Chapter 11

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Disability Income Insurance

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1. Disability not only eliminates income, but it also may increase expenses. Because of the
extra expense, the financial impact of disability may be greater than that of premature death.
2. Morbidity and Mortality - the following chart shows the incidence of disability as
compared to a premature death at various ages. (p.100)
3. Disability Income (Loss of Income or Time) Policy – pays an income benefit
when the insured is unable to work due to illness or injury (even if injured on vacation).
Benefits are paid weekly or monthly and determined as a percentage of the insured’s
past earnings normally 60 to 70%.
a. The full income is not paid to reduce malingering.
b. The insurer considers any other sources of disability income the insured may
have while underwriting the policy and is referred to as benefit integration.
The purpose is to prevent overinsurance that could cause a moral hazard or
fraudulent claims.
c. Benefit periods written are commonly two, three, and five years, age 65 or
lifetime, and written with an elimination period.
4. Pure Loss of Income (Income Replacement) Policy – a relatively new
alternative to traditional disability income policies under which the insured will receive
benefits if he/she loses income due to a covered accident or sickness, even if the insured
is working full-time doing all the same duties he/she did before. With traditional
disability income policies, there has to be a loss of time or duties to trigger coverage,
but under the Pure Loss of Income policy if the insured can do everything that he/she
should do before, but loses 50% of his/her income because he/she cannot do it as well,
he/she will still receive benefits.
5. Elimination Period (Sickness versus Injury) – the elimination period is normally
different for a disability due to an illness than for an injury. The benefit payment as well
as the specific elimination periods for these disability classifications will be stated in
the policy. A policy may state six months elimination period for sickness and immediate
coverage or as little as seven days in case of an accident. Neither party to the contract
can alter the elimination period on a disability income policy during the benefit period.
6. An insured may transfer rights of ownership of a disability policy using an absolute assignment.

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Occupational

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the policy covers injury and sickness on and off the job

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Nonoccupational

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the policy covers injury and sickness off the job only

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Total Disability

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a. Some policies require the insured’s inability to perform duties of his/her own
occupation. The own occupation often applies for the first two years, then
changes to any occupation. If disability is defined as own occupation for first
two years, the insured might be employed in a different occupation and continue
receiving full benefits for the remaining portion of the two year period.
b. Some policies are stricter and require the insured to be unable to perform the
duties of any occupation for which he/she is reasonably suited by education,
training, and experience.

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Partial Disability

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disability resulting in an inability to perform one or more of the
regular duties of an occupation. The benefit usually pays up to 50% of a total disability
benefit for 3 to 6 months.

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Residual Disability

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provides benefits for loss of income after the insured returns to
work usually following a total disability. Benefits are based on the reduction of earnings
as a result of the disability.

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Recurrent Disability

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when a second disability is suffered due to the same cause
within a set period of time (usually six months), the elimination period may not apply the
second time. The benefit period will be considered as a continuous period of disability.

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Presumptive Disability

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loss is presumed to be total and permanent due to the loss
of sight, hearing, speech, or the loss of two limbs. The insurer does not require the
insured to submit to periodic examinations to prove continued disability.

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Permanent Disability

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total disability that reduces or eliminates the insured’s ability
to work for the rest of his/her life.

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Temporary Disability

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when an insured continues to work at a reduced efficiency
or is unable to work at all for a period of time, but is expected to fully recover, such as
broken limbs, surgery, etc

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Lump Sum Benefits

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usually paid under presumptive disability or under special
policies covering business buy-sell agreements

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Rehabilitation

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paid while totally disabled and receiving benefits, if the insured
elects to participate in some form of vocational rehabilitation approved by the insurer.
Total disability benefits will be continued as long as the insured is actively participating
in the training program and remains totally disabled

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Transplant

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when an insured is totally disabled because of the transplant of his/her organ to
another individual, the company will deem him/her to be disabled as a result of sickness

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Cash Surrender Value

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individual disability income policies may provide benefits
to policyowners who do not make claims on their policies. Benefits may be in the form
of a:
a. Provision that offers premium refunds at stated intervals while the policy is in
effect if no claims have been made.
b. Pay back to the policyowner. Upon policy surrender, if no claims have been
made, the premiums paid may be returned to the policyowner similar to the cash
value payment of a surrendered life policy

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Change of Occupation

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could result in a change of benefits depending on the new
occupation, or the insurer could change the amount of premium to fit the occupational
rating for the current level of benefit. The more hazardous the occupation, the less
benefit and the higher the premium.

