CHAPTER TWO – POLICY PROVISIONS

 

BENEFITS

 

The Benefit provisions of a Disability Income insurance policy may be divided into three areas regarding the payment of benefits.  These areas of benefits form the base of a Disability Income insurance policy, and other provisions related to them are used to expand or limit benefits.  A policy may be judged as to its liberalism (generally making it more marketable) or its conservatism (generally making it less marketable) by the way that benefits relate to these areas of benefits.

 

ELIMINATION PERIOD

 

The elimination period is the number of days at the beginning of a disability during which no benefits are paid – often referred to as the “waiting period.”  For those who are familiar with other lines of health insurance, it is similar to a deductible in other types of policies.  The purpose of the elimination period is to exclude illnesses or injuries that disables the insured for only a few days and therefore, can be met by the insured from their own funds. 

 

The typical Disability Income insurance policy elimination period – or at least the most common – is 3 months or 90 days, however periods from 30 days to as long as 720 days are available.  It is important to remember that benefits are paid at the end of the elimination period, therefore, using a 90 day elimination period. As an example, the insured would not receive the first benefit payment for 120 days after the sickness began or the injury was suffered, which disabled the insured.  Most Long-term Disability Income insurance policies have the same elimination periods for sickness or injury.  Conversely, most Short-term Disability Income insurance policies will have a longer elimination period for sickness but for accident the waiting period is either waived or for a relative short period of time, such as 7 days.

 

 

Using the premiums from one of the leading insurers in the Disability Income insurance field, the following graph shows how the premiums relate to the various elimination periods.  These premiums were for $2,000 monthly benefits, Male age 35, to age 65, AAA+

 

 

 

 

 

 

 

 

 

              G     Premiums in $          E  Elimination Period in Days F

 

 

 

VOLUNTARY INTERRUPTION OF ELIMINATION PERIOD

 

Most of the major Disability Income insurers offer a provision that allows the insured to return to work for a brief period of time without penalty before the end of the elimination period.  The recovery period is usually limited to either 6 months, or if the recovery period is less than 6 months, to the length of the elimination period.  If the insured is then disabled because of the same or different cause after this interruption, the two periods of disability will be combined to satisfy the elimination period.

 

 

 

THE BENEFIT PERIOD

 

The Benefit Period is simply the maximum amount of time that the benefits will be paid under the Disability Income insurance policy.  In most policies, the Benefit Period will be the same for disabilities caused by sickness, or caused by injury.  The length of the period is usually offered for two years, five years or to age 65.  Benefits may be provided for “lifetime”, but the disability must be total, continuous and begin prior to age 55 (some policies go to age 60, or 65).

 

As discussed earlier, most disabilities are Short-term and statistics show that 98 percent of all disabled persons recover before one year has lapsed, and the majority recover within 6 months from the start of the disability.  Conversely, if the disability lasts longer than 12 months, the chances of the insured being able to return to work diminishes drastically.  The chance of returning to work is even lower at the older ages.  Therefore, a prudent choice would be for the insured to have as long a benefit period as is available, and of course, affordable. 

 

 

The following graph illustrates the this point and it is based on premiums from one insurer (same source as graph above), $2,000 monthly income, Male age 35, 90 day-elimination period, and risk rated at AAA+)

 

 

RECURRENT DISABILITY PROVISION

 

Most, if not all, Disability Income insurance policies include a provision that determines if a recurrent or consecutive disability or episodes of disability, is to be considered as a new disability or as a continuing claim.  This provision typically provides that recurrent disabilities from the same cause will be considered as one continuous period of disability, unless each period of disability is separated by recovery for a period of not less than six months. 

 

This provision is usually contained in Disability Income insurance policies that have a benefit period to age 65 (or longer).  The advantage of this provision to the insured is that a new elimination period is not required for disability that recurs between 6 months and one year after a brief recovery in a Long-term claim.  This provision eliminates the prospect of multiple elimination periods and the result would be that benefits for a recurring loss due to the same cause is payable to the insured immediately for the portion of the original benefit period that has not been used.

