Lesson 5: Disability Ins. Flashcards
Purpose of DI
While the likelihood of becoming disabled increases over time, the total potential loss from a disability decreases over time
- Human capital vs. Net worth
- More human capital lost for a young person
- Higher net worth for older person
-Disability insurance replaces regular income for people unable to work.
DI Provisions
- generally replaces just 60 to 70% of gross income
- living expenses increase while they are disabled due to additional medical and support needs
- insurers and state law always limit the total replacement amount to be less than 100% of gross income
DI Provisions: Elimination and Benefit Periods
Elimination Period: amount of time an insured must be disabled before receiving payments (like a deductible for health ins.)
-Longer elimination periods = lower premiums but require insureds to maintain additional coverage. might self-insure with a larger emergency fund or purchase a short-term disability insurance policy
Benefit Period: maximum amount of time an insured will receive payments (like liability limits on property ins.)
- longer benefit periods = larger premiums, but receive potentially larger payment from policy
- could be 6 months or decades
Terms of Coverage
Short Term: good if u dont have emerg. fund or large cash balance
-shorter elim period, usually after 2 weeks, benefit period 6 months to 2 years
Long Term: longer elim period (6 months to a year)…benefit period 2 years to retirement, larger potential benefit - good for younger, higher income
Definition of Disability
-Own occupation - cant do your own job or skills, will pay out even if an insured finds work outside their occupation
-Any occupation - cant do any gainful occupation that ur reasonably skilled for…large salary reduction
(cheaper than own occupation)
-as an insured can find any occupation that pays at least 60% of their own occupation, they will not be considered disabled…if you could find any job reasonably skilled for, not disabled
-Split definition: fixed period policy uses “own”, remaining period uses “any”
-Total Disability: Social Security definition of disability and other times called total disability.
This definition is the most restrictive and considers a person to be disabled only if they cannot perform any substantial gainful activity.
-Presumptive Total Disability: if some1 can perform duties of own or any occupation, DI still may pay benefit if it includes presumtive DI
automatically considers certain conditions to be totally disabling:
Loss of sight
Hearing in both ears
The use of both feet
The use of both hands
The use of only one hand and one foot
DI Insurance Provisions
Partial: can’t perform atleast one duty of normal occ. - less than for total DI, only short period - incentive to get back to work…back to work and make 25% of what you used to, partial DI rider will pay 75% of benefit
Integration with SS: DI payments reduced by SS payment…SIS offset benefit reduced by SS amount?
Waiver of Premium: generally waived during benefit period, but not during elim period
Residual Benefits: back to work at reduced pay, policy will pay the difference between current income and income prior to disability
Cost of Living Rider:
The future increase option rider – insured increases the monthly benefit as the insured gets older,
An automatic increase rider – automatically increases the monthly benefits by a stated percentage every year
Non-Cancelable: prevents insurance company from canceling the policy for any reason provided the premium is paid. the insurance company may not raise rates when the insured renews coverage
Guaranteed Renewable: requires insurance company to renew the policy for a specified period of time or until the insured reaches a certain age. the insurance company may raise rates when the insured renews coverage.
Group Disability Insurance
- can be short or long term, many cases both.
- typically lower premiums than individual
- employers pay premiums or employees pay by payroll deduction
Taxation of DI
- If the insured paid the premiums with after-tax dollars, the benefits received under the policy will not be subject to income tax
- Benefits provided under a policy paid for with pre-tax dollars or paid by an employer are subject to income tax
DI with SS Example
Jacques bought a disability policy with a base benefit of $5,000 and an SIS offset benefit of $1,000. Jacques became disabled and eventually received $700 in Social Security disability benefits. How much will Jacques receive from the insurance company after Social Security benefits begin?
Benefit + SIS Benefit - SS