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Unique Aspects of Individual Disability Underwriting

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1. issured occupation is important
2. amount of benefit and length of benefit period requested and length of elimination period are also important
3. Recent enhancements in the disability product have had an impact on all occupational
classes, with the most liberal and broadest changes occurring in the professional and
independent-business markets. In more recent years, salary allotment or salary savings
mechanisms have started to appear increasingly as a vehicle in the professional and
independent-business marketplace. The fact that such individual plans can provide
for greater indemnity amounts, longer benefit periods, and are typically issued with
noncancellable or guaranteed renewable provisions have certainly enhanced the
professional market.

4. Once all underwriting information has been reviewed, the underwriter must determine
if the risk is standard, substandard or denied. If substandard, the insurer may want
to reduce the risk. This may be accomplished by use of one or a combination of the
following:
a. Charge an extra premium.
b. Increase the elimination period, shorten the benefit period, reduce the amount of
benefit or some combination thereof.
c. Utilize a Full Exclusion Rider when a condition appears certain to result in
recurrent disabilities.

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Underwriting Group Disability Plans

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1. When writing disability income insurance on a group basis, there is no medical underwriting.
The field underwriter’s job is to guard against adverse selection and overinsurance.
2. Group disability income insurance is usually offered only on a nonoccupational basis,
which will not cover work-related disabilities. Work-related injuries are usually covered
under Workers’ Compensation Insurance.
3. Most insurers require that a minimum number of employees participate in a group plan.
This enables the insurer to issue the plan without evidence of insurability.
4. The Age Discrimination in Employment Act (ADEA) affects both the short-term and longterm
group disability benefits for the people employed after age 65. This in turn will have
some effect on premium determination by the insurer when underwriting a particular group.

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Short-Term Disability (STD)

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1. Short-Term Disability Income plans are characterized by maximum benefits for
periods of rather short duration, such as 13, 26, or 52 weeks. Often, benefit periods are
coordinated with the employer’s “sick pay plan”. This disability plan is always less
than two years.
2. The elimination period may be as short as zero days for accident and seven days for
sickness but is rarely more than 15 or 30 days.
3. Benefits are typically paid weekly and range from 50% to 100% of the individual’s income.
4. Due to the ruling of the ADEA any employer with 20 or more employees covered by a
short term group disability plan must pay the same level of benefits to those employees
age 65 or over as to those under age 65.

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Long-Term Disability (LTD)

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1. This coverage is characterized by benefit periods of either two years, five years, or to age 65.
2. The elimination period will most commonly be either 30, 60, 90 or 180 days.
3. Benefit amounts are usually limited to about 60% of the participant’s income. Benefits
stated in a policy are the maximum benefit amounts and maximum period of time covered.
4. Normally, the waiver of premium for disability applies after a prolonged period
specified in the policy.
5. Long term group disability protection carried by an employer of 20 or more employees
must continue coverage past the age of 65. The benefits may be paid on a limited
duration scheduled by the age of the employee at time of the disabling incident but must
conform to the ADEA.

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Disability Income Special Uses

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1. Business Overhead Expense – provides the funds to cover the overhead expenses of a
business when the owner becomes disabled, such as office rent, employee labor, etc.
2. Key Employee Insurance – pays a benefit to the business when a key employee
becomes disabled by helping pay for a replacement, training, loss of revenue, etc.
3. Buy-Sell Agreement – pays a lump sum, enabling a partnership or business to buy
out the totally disabled party’s interest in the business. (Policy proceeds are normally
received tax-free.)
4. Disability Reducing Term – is designed to help a business that has long-term
commitments requiring monthly or other regular payments meet their obligations in
the event the owner or a key employee were to be totally disabled. The policy is in
effect for a fixed term, the length of the loan or other commitment, with the amount of
coverage gradually reducing or decreasing each year as the amount due is paid off.

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Cost Of Living Rider

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automatically increases monthly benefits after the onset of
a disability, as the Consumer Price Index (CPI) increases. Some insurance companies
use a simple interest method while others use a more generous method of compounding
interest. Some disability contracts may have a cap on the increased amount, and others
may be written without a cap. Typically, this increase occurs after the insured has
received benefits for a 12-month period. Following this 12-month period, an adjustment
in benefits is made on each anniversary while the disability continues. The best Cost of
Living Adjustment (COLA) for the client is no cap with a compounded adjustment.

