OVERVIEW (LLQP Flashcards)
What are the four types of disability income insurance policies?
- Cancellable
- Guaranteed Renewable
- Non-Cancellable
- Guaranteed issue
Cancellable policies offer the fewest guarantees for the policyholder. These policies can be modified. The insurer may change the benefits and premiums, based on the claim experience of a given group of insureds or type of insured. The change will apply, without the insureds’ consent, not to just one insured but to all the insureds of that group or type. In fact, the insurer could unilaterally cancel the policy.
Guaranteed renewable policies bind the insurer to renewing the coverage each year until the maturity date of the policy (usually at age 65), but the insurer has the right to modify premiums unilaterally. The policy of an individual insured cannot be changed: any alterations must apply to the entire class of policies, impacting all lives insured under that contract type.
Non-cancellable disability insurance has the highest premiums because it offers the greatest level of protection. It is guaranteed to be renewed until the insured reaches age 65. The insurer cannot cancel the policy, increase the premiums, add restrictive riders, or reduce benefits. Only the policyholder has the right to modify the policy, subject to underwriting if applicable, prior to its maturity.
Guaranteed issue disability insurance plans involve individually issued policies that are an alternative to traditional long-term disability (LTD) group insurance coverage and are available to groups in the low-risk occupational classes of executives and professionals: lawyers, doctors, accountants, etc. These plans guarantee coverage for members of the target group.
(Refer to Section 2.2.1)
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What are the different types of disability?
- Total disability
- Residual disability
- Partial disability
- Presumptive disability
- Recurring disability
(Refer to Section 2.2.3.3)
What are the four classifications of occupation in an individual disability insurance policy?
- Any occupation
- Regular occupation
- Own occupation
- Total disability (according to the CPP)
When a policy is issued with the “own occupation” classification, with this definition the insured is considered to be totally disabled if he cannot perform all of the primary duties of his regular occupation, even part of the time. It is the most liberal definition of disability; in that it is the easiest under which to qualify as being “disabled.” While he meets the definition of disabled under “own occupation,” benefits will be paid, even if the insured works in a different occupation.
When a policy is issued with the “regular occupation” classification, the insured would receive a disability benefit when he or she is unable to perform the essential duties of his or her regular occupation. If the insured earns a salary or wage from other employment, the policy benefit will be reduced or eliminated by those employment earnings.
When a policy is issued with the “any occupation” classification, the insured should be unable to perform some or all of the functions of his regular occupation and is not able to perform the functions of any other occupation for which he is suited by education or experience. In effect, an insured who is disabled and unable to function in his regular occupation will be expected, within a reasonable period of time, to become re-employed in a suitable alternative occupation, if possible, or his insurance benefits will be terminated.
“Total disability” is essentially the definition used by the Canada Pension Plan (CPP) the inability to perform the functions of any occupation for which the insured is suited by education and experience. It also entails that the insured will likely never recover and be able to return to employment and, in fact, will likely eventually die from the cause of the disability.
(Refer to Section 2.2.3.3)
What is the “elimination period” of an individual disability insurance policy?
It is the waiting period between when the disability occurred and when the benefit payments commence.
A longer elimination period would reduce the premiums as compared to a shorter elimination period.
(Refer to Section 2.2.2.2)
What is presumptive disability under an individual disability insurance policy?
Presumptive disability occurs when an insured suffers certain specified injuries or conditions which are deemed to be so severe that the person is presumed to be disabled, even if the “disability” does not result in a loss of earning. The types of injury/condition are set out in the policy and would typically include:
- 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.
(Refer to Section 2.2.2.8)
What is the benefit period under an individual disability insurance (DI) policy?
The benefit period under a DI policy is the maximum duration for which benefits will be payable.
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, whichever comes first.
The longer the benefit period, the higher the premiums. The most common benefit periods are for long-term individual disability income replacement policies two years, five years, 10 years or to age 65.
However, as more and more Canadians are working beyond age 65, some insurers offer coverage up to age 75 on an accident-only basis.
(Refer to Section 2.2.2.3)
Name four policy riders that can be added to an individual disability insurance policy.
- Future purchase option
- Cost of living adjustment
- Return of premium
- Accidental death and dismemberment
(Refer to Section 2.2.4.3, 2.2.4.4, 2.2.4.5, 2.2.4.7)
What is the maximum age for a future purchase option (FPO) to be exercised?
Age 50 or 55 depending on the contract.
