Chapter-16 When a person is unable to work because of disability, the financial effect on the individuals family is potentially greater

than if the individual had died. When a wage earner dies, the family is left without a source of income. When a wage earner is disabled, the family not only loses a source of income, but they also face additional expenses resulting from the disability. To help relieve the financial stress created by disability, insurance companies and government programs offer income replacement benefits in the form of disability income coverage. Disability Income Insurance: Private insurance companies issue both individual and group disability income insurance policies. The coverage provided by such policies is classified as either short-term or long-term coverage, depending on the length of the benefit period. The benefit period is the time during which the insurer agrees to pay income benefits to the insured, and the criteria used to classify the benefit period are different for individual and group coverages. Individual disability income coverage is seldom offered with a maximum benefit period of less than one year. Short Term Individual Disability Income Coverage provides a maximum benefit period of from 1 to 5 years. Long Term Individual Disability Income Coverage provides a maximum benefit period of 5 years or more. The maximum benefit period provided by this policy for illnesses commonly extends until the insured reaches age 65; for accidents, benefits often are provided for the insureds lifetime. Group Disability Income Coverage generally specifies shorter benefit periods than those included in individual policies. Short Term Group Disability Income Coverage provides a maximum benefit period of 1 year or less; such coverage commonly specifies a maximum benefit period of 13, 26 or 52 weeks. Long Term Group Disability Income Coverage provides a maximum benefit period of more than one year. Many policies extend the maximum benefit period to the insureds normal retirement age or to age 70. To receive periodic income benefits under a disability income insurance policy, an insured person must meet the policys definition of total disability. In addition, the insured person generally must be disabled for a certain period of time known as the Elimination Period before benefits income payable. Definitions of Total Disability: Any Occupation: At one time, disability income policies defined total disability as a disability that prevented the insured from performing the duties of any occupation. Because a strict interpretation of this definition would prevent most people from ever qualifying for disability income benefits, must insurers now define total disability more liberally.

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Current Usual Definition: Most disability income policies issued today use a twopart definition of total disability. An insured is considered totally disabled if at the start of disability, the disability prevents him from performing the essential duties of his regular occupation. At the end of a specified period after the disability begins, usually 2 to 5 years, an insured is considered totally disabled only if the disability prevents him from working at any occupation for which he is reasonably fitted by education, training or experience. Example: Samuel, a surgeon, is insured under a disability income policy that contains the current usual definition of total disability; the policys definition of total disability changes after the insured has been disabled for two years. Samuel was involved in an accident and lost his right arm. Although Samuel is unable to perform surgery, he has been hired to teach in a medical college. Analysis: Because Samuels injury prevents him from working as a surgeon, he meets the policys initial definition of total disability, and thus, will be eligible to receive disability income benefits for up to 2 years. At the end of that time, Samuel will no longer be considered totally disabled because his disability does not prevent him from working at an occupation for which he is reasonably fitted by his education and training. Some policies that use this definition of total disability also state that the insured is not considered to be totally disabled if he is working in a gainful occupation. Thus, no total disability income benefits are payable if the person insured by such a policy voluntarily returns to work at any occupation.

Own Previous Occupation: This definition, which is included more often in individual policies than in group policies, specifies that an insured is totally disabled if she is unable to perform the essential duties of her own previous occupation. In fact, policies using this own previous occupation definition specify that benefits will be paid even while the insured is gainfully employed in another occupation, as long as she is prevented by disability from engaging in the essential duties of her own previous occupation. For example, Samuel in our previous example is unable to perform surgery and, thus, will never be able to work in his own previous occupation. Therefore, the insurance company will pay Samuel the full disability income benefit until the end of the policys benefit period. Income Loss: Often called Income Protection Insurance specifies that an insured is disabled if she suffers an income benefit both while the insured is totally disabled and unable to work and while she is able to work but, because of a disability, is earning less than she earned before being disabled. Income protection policies specify (1) a maximum benefit amount that will be paid when an insured is completely unable to work and (2) a method of determining the benefit amount payable when the disabled insured is working but is earning less than she previously earned.

