►DISABILITY INCOME BENEFITS

• The benefits paid under a disability income policy are in the form of monthly income payments

• Insurers typically place a ceiling on the amount of disability income protection they will issue on
 any one applicant, based on the insured's income at the time of purchase

• As compared to the insured's previous earnings, the benefits provided under disability income insurance  should be somewhat less to avoid over-insurance

• Insurers use two methods to determine the amount of benefits payable under their disability
 income policies: percent-of-earnings approach and the flat amount method

• The first method is called the percent-of-earnings approach, which determines the benefit amount
 by using a percentage of the insured’s pre -disability earnings and takes into account other sources of
 disability income

• The second method used to establish disability benefits is the flat amount method. Under this
 approach, the policy specifies a flat income benefit amount that will be paid if the insured
 becomes totally disabled. Normally, this amount is payable regardless of any other income
 benefits the insured may receive.

Disability Defined

• With one exception (partial disability), an insured must be totally disabled before benefits under
 a disability income policy are payable

• What constitutes total disability varies from policy to policy

• The insured must meet the definition set forth in the policy

• In disability income insurance, the definition of total disability often considers the insured’s
 education, training, and experience

• There are two definitions of total disability: any occupation or own occupation

Any Occupation

The "any occupation" definition of total disability requires the insured to be unable to perform any
occupation for which he is reasonably suited by reason of education, training, or experience in order to
qualify for disability income benefits.

Own Occupation

The "own occupation" (own-occ) definition of total disability requires that the insured be unable to perform the
insured’s current occupation as a result of an accident or sickness.

• From a policyowner's point of view, an "own occupation" disability income policy is more advantageous

• It is more expensive and difficult to qualify for

• Most long term disability group policies provide benefits under an “own occupation” clause for the first two years of disability, and thereafter, provide benefits under an “any occupation” clause

Nonoccupational coverage

The coverage provided by a Disability Income policy that does not provide benefits for losses occurring as the result of the insured's employment is called nonoccupational coverage.

Presumptive Disability

• This provision specifies certain conditions that automatically qualify the insured for the full
 benefit because the severity of the conditions presumes the insured is totally disabled even if he
 is able to work

• Presumptive disabilities include total blindness, total deafness, loss of speech, and loss of
 two or more limbs

Partial Disability

• Partial disability is the inability of the insured to perform one or more important duties of
 the job or the inability to work at that job on a full-time basis, either of which results in a
 decrease in income

• Normally, partial disability benefits are payable only if the policyowner has first been totally disabled

• This benefit is intended to encourage disabled insureds to get back to work, even on a part-time
 basis, without fear that they will lose all their disability income benefits

• The amount of benefit payable when a policy covers partial disabilities depends on whether the
 policy stipulates a flat amount or a residual amount

Flat Amount Benefit

• A flat amount benefit is a set amount stated in the policy

• This amount is usually 50% of the full disability benefit

• For example, let's assume Helen, who has a disability income policy with an own-occupation
 definition, is severely injured after falling down a flight of stairs. She is unable to work for four

months during which time her disability income policy pays a full benefit. After four months she
is able to return to work, but only on a part-time basis earning substantially less than she did
before her injury. If her policy did not contain a partial disability provision, her benefits would
cease entirely because she no longer meets the definition of totally disabled. However, if her
policy provides for partial disability benefits to be paid as a flat amount, she will be able to work
on a part-time basis and continue to receive half of her disability benefits.

Residual Amount Benefit

• A residual amount benefit is based on the proportion of income actually lost due to the partial
 disability, taking into account the fact that the insured is able to work and earn some income

• The benefit is usually determined by multiplying the percentage of lost income by the
 stated monthly benefit for total disability

• For example, if the insured suffered a 40% loss of income because of the partial disability, the
 residual benefit payable would be 40% of the benefit that the policy would provide for total disability

Cause of Disability

• Policies that use the accidental means provision require that the cause of the injury must have
 been unexpected and accidental

• Policies that use the accidental bodily injury provision ( sometimes called the results provision)
 require that the result of the injury has to be unexpected and accidental

• For example, Bob took an intentional dive off a high, rocky ledge into a lake. He struck his head
 on some rocks and ended up partially paralyzed. If his policy had an accidental means provision,
 the benefits would probably not be payable because the cause of his injury (the dive) was
 intentional. However, if his policy had an accidental bodily injury (or results) provision, benefits
 would be payable because the result of the accident (his injury) was unintentional and accidental.

