Unit 15 - Disability Income Insurance Flashcards
Pure Loss of Income / Income Replacement Contracts
An income replacement contract pays a benefit if the insured experiences a loss of income as a result of suffering a covered illness or injury.
If the insured can do part of the job this would pay the difference from what he/she makes now vs. what he/she made before.
Presumptive Disability
Is a condition that automatically qualifies insureds for disability benefits whether or not they can work.
Conditions generally include:
- loss of or loss of use of any two limbs
- total and permanent blindness in both eyes
- total loss of speech
- total loss of hearing in both ears
Physician Care Requirement
Some older policies required that the insured be confined to the house and under the treatment of a doctor. This is called medically defined disability.
Benefits Monthly Indemnity
When an individual qualifies for benefits, disability income plans pay a monthly amount to make up for lost earnings due to the insured’s inability to work.
The benefit is referred to as an indemnity - it returns the insured to their original financial condition before the loss.
Elimination Period / Waiting Period
- The time period an insured must be disabled before benefits begin. Like a time deductible.
- When the elimination period is satisfied, benefits begin and are not paid retroactively
- Elimination periods may be 30, 60, 90, or 180 days or longer, depending on the time period selected.
- Longer would reduce the premium
Benefit Period
Benefits are paid during the disability period or until the end of the specified period of time.
- Typical periods are 1 year, 2 years, 5 years, and to age 65
- The longer the benefit period, the higher the policy premium
Waiver of Premium
This feature eliminates the need to pay permiums during any period of disability.
- Waives further premium payments after initial waiting period
- Refunds any premiums paid during the waiting period (usually 90 days)
Additional Monthly Benefit (AMB) Rider
Government programs have long waiting periods.
The AMB rider pays an additional benefit amount with the regular monthly benefit for a limited period of time, usually 6 or 12 months.
Pays even if the insured receives government benefits.
Social Insurance Supplements (SIS)
- The SIS rider is a monthly benefit.
- Fill gaps left by government programs
- Pays when social benefits are not being paid
- Makes up the difference between the government benefit and the amount of the rider
- Pays only during the policy benefit period
Occupational vs Non-Occupational Coverage
- Occupational - both job related and non-job related
- Non-Occupational - only non-job related
At-Work Benefits
Insurers offer reduced benefits for individuals who are impared, but not totally disabled, and return to work.
Partial Disability Benefits
Means the person can perform some, but not all, of the essential duties of his/her occupation.
- Returns to work in a reduced capacity
- Usually pays 50% of total benefit
- Usually no longer than 3 to 6 months
Residual Disability Benefits
Another alternative for partial disability, based on amount of income lost rather than 50% of the total disability benefit.
- Paid whether insured is able to work full or part time
- Benefit is based on reduction of income
- Pays as long as the reduction in income continues
Recurrent Disability
This provision protects employees who return to work, but become disabled again for the same or related cause. If this situation occurs within a certain period of time, the insured is considered still disabled from the original disability and is not subject to a new elimination period.
Cost-of-Living Adjustment (COLA) Rider
The benefit received by a disabled insured is increased authomatically to match increases in the Consumer Price Index (CPI).
Typically adjustments are made every 12 months.
Future Increase Option (FIO) Rider
Allows insureds to buy additional amounts of disability income insurance coverage at stated future times without having to provide proof of insurability.
- Rate for additional coverage will be based on the insured’s attained age at the time of purchase, not age when policy was originally issued.
- Insured’s income must have increased
- No evidence of insurability is required
- Number to purchase option dates is limited, usually rider provides option dates every 3 years from ages 25 to 50.
Relation of Earnings to Insurance Provision
The insurer can reduce the benefit paid to a disabled insured if the insured’s income is less than when they bought the policy.
- Insurer will base the amount of benefit on the insured’s average income over a previous 24 month period.
Accidental Death & Dismemberment (AD&D)
The AD&D rider pays the principal sum, the full benefit, if the insured dies or loses two limbs or the sight in both eyes in an accident. The capital sum, one-half of the principal sum is paid if the insured loses one limb or sight in one eye.
Death benefit might be stated as a sum equal to 48 times the monthly disability benefit.
Rehabilitation Benefit
Pays for vocational trainign to prepare insured for a new occupation when they are totally disabled and unabl to return to their normal occupation.
Pays as long as the insured is disabled and stays in the program.
Medical Reimbursement Benefit (Non-Disabling Injury)
This benefit does not pay a disability benefit but instead reimburses the insured for medical expenses incurred to treat a non-disabling injury.
Short-Term Disability (STD)
- These policies have shorter elimination periods, sometimes just a few days or none at all.
- Benefit period is normally 6-24 months
- Benefit amounts are generally 60% or 70% of the employee’s compensation
Long-Term Disability (LTD)
- Designed to begin paying a benefit when the short-term disability benefit ends
- Elimination period usually the benefit period of the Short-Term Disability
- Benefit period are from 2 years up to age 65
- Benefits are usually with benefit payments from worker’s compenation and Social Security
Key Person Disability Insurance
The key person’s economic value to the business is determined in terms of the lost business income that would occur to replace the key personal for an extended period of time.
- Benefit may be paid in lump sum or monthly installments
- Elimination period: 30-90 days
- Benefit period: 1-2 years
Business Overhead Expense (BOE) Policy
The purpose is to cover certain overhead expenses that continue when the business owner / partner is disabled.
- Will cover business expenses: rent, taxes, insurance premiums, utility bills, and employee’s compensation (NOT the owner or partner’s salary)
- The average eligible overhead expenses of the business determine the benefit amount
- Elimination period: 15-30 days
- Benefit period: 1 or 2 years
Disability Buy-Sell Insurance
Can be used to fund an agreement to buy out the interest of a business owner or partner who becomes disabled and can no longer contribute to the business.
- Can be lump sum or monthly installments
- monthly, usually the benefit period will not exceed five years
- Elimination period: 1 or 2 years
- At the end of the elimination period the buyout is irreversible.
Qualifying for Benefits (Social Security)
To qualify for Social Security benefits:
- Must have paid social security payroll (FICA) taxes to earn at least 6 credits during the last 13 quarters to be currently insured.
- The number of needed credits increases with age up to 62.
- Fully insured status is achieved when someon has paid into Social Security for 10 years, earning 40 credits.
Social Security Benefits Available
- Person must have at least 6 credits in the last 13 quarters
- Number of credits required increases with age up to age 62
- Fully insured earned 40 credits
- 5 month waiting period for benefits
- Not retroactive to cover first 5 months
- Disability must last 12 months
- Amount of benefit based upon the person’s Primary Insurance Amount (PIA)
- Spouse and children may receive benefits
Worker’s Compensation
Benefits cover:
- medical treatment
- rehabilitation
- income lost due to disability or death
The total Social Security family benefit amount is capped at a certain amount based on
The workers’ average earnings
What is the most important factor in underwriting disability income insurance?
The insured’s occupation