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Presumptive Disabilities: Some disability income policies classify certain conditions as presumptive disabilities. A Presumptive Disability is a stated condition that, if present, automatically causes the insured to be considered totally disabled; thus, the insured receives the full income benefit amount provided under the policy, even if he resumes full-time employment in a former occupation. Presumptive disabilities include total and permanent blindness, loss of the use of any two limbs, and loss of speech or hearing. Elimination Period: Although some forms of disability income coverage are designed to provide benefits beginning on the first day of an insureds disability, most policies specify an elimination period. An Elimination Period, often referred to as a Waiting Period, is the specific amount of time that the insured must be disabled before becoming eligible to receive policy benefits. Like the deductible amount found in medical expense policies, the purpose of the elimination period, the insurer can substantially reduce the expenses involved in processing and paying claims for disabilities that lost for only a very short time. This expense savings is reflected in the cost of the coverage; the longer the elimination period, the lower the cost for otherwise equivalent disability income coverage. The length of elimination period included in both short-term and long-term individual disability income policies is typically from 30 days to 6 months. The elimination period in a group policy is typically related to the length of the maximum benefit period. Group Short-term disability income policies typically specify no elimination period for disabilities caused by accidents and an elimination period of one week for disabilities caused by sickness. Group long-term disability income policies typically specify an elimination period of from 30 days to 6 months, though such plans also typically coordinate their short-term and long-term coverages. That is, the length of the elimination period before long-term benefits are payable is designed to ensure that short-term coverage ends at the same time that long-term benefits become payable. Benefit Amounts: As a general rule, the benefit amount provided by disability income coverage is not intended to fully replace an individuals pre-disability earnings. Instead, disability income benefits are limited to an amount that is lower than the individuals regular earnings when not disabled. Without restrictions on the income amounts available through disability income coverage, a disabled insured could receive as much income as he received when working. In such a case, the disabled insured has no financial incentive to return to work. Disability income benefit amounts, however, should not be so low that a disabled insured suffers a drastic reduction in income and lifestyle; the purpose of disability insurance is, after all, to provide protection against the economic consequences of income loss. Therefore, the benefit amount paid to a disabled insured should bear a relationship to the amount of the individuals income before disability.

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Disability income providers use two methods to establish the amount of disability income benefits that will be paid to a disabled person: (1) an income benefit formula or (2) a flat benefit amount. The method used generally depends on whether the coverage is provided by a group or an individual policy and on whether the coverage is short-term or long-term. 1. Income Benefit Formula: Group disability income policies typically include an income benefit formula that the insurer uses to determine the amount of the periodic benefit that is payable to a disable insured. An income benefit formula usually expresses the disability income benefit amount as a stated percentage of the insureds pre-disability earnings and considers all sources of disability income that the disabled insured receives. The amount of the stated percentage in the formula varies from policy to policy. The percentage typically included in group long-term disability income policies ranges from 60 to 75 percent. 2. Flat Amount: Individual disability income policies usually specify a flat benefit amount that the insurer will periodically pay to an insured who becomes totally disabled. The specified benefit amount is based on the amount of the insureds income when the policy was purchased. Unlike the benefit paid under group disability income policies, the specified benefit amount typically is paid to a disabled insured regardless of any other income benefits the insured receives during the disability. Insurers carefully limit the maximum amount of disability income benefit that a particular applicant can purchase. When determining the maximum amount of disability income available to an applicant, the insurer considers the following factors: The amount of the applicants usual income earned from employment, before taxes. The amount of the applicants unearned income, such as dividends and interest that will continue during a disability. Additional sources of income available to the applicant during a disability, such as disability income benefits provided through group disability income coverage and government-sponsored disability income programs. The applicants current income tax bracket, because the applicants usual earned income is taxable income, whereas disability income benefits provided under an individual policy usually are not taxable income. Buy Up Options: Most group disability income policies limit benefit amounts to a specified percentage of an insured employees earnings. A Buy-Up Option is individually purchased supplementary disability income coverage that increases the benefit amount available to the insured. An employee typically purchases a buy-up option under a separate policy. For example, an employee covered by a group

