Disability Income Insurance (Keir Topic 25)

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Social Security disability eligibility requirements

Back 1

1) 40 credits or number of credits equal to the number of years from age 21 to agent disability with a minimum of 6

2) credits are recent

3) inability to engage in any substantial gainful employment (earn $1,180/mo in 2018)

4) disability expected to last at least one year or result in death

Front 2

Besides disabled, who else in the family is eligible for Social Security disability?

Back 2

1) Spouse age 62 or older who is caring for a child under the age of 16

2) children under age 18 or 19 if in high school

Front 3

Purpose of disability income insurance

Back 3

Replace portion of earned income when worker is unable to work because of injury or sickness (some only cover accidental injury but most cover both). Benefit is usually fraction of income and person has to be totally disabled. Illness more probable. Expensive because higher probability benefits will be paid.

Front 4

Exclusions for individual disability insurance

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war, self-inflicted injuries, work related injuries, pre-existing conditions (disabling physical condition insured sought treatment for before disability policy issued).

Some states excluding injuries or sickness from alcoholism or drug addiction.

Some policies, especially short term policies current blue-collar industrial workers, exclude illnesses or accidents from occupational exposures (called nonoccupational policies)

Front 5

Probationary period for disability insurance

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Period after issue during which sickness coverage is not yet effective. Usually 15 to 30 days. Protects insurance company from paying for pre-existing conditions. Coverage to applies during first few days for bodily injuries from accidents.

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“Own occupation” definition of disability

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Most liberal, most protection for client. Client is unable to perform his or her own occupation. $$$ because numerous long-term claims

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“Any occupation” definition of disability

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Worst definition for a client. Unable to engage in any occupation. Definition not usually used in individual policies

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“Modified any occupation” definition of disability

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Also known as the “education, training or experience” definition. Disability keeps them from engaging in any occupation for which they are qualified to do education, training or experience

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“Split” definition of disability

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Starts as “own occupation” for a period of time, usually two years. Then changes to “modified any occupation”.

Front 10

Spectrum of disability definitions for most protected to lease. Most likely to pay versus least likely

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Back (Definition)

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Elimination period - definition and purposes

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Amount of time insured must be disabled before benefits payable, requires insured to cover small claims out of pocket.

helps reduce premium cost, deter from faking disability.

The longer the elimination period, the lower the premium. Client needs enough emergency funds to cover.

Front 12

Short-term versus long-term disability coverage

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Short term six months, one year or two years

Long-term five years, 10+ years, until 65 or lifetime

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Taxation of benefits paid

Back 13

Premiums paid after tax, benefits tax free

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Common disability insurance underwriting requirements

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1) earnings history for past two years

2) medical history

3) Person habits and lifestyle

Applicant assigned to underwriting class based on job title and description of duties

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Guaranteed renewable policies

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Policy in force as long as premiums paid until certain age. Insurer may increase premiums for entire classification of policyholders. Decent option for clients

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Noncancellable policies

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Insured has the right to renew policy for state a number of years or two stated age, with premium at renewal guaranteed. Good option for clients

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Conditionally renewable policy

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Insurer can terminate contract by not renewing under certain conditions stated. Avoid policy type

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Optionally renewable polcies

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Company can cancel policy at end of term. Avoid policy type

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Cancellable policy

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Terminated by insurer at any time during term. Avoid policy type

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Presumptive disability provision

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Specific injuries that qualify for permanent total disability. Lots of sight, speech, hearing, use of both hands, use of both feet, use of one hand and one foot.

Benefits cease if individual recovers

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Recurrent disability provision

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Differentiates between two separate disabilities and continuation of same disability for purposes of waiting periods and benefit maximums.