 

Conversely, if the disability results from a different cause after an earlier disability, or if the loss recurs due to the same cause after twelve months after recovery, then the insured would have a new benefit period and a new elimination period.

 

 

THE BENEFIT AMOUNT

 

For personal Disability Income insurance policies, the amount of the disability income is payable on a monthly indemnity basis for a fixed amount.  In essence, the disability income policy is an indemnity policy.  (For general reference, an indemnity agreement is designed to restore an insured to his or her original financial position after a loss.)  One of the fundamental principles of indemnity is that the insured should neither profit nor be put at a monetary disadvantage for incurring the loss.  Since the purpose of Disability Income insurance is to reimburse the insured for loss of income due to disability; therefore, in order to understand this product, these fundamentals should be kept in mind.

 

Taking this one step further, for total disability under the Disability Income insurance policy, the indemnity is usually written on a valued basis.  This means that the policy benefit as stated in the policy is assumed to equal the actual monetary loss suffered by the insured because of the disability.  This amount is stated on the policy and is not adjusted to the earnings of the insured, or for any other insurance payments, at time of claim for either total or partial disability.  If residual disability is involved, the benefit can be reduced in proportions to the loss of earnings of the insured, as discussed later. 

 

The benefit amount is extremely important in these policies because of the possibility of adverse selection as indicated previously.  Insurers limit the disability income that an individual may purchase to not more than (normally) 85% of the insured’s earned income.  The 85% is usually used for those in lower incomes as determined by company practices, and will be graded downwards to 65% - or in some cases, 50% - (or even less) for those in the highest income tax brackets. 

 

The benefit amount limits take into consideration any other income to the insured, such as from other type of sick-pay plans offered by the employer, Government (SSI) disability plans, and other types of personal &/or group insurance.  The limits may also be reduced if an insured has a significant amount of unearned income, or if they have a high net worth (such as $3-5 million). 

 

Limits may seem severe, but the purpose is to eliminate as much as possible the adverse selection and moral hazard of overinsurance.  If the benefits of a Disability Income policy equals or exceeds the amount of income without the disability, there could be very little reason for an insured to return to work in case of a claim, with the result that recovery can be stretched out for a long period of time, or never be attained.  As with other insurance products, insurance laws weigh heavily in favor of the insureds and provide very little recourse for an insurer at time of claim, therefore the limits of benefits at time of underwriting is about the only control an insurer has to eliminate the overinsurance hazard.  And when the insured is aware of undisclosed sources of income or knows how much he will need to maintain his present standard of living and is able to purchase benefits equal or nearly equal to that amount, the element of anti-selection rears its ugly head.

 

One thing to keep in mind where the employer pays the premiums:  The monthly benefit will usually be higher because the benefit is taxable to the employee so the net result will be approximately the same.  If the insured has unearned income, such as dividends, interest, etc., the monthly benefit may be offset by all or some portion of the unearned income.

 

Having said all this, the fact still remains that under limits regularly used by Disability Income insurance carriers for personal insurance, an insured in the most favorable risk classifications and with adequate income, may acquire up to as much as $20,000 indemnity a month for total disability.  It should be noted that this amount is usually separate from the limits of special business Disability Income insurance policies – for example, overhead expense insurance.

 

PARTICIPATION CHARTS

 

Most company’s use a “participation chart” which determines the maximum monthly benefit according to the applicant’s annual income.  Limits have grown over recent years, and whereas it used to be 50 or 60 percent of compensation with a monthly cap of $6,000 or so was normal, these limits are much higher in today’s market.

 

The following is an example of a participation chart used by some companies, however it is rather conservative and higher amounts are available.

 

 

 

BASIC BENEFIT PROVISIONS

 

There are different benefit provisions for total disability and a benefit for waiver of premium, and they are used by all insurers in spite of any other coverage that may be included in the policy.  The benefit provision will define loss, the method of benefit payment, and determination as to termination of benefits.

 

TOTAL DISABILITY BENEFIT

 

The benefit provision for total disability states that monthly indemnity will be paid if the insured becomes totally disabled while the policy is in force and the insured must remain totally disabled until the end of the elimination period (during which there are no benefits paid). 