The future purchase option allows the policy owner to increase the amount of monthly income benefit to keep pace with his or her growing income, with no evidence of medical insurability. The premium will be increased in step with the increase in coverage. Income will have to be proven when this option is exercised.
(Refer to Section 2.2.4.3)
Mohamed has a regular occupation individual disability insurance policy. Mohamed has been totally disabled and has filed disability claim forms with his insurance company and with Canada Pension Plan. Who would be the first payor on this claim?
Canada Pension Plan.
An insurance company will require a disabled individual to file a claim with the Canada Pension Plan disability program. This is commonly referred to as Canada Pension Plan primary offset. The amount of money that the disabled individual receives from Canada Pension Plan will reduce (offset) the amount of money that the individual will receive from the insurer.
(Refer to Section 6.5.2.2)
Alicia is a pharmacist who owns her own business. She employs two other pharmacists for her store. Alicia has been very careful with her investments over the past 10 years and has accumulated a sizeable investment portfolio.
Her life insurance agent approaches her about purchasing some individual disability insurance. She receives an illustration that shows the premiums for a monthly benefit of $7,000 with a 30-day elimination period. The premiums are very expensive and Alicia does not want to spend that much money. Alicia asks the agent to recommend a way to keep the monthly benefit, but to decrease the premiums that would be required.
What changes would you make to the illustration to allow Alicia to maintain the monthly benefit amount, but lower the premium costs?
Recommend a longer elimination period.
Since Alicia has access to funds that would help to replace any lost income, a longer elimination period would decrease the cost of the disability insurance policy but still provide her with income protection if she were to be seriously disabled for a long period of time.
(Refer to Section 2.2.2.2)
Nahim is a mechanical engineer at a large international corporation. He travels extensively in North America supervising large construction sites. Nahim owns an Own Occupation individual disability insurance policy with a 90-day elimination period, a benefit period up to age 65, a presumptive disability clause, and a monthly benefit amount of $6,000 per month. While on a job site in Boston, he was involved in a serious accident that left him paralyzed from the waist down. He was off work for 6 months. Nahim has filed a claim form with his insurance company.
How would the insurance company respond to this claim?
They would pay the $6,000 per month benefit to Nahim and would continue to pay the benefit until Nahim reaches age 65. This would be considered a presumptive disability because Nahim was paralyzed from the waist down. Nahim could continue to work in some other occupation because his policy was issued as an Own Occupation policy contract and he has met the presumptive disability test.
(Refer to Section 2.2.2.8)
What are the top four health conditions that are included in critical illness insurance policies?
- Heart attack
- Cancer
- Stroke
- Coronary bypass surgery
Most policies cover these top four health conditions. There are other illnesses and conditions that can be covered by different policies. You should be aware that not all companies cover all conditions and that there will be differences between insurers on the definitions of the illnesses covered. The definition must be met or the insured will be unable to make a successful claim.
(Refer to Section 3.1.3)
Veronica has a very basic critical illness policy that she purchased eight years ago. She has recently been in a car accident that has left her in a coma. Would she qualify for payment of claim under her critical illness policy?
No.
A basic critical illness policy would not provide coverage for a coma. Policies can be structured to provide benefits for additional conditions including:
- Blindness
- Deafness
- Kidney failure
- Major organ transplants
- Multiple Sclerosis
- Paralysis
- Coma
- Other illnesses that are particular to each insurer
(Refer to Section 3.1.3)
Alex is 58 years old and purchased a critical illness insurance policy five years ago. He had a heart attack seven days ago and died. How would the insurer handle this claim?
The insurer would not pay the claim.
Under a critical illness policy, the insurer will pay a lump-sum benefit if the insured is diagnosed with any critical illness covered in the policy and, for most conditions covered, is still living 30 days after the diagnosis.
(Refer to Section 3.1.5)
TRUE OR FALSE?
When a COLA rider is compounded, the annual increase will be based on the current year’s increase in CPI.
When a COLA rider is compounded, the annual increase will be based on the previous year’s increase in CPI.
- Example;
Lee has a disability insurance policy that pays a monthly benefit of $4,500. The policy includes a compounded cost of living adjustment (COLA) rider with a maximum annual indexing rate of 5.00%. The policy does not allow for carrying forward unused indexing. Lee is severely injured in an accident and makes a claim. He receives benefits for 4 years and the changes in the consumer price index (CPI) are as follows:
Year 1: 2.50%
Year 2: 1.50%
Year 3: 3.00%
Year 4: 5.50%
The amount of monthly benefit paid to Lee during the fourth year of his disability period is $4,822.14.