Typical clause specifies that if within six months of a total disability, insured sustains subsequent period of disability from the same or related cause, second disability is a continuation of the first

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Waiver of premium provision

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Premium is waived after insured has been continually and totally disabled for period like 90 days as long as premiums paid during elimination period

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Misstatement of age provision

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Contract not voidable when age is misstated but premium adjusted to provide benefit for correct age

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Facility of payment provision

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Insurer can pay policy’s death benefit up to $1000 to any relative or beneficiary company believes is entitled to receive

Front 25

Relation of earnings to insurance provision

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A.k.a. average earnings clause. Adjust benefits if total paid by all policies exceeds greater of 1) earned income or 2) average earned income for the last two years

Front 26

Relation of earnings to insurance provision

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A.k.a. average earnings clause. Adjust benefits if total paid by all policies exceeds greater of 1) earned income or 2) average earned income for the last two years

Front 27

Change of occupation provision

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Insurer can reduce benefit if insured changes to more hazardous occupation. If changes to less hazardous occupation, premium is reduced but benefits same

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Partial disability rider

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Reduced benefit if insured can perform some but not all important daily duties of occupation. Usually 50% of total disability benefits for a shorter period of time like six months

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Residual disability rider

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Helps make up lost income for a continuing but less than total disability. Insured can’t work at full-income capacity. Often permanent.

Benefit % = % of maximum policy benefit as percentage reduction in earnings

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Guaranteed insurability option rider

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Benefit periodically increases if income increases, without proof of insurability with each increase. Good for clients who believes income will increase substantially but concerned about insurability in future

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Cost of living adjustment rider

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Benefit payments increase in future years based on consumer price index or fixed percentage each year. Usually camp and total increase

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Social Security rider

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Benefits when individual is disabled on your policy definition but does not qualify for Social Security disability.

Helpful when application for Social Security is pending and can replace benefits not paid when a Social Security claim is denied. Writer can be a written do you start benefits at certain times, until Social Security benefits begin or after Social Security denies the claim or no benefits of insured to receive any Social Security or benefit reduced by once paid for by Social Security.

Front 33

Taxation of disability premium and benefits

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Premiums never deductible.

Benefits usually tax-free (one reason benefits are less than client’s full gross income)

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Employee-provided group disability insurance

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Individual s/b primary, employer group supplement.

Usually 50-70% income, may vary by position.

Group has ST (start after 1-2 weeks, 6 months) and LT (elimination period 6 months b/c coordinates with ST, until normal retirement age or death).

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Definition of disability for LT

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Total and continuous inability to engage in any and every gainful occupation for which she is qualified or shall be reasonably qualified for by reason of training, education or experience.

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Common exclusions under LT disability

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-Not under care of physician

-resulting from self-inflicted injuries

-Occurring prior to employee’s eligibility for coverage under employer’s plan

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How short term disability works

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Employer continues employee pay for short time, no insurance involved. Next 3 to 6 months of short term plan benefits, typically financed by insurance

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Full integration (aka substitution) social security with LT group disability

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Long term disability benefits reduced to four extent of Social Security benefits. Group benefits substitutes for social security unless or until social security becomes available

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Dual percentage Social Security with LT group disability

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Group disability benefits based on different percentages of employee earnings, depending on whether other sources are available or not

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Social Security disability backpay: how does that work with group benefits already received?

Back 40

If Social Security disability approved, benefits are paid retroactively tosixth month of disability as lump sum. Some group policies require repayment of benefits received (via social Security reimbursement agreement that company requires the insured to sign when applying)

Front 41

Taxation of employer group disability

Back 41

Employer can deduct premiums and direct compensation plan no insurance involved.

If employee contributes portion of the premiums and pays them with after-tax dollars, benefits attributable to employee contribution received tax free.

If employer plan pays all premiums under plan, benefit payments included in employee’s gross income and subject to Social Security and Medicare taxes for limited time, usually six months unless cafeteria plan

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Taxation for partners an S Corp owners

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Premiums paid added to taxable income for a partner or over 2% shareholder. Benefits paid tax free

Front 43

Double bonus plan as it relates to disability insurance - how does it work and how is the bonus amount calculated?

Back 43

Employer gives employee enough bonus by policy and pay taxes on the bonus.

Premium divided by (1 minus tax bracket) = bonus amount

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Taxation of DI premiums if pass-through entity a.k.a. partnership, S Corp owner or LLC member

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Business can deduct premiums paid but income for owner. Unlike health insurance premiums, DI premiums are not above the line deduction.