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Guaranteed Purchase Option (Guaranteed Insurability) Rider

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guarantees
that on specified dates, ages, or occurrences, such as marriage, birth of a child, etc., the
insured may purchase additional monthly benefits, if income justifies it, without proof
of insurability. Rates are based on attained age. Some insurers refer to this as a Future
Increase Option (FIO).

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Waiver Of Premium Rider

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in the event total disability continues beyond a specified
period, future premiums will be waived by the insurer for the duration of the disability.

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Impairment Rider

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eliminates coverage for preexisting conditions, such as back
injuries. Attaching this rider excludes coverage for a condition that would otherwise be
covered. The use of this rider may make insurance obtainable for an uninsurable person.

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Return Of Premium Rider

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this provision provides for a refund of the entire or some
part of the premium based upon favorable claims activity over a specified period of time.
If the funds are not used the insurer pays interest upon the accumulation which may be
cash surrendered at the end of the policy period or at any time the owner so chooses

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Life Time Benefit Rider

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extends the benefits for life if total disability begins before
a specified age. If disability begins when the insured is older than the age specified, the
rider is not in effect

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Non-Disability Injury Rider

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does not pay disability income, but pays the medical
expenses that are related to an injury that does not result in total disability. It is a form
of medical expense coverage added to a disability income policy

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Hospital Confinement Rider

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waives the elimination period if insured is hospitalized
during the period of elimination and only pays when being treated as an inpatient

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Social Insurance Supplement (SIS) Rider

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pays in addition to regular disability
policies until Workers’ Compensation or Social Security payments begin. If either
benefit stops, the SIS will pay benefits. The SIS is normally written for a specified
period of time. (Developed by private insurers to reduce over insurance by matching
Social Security as closely as possible.)

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Additional Monthly Benefit (AMB) Rider

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many insurance companies offer a
short-term additional benefit in the form of a rider. The rider normally covers the first
six to twelve months of a disability period. Some insurers refer to the rider as a Social
Security Rider as it pays benefits while the insured is awaiting Social Security Benefits.
The rider is not related to Social Security and, therefore,
Additional Monthly Benefit (AMB) Rider is used to define the benefit. The short-term
benefit could supplement either a government or private benefit plan. Unlike the SIS,
this rider (AMB) does not consider the amount of a Social Security Benefit. It is strictly
in addition to all other disability benefits.

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California Workers’ Compensation

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1. This Workers’ Compensation program was designed to provide financial relief to
workers and their families.
a. The Policy
1) Workers’ Compensation coverage applies to bodily injury and occupational
diseases that arise out of and in the course of employment.
2) Compensation laws impose absolute liability on the employer without regard
to fault or negligence.
3) The premium is paid by the employer.
4) The Workers’ Compensation program is administered by the Division of Workers’
Compensation.
b. Part one - Workers’ Compensation Insurance.
1) Pays benefits described under the heading “California Workers’ Compensation
Benefits”.
2) Protects the insured (employer) against statutory claims.
3) Does not cover operations at any workplace not described in the Declarations,
if the insured has other insurance for such operations, or is self-insured. It
also does not cover pain, suffering, or the flu.
c. Part two - Employers’ Liability Insurance.
1) Designed to fill gaps in compensation coverage and to cover claims that are not
subject to compensation laws (loss of consortium, third party over actions, etc.).
2) Protects the insured (employer) against common law claims.
3) Does not cover operations at any workplace not described in the Declarations,
if the insured has other insurance for such operations, or is self-insured. It also
does not cover liability assumed under contract, or persons hired in violation
of the law (with the insured’s knowledge).