• Today, most disability income policies use the accidental bodily injury, which is far less
  restrictive than the accidental means provision

►DISABILITY INCOME POLICY PROVISIONS

Probationary Period

• The probationary period specified in a disability insurance policy is the period of time that must
 elapse following the effective date of the policy before benefits are payable

• It is a one-time-only period that begins on the policy's effective date and ends 15 or 30 days
 after the policy has been in force

• Purpose of the probationary period is to exclude preexisting sicknesses from coverage and
 provide a guidepost in borderline cases when there is a question as to whether an insured
 became ill before or after the effective date of the policy

• Helps protect the insurer against adverse selection because those who know they are ill are
 more likely to try to obtain insurance coverage

• Probationary period does not apply to accidents because you cannot anticipate an accident

Elimination Period

• The elimination period is the time immediately following the start of a disability when
 benefits are not payable

• The elimination period serves as the deductible in a disability income policy

• Elimination periods eliminate claims for short-term disabilities

• The longer the elimination period, the lower the premium for comparable disability benefits

• The elimination period is sometimes called the waiting period

Benefit Period

• The benefit period is the maximum length of time that disability income benefits will be paid to
 the disabled insured

• The longer the benefit period, the higher the cost of the policy

• Rather than charge additional premiums or exclude coverages when issuing disability
 income coverage to a substandard risk, an insurer may shorten the benefit period

• Individual short-term policies provide benefits for six months to two years

• Individual long-term policies are characterized by benefit periods of more than two years, such
 as 5, 10, or 20 years

Delayed Disability Provision

• In some cases, total disability does not occur immediately after an accident but develops some
 days or weeks later

• Most policies allow a certain amount of time during which total disability may result from an
 accident and the insured will still be eligible for benefits

• The amount of time allowed for a delayed disability may be 30, 60, or 90 days etc.

Recurrent Disability Provision

• It is not unusual for a person who experienced a total disability to recover and then, weeks or
 months later, undergo a recurrence of the same disability

• Most policies provide for recurrent disabilities by specifying a period of time during which
 the recurrence of a disability is considered a continuation of the prior disability

• The insurer will then pay benefits without a new elimination period

• If the recurrence takes place after that period, it is considered a new disability and will be
 subject to a new elimination period before benefits are again payable

Change of Occupation Provision

Under the change of occupation provision, if an individual covered under a disability income policy is injured while engaged in an occupation that is more hazardous than the occupation stated in the policy, the result will be the benefit level is reduced. If the insured is engaged in a less hazardous occupation than what was originally stated in the policy, the benefits will likely be increased.

Nondisabling Injury

• Frequently, a person covered by a disability income policy will suffer an injury that does not
 qualify for income benefits

• Many such policies include a provision for a medical expense benefit that pays the actual cost of
 medical treatment for nondisabling injuries that result from an accident.

Elective Indemnity

• Some short-term disability income policies provide for an optional lump sum payment for
 certain named injuries

• The insured may sometimes select this elective indemnity option when applying for the policy

Coverage after Age 65

Disability income policies typically require the insured to be actively working for a stated number of hours per week if coverage extends past age 65.

► OPTIONAL BENEFITS AND RIDERS

Waiver of Premium Rider

• A waiver of premium rider generally is included with guaranteed renewable and noncancellable
 individual disability income policies

• It exempts the policyowner from paying the policy's premiums during periods of total disability

• To qualify for the exemption, the insured must experience total disability for more than a
 specified period, commonly three or six months

• The waiver of premium generally does not extend past the insured's age 60 or 65

• Premiums are waived beginning at the date of disability

Social Security Rider

• The Social Security rider provides for the payment of additional income when the insured is
 eligible for social insurance benefits but those benefits have not yet begun, have been denied,
 or have begun in an amount less than the benefit amount of the rider

Cost-of-Living Adjustment (COLA) Rider

• The cost-of-living adjustment (COLA) rider provides for indexing the monthly or weekly benefit
 payable under a disability policy to changes in the Consumer Price Index (CPI)

• Typically, the benefit amount is adjusted on each disability anniversary date to reflect changes in
 the CPI

Guaranteed Insurability Rider

• This option guarantees the insured the right to periodically increase the amount of benefits
 payable under the policy without evidence of insurability

Rehabilitation Benefit

Because of disability, insureds may not be able to return to their normal occupation but still be able to work at
some kind of job. The rehabilitation benefit facilitates vocational training to prepare insureds for a new occupation.

• Under the rehabilitation benefit in a disability income policy, the insurer will pay the
 approved cost of a rehabilitation program to help a disabled return to work