Front 45

4 considerations for determining disability income needs

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-household financial resources

-existing coverage under employer plans

-social Security disability

-Individual DI policy options

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LTC exclusions

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No benefits for preexisting condition for treatment recommended or received within 6 months of purchase.

No benefits for alcohol or drug addictions within two years of purchase

Front 47

Trigger for long-term care policy benefits

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Activities of daily living (ADLs). Often 5/6 required: dressing, eating, bathing, transferring, toileting or maintaining continents. Physician certification of inability to perform at least 2 for 90+ days without substantial help.

Severe cognitive impairments requiring substantial supervision to protect person from threats to health and safety. Senile dementia, Alzheimer’s, Parkinson’s.

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Types of services covered by an LTC

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Care and skilled nursing facility, intermediate nursing facility, custodial care (unskilled assistance), home health care, adult daycare, respite care (for caregivers)

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Purpose of elimination period, typical for LTC

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Eliminate small claims, control cost of policy. 0 to 180 days. Consider how long care received at home and by whom counts towards elimination period

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Common benefit periods for LTC

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Two, three, five years. I can go to lifetime that many companies have stopped offering.

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LTC: Reimbursement versus indemnity daily benefit amount

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Reimbursement pays for actual expenses incurred. Pool of money.

Indemnity a.k.a. per diem selected daily benefit for each day care received

Front 52

LTC waiver of premium

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Eliminates need for premiums often six months after benefit payments have started

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Flavors of inflation protection in LTC

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Simple and compound. Or guaranteed purchase option where insured can increase daily benefit amount without proof of insurability, premium increases

Front 54

Forms of LTC nonforfeiture benefits

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Reduced paid up amount of insurance, return of our premiums paid minus claim payments. Some states have contingent nonforfeiture benefits so that if premiums increase by a certain percentage, insured can choose to take benefits at the new premium would purchase or take a paid up policy with a shorter benefit period.

Front 55

LTC renewability provisions

Back 55

HIPPA Requires policies be either a guaranteed renewable or noncancellable (premiums don’t change)

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Factors that determine LTC policy cost for insured

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Level of benefits, elimination period, benefit period, age

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Taxation of LTC premiums and benefits: issue before 1997 vs issued 1997 and after

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Before 1997: premiums deductible as qualified medical expense, self-employed could deduct

1987 and after: must meet several qualifications for premiums to be deductible medical expense up to limited amounts based on age

Benefits tax free for reimbursement policies. Per diem benefits from indemnity policy tax free up to certain amount.

LTC group benefit premiums deductible or employer. Employees usually receive benefits tax free

Front 58

Can LTC premiums be paid by FSA, cafeteria plans or HSA?

Back 58

No for FSA and cafeteria plans. Can use HSA for premiums

Front 59

Long-term care covered by Medicare, medical expense insurance, life insurance, long-term care insurance

Back 59

Long-term care covered by Medicare, medical expense insurance, life insurance, long-term care insurance

Front 60

Group LTC nuances

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Not actually group insurance plans. Can discriminate and use underwriting.

Can limit to FTEs.

Employer can choose plan features such as elimination period, benefit period, amount.

Not subject to cobra

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Partnership for LTC program offered by most states

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Relieves some burden on Medicaid and encourages more to purchase private LTC insurance. Special eligibility rules to qualify for Medicaid payments for LTC after insurance policy pays for the initial period of care. Allows people to protect some assets via asset disregard. Some states offer reciprocity if insured moves to a different state.

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Continuing care retirement communities a.k.a. life care communities

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Like grandma’s situation. Independent to custodial care to skilled nursing

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4 ways life insurance can provide for LTC. Taxation of premiums and benefits.

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1) accelerated death benefits

2) Viatical settlement agreement - sell policy to third-party for negotiated percentage of death benefit. Buyer keeps policy in force and collect proceeds when insured dies.

3) Borrowing from policy’s cash value

4) long-term care rider — reimbursed (all costs incurred) or indemnity (set dollar amount per week or month once benefits begin)

Benefits usually tax-free but premium is not tax-deductible.

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Recession by insurance company

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Company’s ability to avoid a policy

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Twisting

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Sales practice insurance agent making misleading statements or incomplete comparisons of policies