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California Workers’ Compensation Benefits

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1. Medical Benefits – Unlimited; not time or dollar limits.
2. Income Benefits (or Disability Benefits)
a. Total Disability – Benefits begin after a 3-day waiting period. Retroactive
benefits are later paid back to the initial date of disability if disability lasts
beyond 14 days. The benefit amount is 66 2/3% of wages, subject to maximum
and minimum weekly limits.
b. Partial Disability – Benefits restore a percentage of lost wages.
c. Scheduled Injury – There is a schedule of benefits for specific permanent
partial injuries (a specific amount for loss of an eye, a specific amount for loss
of a hand, etc.).
3. Death Benefits – A statutory maximum amount of $5,000 is provided as a burial
allowance. Income benefits of 66 2/3% of a deceased worker’s wages are provided
for a surviving spouse (subject to maximums and minimums). Dependent children are
eligible for benefits until reaching age 18 years. Generally, the maximum benefit is
$160,000, though additional benefits are payable if there continues to be any dependent
children after the basic benefit has been paid.
4. Rehabilitation Benefits – California provides necessary living expenses plus a
maintenance allowance, or temporary disability benefits may be provided. An employee
who fails to cooperate with the rehabilitation plan will lose the maintenance allowance
for the days of non-cooperation.
5. Does not include extra income benefits.

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California State Compensation Insurance Fund

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1. A public insurer (sponsored and controlled by the State) that competes with private
insurers in the class of Workers’ Compensation Insurance.
2. If an employer wishes to secure coverage from the State Fund, an application similar to
that made to a private insurer must be made to the Fund.
3. The State Fund issues a policy similar to those used by private insurers. It must
conform to the Workers’ Compensation laws of the state.

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24-Hour Care Coverage

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1. In the state of California, Assembly Bill 3625, Chapter 1069 authorizes either a Life
Agent or a Fire and Casualty Broker-Agent to transact 24-Hour Care Coverage.
2. “24-Hour Care Coverage” is defined as the joint issuance of a Workers’ Compensation
policy with a disability insurance policy, health care service plan contract, or other
medical insurance coverage for nonoccupational injuries and illnesses. This product
shall not include a life insurance policy.
3. The main feature of 24-Hour Care Coverage is to lower the cost of Workers’
Compensation and health insurance coverage for employers in California. This is
accomplished through insurers combining their claims databases for both types of
coverage, and causing the same sort of cost controls common on the nonoccupational
side to also be utilized in Workers’ Compensation. Combining the coverage would also
allow more managed care programs to be used for Workers’ Compensation.
4. The life agent who sells 24-hour coverage is required to obtain 4 hours of CEC in
Workers’ Compensation.
5. 24-hour coverage is a seamless system to cover occupational and nonoccupational coverage.

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Second Injury Fund

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An employer who operates within the provisions of Workers’ Compensation and knowingly
employs a handicapped employee shall be relieved of liability for compensation awarded to an
apportionment of the benefits that might be expected had there not been a prior injury. California’s
Second Injury Fund is designed to pay the additional compensation from a second injury.

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Social Security – The Old Age and Survivors
Disability and Health Insurance - OASDHI

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Qualification for Social Security disability benefits is contingent upon the employee having
the proper insured status (for disability, 20 of the last 40 quarters of social security coverage
is considered fully insured), and satisfying the waiting period.
1. Definition of Disability – to collect Social Security disability benefits, an employee
must be unable to engage in any kind of gainful employment due to a medically
determined physical or mental condition that has lasted or is expected to last at least
12 months or result in an early death.
2. Waiting Period – the waiting period is five months. In general, benefits start with the
sixth full calendar month of disability and are not retroactive to the date of disablement.
3. Disability Income Benefits – are based on the employee’s average indexed monthly
earnings on which Social Security taxes have been paid, this is referred to as the
Primary Insurance Amount (PIA).
a. When an employee age 31 or older has been credited with at least 20 of the
40 quarters required, under Social Security, the employee is considered fully
insured. This requirement reduces for employees under age 31.
b. Higher average earnings will result in a larger absolute benefit and lower-paid
workers will receive a greater percentage of their pre-disability income than the
higher-paid workers.
c. A disabled employee who has been earning the minimum wage can expect a
Social Security benefit of approximately 57% of earned income.
d. A disabled employee who has been paying the maximum Social Security tax
can expect a benefit of only about 30% of earned income.
e. Benefits cease when the employee reaches age 65, dies, or is no longer disabled.
The benefit received at age 65 is the retirement benefit.
f. An employee must be currently insured to receive a Social Security disability
benefit. The benefit is computed using the Primary Insurance Amount (PIA).

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Military/War Disability

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A disability as the result of war or any military duty is a disability not covered by any type
of commercial disability income policy.