLA) rider on a DI policy?

Answer 56

• Annual increase in benefits, starting in the second year
  Simple: Flat rate (eg 2.00%) Compound: After first year, benefit is indexed to rate of inflation of previous year

Question 57

What are some key points of Accidental Death & Dismemberment (AD&D) rider on a DI policy?

Answer 57

• If the client dies, loses sight, hearing or loss of one or more limbs, then an additional payment benefit is provided.
• Death must occur within 365 days of the accident and related to the accident

Exclusions:
- Self-inflicted wounds;
- Attempted suicide;
- Participation in dangerous sports;
- Flying other than as a passenger on a commercial airliner.

Question 58

Name some key points of Partial
Disability & Residual Disability rider on a DI policy?

Answer 58

Partial Disability
- If client was on disability for 6 months (usually), and then goes back to work part-time for less hours than before, he can get partial payment.

• If he can work 50% of the time, he will get 50% of the disability. Loss of time or tasks is determined and used to calculate the benefits.

Residual Disability
- If client was on disability for 6 months (usually), and then goes back to work part- time for less income than before, he can get some disability payment.

• If he can earn 80% or more of his income, he cannot get any residual disability.
• If he can earn only 20% of his income, he qualifies for full benefits Between 20-80% loss this formula applies
  (example)
  Full-time income = $80,000, part-time income = $32,000, Loss in income = ($80,000-$32,000)/$80,000 x 100 = 60%.
  Thus, 60% of $3000 disability = $1800 residual disability

Question 59

What are some key points for Return of Premium rider on a DI policy?

Answer 59

• If client is concerned that he will not claim disability
• Provides tax-free ROP return of premium if policy expires at age 65 and total claims don’t exceed paid premiums

Example:

• if no claims, 70% of premiums paid
• If claims filed, difference between premiums and claims is paid
• If claims exceed premiums, no ROP payment

Question 60

Explain with some key points the Hospitalization Benefit rider on a DI policy

Answer 60

• Hospital stays (minimum 18-72 hours) will trigger this benefit, regardless of waiting period.
• Pays a daily benefit ($50-$250/day) for re-imbursement of expenses, usually for 3-4 months

Question 61

TRUE OR FALSE?

In the case of LTD coverage, if the premiums are paid by the employer, the benefits received by the employee will be taxable income. As with STD, the employer-paid premiums are a deductible expense. However, if the employee/plan member pays 100% of the premium, the benefits will be received tax-free. The premiums are not eligible for a tax deduction.

Answer 61

TRUE