Unit 15: Disability Income Insurance

Question 1

What is disability?

Answer 1

•inability to work
•work=one’s own occupation OR any occupation

Question 2

Own occupation

Answer 2

Disability=insured’s inability to perform any or all duties of their occupation at the time disability begins

Ex. Lee is a page layout specialist & loses 3 fibers on each hand in an accident
—>under their own occupation definition, Lee is unable to use the keyboard
—>primary duty of this occupation & is disabled

Question 3

Any occupation

Answer 3

Disability=insured’s inability to perform the duties of ANY occupation for which they’re reasonably qualified by training, education, & experience

Question 4

What is an income replacement contract?

Answer 4

•pays a benefit if the insured experiences a loss of income as a result of suffering a covered illness or injury
•benefit trigger is the amount of income the insured is receiving at the time of the claim
•a reduction in income triggers payment

Question 5

What is presumptive disability?

Answer 5

•condition that automatically qualifies insureds for disability benefits whether or not they can work, including:
-loss of/loss of use of any 2 limbs
-total & permanent blindness in both eyes
-total loss of speech
-total loss of hearing in both ears

•may also be determined using the loss of earnings test:
-insured’s level of earnings before disability is compared to the level of earnings after disability
-if post-disability earnings fall below pre-disability earnings by a given %, the insured is considered totally disabled & eligible for a full benefit even if he or she is earning some income

Question 6

What is the physician care requirement?

Answer 6

•some older policies required that the insured be confined to the house & under the treatment of a doctor
—> called a “medically defined disability”

Question 7

Benefits (monthly indemnity)

Answer 7

•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
•benefit is referred to as an “indemnity”-it returns the insured to their original financial condition before the loss

Question 8

What is the elimination period/waiting period?

Answer 8

•time period an insured must be disabled before benefits begin
•can be thought of as a kind of deduction-a time deductible rather than a dollar deductible
•keeps the insurance company from paying claims for short term or temporary disabilities
•when elimination period is satisfied, benefits begin & they are not paid retroactively
•may be 30, 60, 90, 180 days, or longer
•longer elimination period—>reduces the insurance premium & makes the disability income policy more affordable

Question 9

Benefit period

Answer 9

•benefits are paid during the disability period or until the end of a specified periods of time called the benefit period
•typical benefit periods are 1 year, 2 years, 5 years, and to age 65
•longer benefit—>higher policy premium

Question 10

What is the waiver of premium feature?

Answer 10

•eliminates the need to pay premiums during any period of disability
•becomes effective after the waiting period is satisfied
•refunds any premiums paid during the waiting period (usually 90 days)

Question 11

Coordination with government benefits

Answer 11

•disabled insureds may also receive benefits from workers comp or other government programs
•during the planning process, the agent/producer must account for the possibility of an insured receiving too many benefits because this can encourage malingering
•the other possibility is receiving benefits that do not meet the individual’s income needs

Question 12

What is the additional monthly benefit rider?

Answer 12

•pays an additional benefit during the first 6-12 months
•pays even if the insured receives government benefits

•gov programs have long waiting periods & take a long time to process disability claims
•AMB rider pays an additional benefit amount with the regular monthly benefit for a limited period of time, usually 6 or 12 months

Question 13

What is the social insurance supplement (SIS) rider?

Answer 13

•monthly benefit
•pays when social benefits are not being paid
•makes up the difference between the government benefit & the amount of the rider
•pays only during the policy benefit period

•for those receiving a benefit for total disability this rider pays for additional benefits, less any legislated benefits like social security or workers comp for the same period of time
•the payment is in addition to other benefits payable under the insurance policy
•this rider benefits continue only as long as regular policy benefits are payable:
-during the policy’s benefit period
-while the insured remains disabled

Question 14

What is occupational coverage?

Answer 14

Disability income insurance that covered both job-related & non-job-related disabilities

Question 15

What is non-occupational coverage?

Answer 15

Covers disabilities that result from non-job-related illnesses or injuries

Question 16

At-work benefits

Answer 16

Insurers offer reduced benefits for individuals who are impaired, but not totally disabled, & return to work

Question 17

What are partial disability benefits?

Answer 17

•can perform some but not all essential duties of their occupation
•partial disability benefit is 50% of the total disability benefit
•partial disabilities benefits paid for a shorter period-usually 3-6 months
•may qualify for these benefits either as a result of suffering a partially disabling illness or injury & returns to work in a reduced capacity

Question 18

What are residual disability benefits?

Answer 18

•alternative for partial disability
•benefits are paid when the insured cannot perform some of the duties of their occupation
•based on the amount of income lost rather than 50% of the total disability benefit
•to receive, insured’s earnings must be reduced by a stated % due to the disability
•loss is multiplied by the total disability benefit to determine the benefit payment
•can be paid whether the insured is working full-time or part-time
•paid throughout the benefit period as long as the insured’s income is reduced

Question 19

What is recurrent disability?

Answer 19

•condition recurs after returning to work
•doesn’t have to wait to start receiving benefits if the condition recurs within a certain time frame after returning to work

Question 20

What is the elimination period?

Answer 20

The amount of time an insured must be disabled before receiving benefits

Question 21

The amount of time an insured must be disabled before receiving benefits is known as the _________.

Answer 21

Elimination period

Question 22

What is the cost-of-living adjustment (COLA) rider?

Answer 22

•benefit received by a disabled insured is increased automatically to match increases in the consumer price index (CPI)
•typically, cost of living adjustments are made every 12 months for as long as the insured receives disability benefits

Question 23

What is the future increase option (FIO) rider?