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disability income policy that provides 60% income replacement benefit could increase benefits to 80% percent of earnings by purchasing a buy-up option. Supplemental Disability Benefits: 1. Partial Disability benefits: A disability that prevents the insured either from performing some of the duties of his usual occupation or from engaging in that occupation on a full-time basis. The amount of the disability income benefit paid when an insured has a partial disability is described in the policy. Typically, the amount is either a specified flat amount, often 50% of the total disability income benefit amount, or an amount established according to the formula specified in the policy. Using the formula method, the amount of the income benefit will vary according to the percentage of income than the insured has lost because of the partial disability. 2. Future Purchase Option Benefit: Grants the insured the right to increase the benefit amount in accordance with increases in the insureds earnings. This benefit provision generally specifies that benefit increases can be made only if the insured can prove a commensurate increase in income, further, the amount of such increases is generally limited to a specified maximum. The insured, however, usually is permitted to increase the benefit amount without providing evidence of insurability. 3. Cost of Living Adjustment Benefit: (COLA) provides for periodic increases in the disability income benefit amount that the insurer will pay to a disabled insured; theses increases usually correspond to the increases in the cost of living. When a policy or rider provides a COLA benefit, it usually defines an increase in the cost of living in terms of a standard index, such as the Consumer Price Index. Exclusions: Disability income policies often specify that income benefits will not be paid to a disabled insured if the insureds disability results from certain causes. The causes include the following: Injuries or sickness that results from war, declared or undeclared, or any act of war. Intentionally self-inflicted injuries. Injuries received as a result of active participation in a riot. Occupation-related disabilities or illnesses for which the insured is entitled to receive disability income benefits under some government program. Specialized types of disability coverage: designed to provide benefits for specific expenses other than loss of income that may result from an insureds disability. Businesses are subject to certain financial risks if an owner, partner, or key person dies or get disabled. 1. Key Person Disability Coverage: provides benefit payments to the business if an insured key person becomes disabled. When a key person is unable

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to work because of disability, the business loses the persons services and, thus, loses money. Such losses can be offset by key person disability benefits. 2. Disability Buyout Coverage: A buy-sell agreement also may include provisions concerning the purchase of a partners or owners interest in the business should the partner or owners become disabled. Disability buyout coverage provides benefit designed to fund the buyout of a partners or owners interest in a business should he become disabled. 3. Business Overhead Expense Coverage: Should a business owner become disabled, she still may incur expenses to operate the business. For example, office rent or mortgage payments continue and office utility bills come due. Some insurers sell business overhead expense coverage that provides benefits designed to pay the disabled insureds share of the business overhead expenses. Policies typically define Overhead expenses as usual and necessary business expenses, including employee salaries, rent, mortgage payments, telephone, electric and gas utilities, and other expenses required to keep the business open. Government Sponsored Disability Income Program: In the US, workers who are disabled as a result of accidents or illnesses are eligible to receive wage replacement benefits, as well as medical expense benefits, under state-mandated workers compensation programs. Each state has adopted a Workers Compensation Program that is designed to ensure that workers who are insured or disabled on the job receive fixed monetary awards without requiring the workers to pursue legal action against their employers. Programs are funded by mandatory employer contributions, and the amount of awards and benefits vary from state to state. The federal government has created similar programs that cover federal employees. In addition, two federal programs social security disability income and supplemental security income provide disability benefit payments to qualified individuals. Workers who are under age 65 and who have paid a specified amount of social security tax for a prescribed number of quarter-year periods are eligible to receive social security disability income (SSDI) benefit payments if they become disabled. For purposes of SSDI, disability is defined as a persons inability to work because of a physical or mental sickness or injury, this sickness or injury must have lasted or be expected to last for at least one year, or it must be expected to lead to the persons death. SSDI provides a disabled worker with a monthly disability income benefit equal to the monthly benefit that would normally have become payable when the worker retired. SSDI benefit payments do not begin until the insured has been disabled for at least five months and, hence, begin approximately six months after the onset of disability. As a general rule, benefit payments continue until (1) two months after the disability ends, (2) the insured worker dies, or (3) the insured worker reaches the age when the regular social security retirement income benefits become payable. The spouse and dependent children of a disabled worker may also receive an income benefit while the worker is disabled. Their income benefits are equal to a

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percentage of the amount received by the disabled worker. Benefits, however, are subject to an overall family maximum benefit amount. The Supplemental Security Income (SSI) program provides benefit payments to people with limited incomes who are disabled, blind, or age 65 or Older. Unlike SSDI payments, SSI payments are limited to individuals who have paid a specified amount of social security tax; instead, recipients must have low incomes. For purposes of SSI, disability is generally defined as it is for SSDI purposes for individuals who are at least age 18. In most states, individuals who receive monthly SSI benefits also qualify for Medicaid.

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