Objective 7 : Disability Income Insurance

Question 1

Disability income insurance is designed to

Answer 1

replace a portion, often 60 percent, of an individual’s income if he or she becomes disabled.

Question 2

short-term disability

Answer 2

max 89 days

is available as group insurance and may be called a sick leave plan

Question 3

long-term disability

Answer 3

89 days to 5 years or lifetime limit

Question 4

benefit period

Answer 4

ends when the insured “returns to work” or reaches the maximum benefit period

Question 5

Waiting Period/elimination period

Answer 5

seven days for a short-term disability policy

may be 30/60/90 days, or one year or more for a long-term disability policy

Shorter waiting periods require higher insurance premiums. Consequently, individual insureds often choose the longest waiting period that they can afford to be without income

Question 6

Definition of Disability

Answer 6

his definition might be based on the insured’s inability to perform occupational duties, on the amount of earned income lost, or both.

if based on occupation :
distinction made : any occupation vs own occupation

if based on income :
a specified percentage of earned income lost will result in the payment of benefits

Question 7

A noncancelable disability income policy

Answer 7

the insurer cannot cancel or change the benefits provided, the rates, or other policy features unless the insured requests a change

Question 8

A guaranteed renewable policy

Answer 8

will continue as long as the premiums continue to be paid, up to a specified age as long as the insured is gainfully employed

Even though the insurer must renew the policy at the insured’s request, the insurer reserves the right to raise premiums on renewal

Question 9

A conditionally renewable policy

Answer 9

provides that the insurer has an option to increase the premium and change the policy terms at renewal.

allows the insurer to cancel the contract if the conditions for renewal are not met.

Question 10

3 types of disability income insurance

Answer 10

Individual disability income insurance
Group disability income insurance
Social Security disability income program

Question 11

Individual Disability Income Insurance

Answer 11

• purchased using after-tax dollars (are not taxable to the insured)
• A job change will not affect coverage, so the insured can purchase a noncancelable policy at a young age, when premiums are lower, and continue the coverage until retirement or beyond.

Question 12

Group Disability Income Insurance

Answer 12

• made available through an employer or some type of association
• economies of scale enable the insurer to offer lower premiums to the insured individuals.
• Premiums are paid by the employer in part or in full, and premiums may be deducted from the insured’s payroll on a before-tax basis; consequently, benefits are taxed as ordinary income when they are paid to the insured during disability.
• under an association’s plan, premiums are paid by the individual with after-tax dollars, so benefits are not taxable.
• Most group LTD plans use a split definition of disability, with which an “own occupation” definition applies for an initial disability period, such as two years, and then an “any occupation” definition applies for the remaining benefit period, until the maximum benefit period is reached.
• Some insurers limit the maximum amount of monthly benefits that an insured can receive from all disability income sources, restricting the insured to a specified percentage of his or her income. This discourages over-insurance and fraudulent disability claims.

Most LTD plans have a coordination-of-benefits provision. These provisions generally do not account for individual disability income insurance.

-when the individual’s employment or association ends, the group disability income coverage terminates. The coverage also terminates if the employer fails to pay the premium for the employee, or if the group policy is terminated by the employer or association. Most LTDs do not have provisions to enable an insured to convert the plan to an individual disability income policy.

Question 13

Social Security Disability Income Program

Answer 13

provides two protections for disabled workers:

(1) Monthly cash benefits
(2) Establishment of a period of disability

To be considered “disabled”
(1) A worker must be unable to engage in any
substantial gainful activity because of a “medically
determinable” physical or mental impairment . A
substantial gainful activity is one that requires
significant activities that are physical, mental, or a
combination of the two, in work that is performed
for profit, even if no profit is realized.. This disability
definition is comparable to an “any occupation”
definition,

(2) the worker’s impairment must be established by
objective medical evidence, and it must be
expected to last for at least twelve consecutive
months or to result in the individual’s death.

Monthly Cash Benefits

• requires a five-month waiting period
• In specified cases, even if a worker is disqualified, eligible dependents can still receive auxiliary benefits.

Establishment of a Disability Period

• used in determining other types of Social Security benefits for the worker’s family.
• must be established during a worker’s disability or within twelve months after the disability ends, assuming the worker has met “disability insured status” and the disability lasted at least five consecutive months