Answer 23

•allows insured to increase policy benefits
•no evidence of insurability required
•the insured’s income must have increased

•allows insureds to buy additional amounts of disability income insurance coverage at states 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
•only able to buy a predetermined amount of additional coverage at each option date
•insured’s income must have increased to the point that the additional coverage is needed
•number of purchase option dates is also limited
•usually only provides option dates every 3 years from ages 25-50

Question 24

What is the relation of earnings to insurance provision?

Answer 24

•allows insurer to change policy benefit if insured’s income has decreased
•portion of the premium will be refunded to represent the decrease in coverage

Question 25

What is the accidental death & dismemberment (AD&D) rider?

Answer 25

•pays the principal sum (full benefit) if the insured dies or loses 2 limbs or the sight in both eyes in an accident
•pays capital sum (1/2 of the principle sum) if the insured loses 1 limb or the sight in 1 eye

Question 26

What is the rehabilitation benefit?

Answer 26

• helps the insured train for a new occupation
•Pays as long as insured is disabled and stays in the program

Question 27

What is the medical reimbursement benefit (non-disabling injury)?

Answer 27

Helps pay medical bills for a non-disabling injury

Question 28

What is the return of premium rider?

Answer 28

•Refunds a stated percentage of the premium after a stated time
•Benefits paid during that time are subtracted from the refund amount

Question 29

What are the common exclusions found in disability income policies?

Answer 29

Losses arising from,
•War or military service
•Suicide and other self inflicted injuries
•Non-commercial aviation
•Commission of a felony
•Living overseas

Question 30

What are the benefit limits?

Answer 30

• Ensures will generally limit the amount to know more than 65% or 70% of net income
•Existing coverage from another policy will be subtracted from the amount and ensure is willing to issue

Question 31

What are policy issuance alternatives for individuals who are uninsurable?

Answer 31

•issue a rated-up policy—>charge an additional premium to cover the increased risk
OR
•attach an impairment rider to the policy that elongated coverage for a particular condition that makes the individual uninsurable

Question 32

What are the 2 types of group disability insurance?

Answer 32

•short-term disability (STD)
•long-term disability (LTD)

Question 33

What is short-term disability (STD)?

Answer 33

•policies have short elimination periods-sometimes a few days or no elimination period at all
•benefit period normally 6-24 months
•benefit amounts generally 60% or 70% of the employee’s compensation

Question 34

What is long-term disability?

Answer 34

•designed to begin paying a benefit when the short-term disability benefit ends
•elimination period is usually the same as the benefit period of the short-term plan
•benefit periods are from 2 years up to age 65
•benefits are usually with benefit payments from workers comp & social security

Question 35

What is key person disability insurance?

Answer 35

•Pays a monthly benefit to a business to cover expenses for additional help or outside services when an essential person is disabled
•Benefit amount may be paid in a lump sum or in monthly installments
•Generally the policies elimination period will be 30 to 90 days
•Benefit period will be one or two years

Question 36

Business overhead expense (BOE) policy

Answer 36

•purpose is to cover certain overhead expenses that continue when the business owner is disabled
•policy will indemnify the business (NOT the owner) for such business expenses as rent, taxes, insurance premiums, utility bills, & employees’ compensation, but NOT the owner’s or partner’s salary
•by covering these expenses the business is able to keep its doors open & continue to operate
•generally have elimination periods of 15 or 30 days
•benefit periods usually of 1 or 2 years
•average eligible overhead expenses of the business determine the benefit amount of the policy

Question 37

What is disability buy-sell insurance?

Answer 37

•can be used to buy out the interest of a business owner or partner who becomes disabled and can no longer contribute to the business
•buy-sell agreement will specify the value of a method of determining the value of the disabled owner’s business interest
•benefits may be paid in a lump sum or in monthly installments
•if the policy provides a monthly benefit, usually the benefit period will not exceed 5 years
**at the end of the elimination period, the disability policy’s funds become available & the buyout plan is put into effect
—>at that point the buyout is irreversible
—>a business owner or partner will want to avoid having to sell their business interest for a short-term disability
—>the elimination period for disability buyout insurance will normally be 1 or 2 years

Question 38

How to qualify for Social Security disability benefits?

Answer 38

•Someone must have paid Social Security payroll (FICA) taxes to earn at least six credits during the last 13/4 to be currently insured
•The number of needed credits increases with age up to age 62
•Fully insured status is achieved when someone has paid into Social Security for 10 years, earning 40 credits
•In addition the person must meet Social Security is definition of totally and permanently disabled which means:
-The person is unable to perform the duties of any occupation and,
-The disability is expected to last for at least 12 months or end and death or total blindness
•Once a person becomes eligible for disability there is a 5 month waiting period to receive benefits that are not paid retroactively

Question 39

What are the benefits available under Social Security disability?

Answer 39

• based on the individuals primary insurance amount (PIA), calculated using percentages of the persons income over his or her working years
•Benefits are not designed to replace a workers total earnings

Eligible beneficiaries receive a benefit express as a percentage of the workers’ PIA:
•A disabled worker receives a benefit equal to 100% of PIA
•A spouse caring for the workers’ unmarried child under age 16 or disabled before age 22 receives a benefit, equal to 50% of the workers PIA or,
•Each unmarried child under age 18, 19 if in high school, or disabled before age 22 receives a benefit equal to 50% of the workers PIA

•The total family benefit is captured by a maximum family benefit amount based on the workers average earnings

Question 40

Workers’ compensation

Answer 40

•A form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employees right to sue the employer for negligence
•Administered on a state by state basis, with the state governing board overseeing the system
•Benefits are payable regardless of fault
In most cases, employees cannot sue the employer for damages if an injury or illness occurs

Benefits cover:
•Medical treatment
•Rehabilitation
•Income lost due to disability
•Income lost due to death

Question 41

What does business overhead expense insurance typically cover?

Answer 41

A small business