 

A typical policy wording for an individual Disability Income policy would be:

“Total disability and totally disabled mean injury or sickness that restricts the Insured's ability to perform the material and substantial duties of his regular occupation to an extent that prevents him from engaging in his regular occupation.”

 

An Association Group policy typically goes into more detail.  The following is an example of such a definition:

 

"’Total disability’, as used herein, means disability commencing while the policy is in force as to the Insured, which wholly and continuously prevents the Insured from performing the duties of his occupation, and which requires the regu­lar care and attendance of a currently licensed physician or surgeon.  Provided, that in no event shall "total disability" exist for any purpose of the policy during any period in which the Insured is engaged in the duties of his occupation, nor shall "total disability" exist for any purpose of the policy following a ten-year period for which benefits are payable.  If the Insured is not wholly and continuously disabled by reason of injury or sickness from engaging in any suitable occupation or employment for wage or profit for which he is qualified by reason of prior education, training, or experience.”

 

After the elimination period, monthly indemnity benefits will be paid at the end of each month while the insured is totally disabled.  (Remember the previous discussion as to when a disabled insured starts getting benefit payments after the elimination period.)

 

Monthly benefits payments will cease at the end of the benefit period or the date of the end of the disability, whichever comes first.

 

WAIVER OF PREMIUM BENEFITS

 

The Waiver of Premium (WP) provision is rather straightforward and similar to WP provisions in other types of insurance.  Simply put, the premiums for the Disability Income insurance policy will be waived for any premiums due after the insured has been totally disabled for the shorter of (1) 90 consecutive days, or (2) the elimination period.  If premiums have been paid during the WP period they will be refunded.  The premiums will be waived as long as the insured remains disabled, until age 65.  The WP terminates when the insured reaches age 65 in nearly all policies.

 

Some policies will waive the premium that falls due within a period (usually 90 days) after recovery.  This allows an insured to “get back on his feet” after a disability.

 

Examples of the wording of this provision are:

 

“Waiver of Premium. After the disability has lasted for ninety days while this policy is in effect, we will waive the premium as long as the Insured is unable to return to work full time in his regular occupation as a result of the injury or sickness which causes the disability.  We will refund premium already paid for that period on a pro rata basis.”

 

“The Company will waive the payment of any premium becoming due during any period of disability for which in­demnity has become payable under the policy and the policy shall remain in force as to such Insured until the next premium due date, subject to the (other provisions), except as to the payment of premium.”

 

REHABILITATION BENEFIT

 

This benefit is used as an inducement for a disabled insured to return to work.  It provides for payment of a specified amount (typically 12 times the total of the monthly indemnity and any other supplemental indemnities) to cover the costs, when not paid by other insurance or public funding, when the insured enrolls in a formal retraining program that will help the insured return to work.  Note the rehabilitation is not mandatory in the greatest majority of the policies.

 

A typical policy wording where the company participates in rehabilitation expenses.

 

“Rehabilitation. While the insured is receiving the Disability Benefit, you may request or we may suggest participation in a rehabilitation program designed to help him return to work. If we determine that such a program is appropriate, we may pay reasonable expenses for such items as tuition, books, training programs, or additional living expenses. The actual expenses covered and the terms of the plan will be subject to mutual agreement. Our agreement will be outlined in a written plan of rehabilitation. Benefits will continue as provided by this policy except if they are modified by the plan of rehabilitation.”

 

NON-DISABLING INJURY BENEFIT

 

This benefit pays “up-to” a specified amount which helps to reimburse the insured for medical expenses incurred for treatment of an injury that did not result in total disability.  The amount generally is in the range of 25% of the monthly indemnity benefit.  The benefit of this provision to the insured is obvious – additional medical expenses paid – and for the insurer, the payment can possibly and logically eliminate a disability claim by making it possible for the insured to treat the injury before it becomes a disability. 

 

TRANSPLANT BENEFIT

 

A relatively new benefit, this benefit actually is two-fold.  If an insured becomes totally disabled because of the transplanting of an organ from his body to that of another, the insured will be considered as totally disabled because of sickness.  Further, this benefit provides that cosmetic surgery performed to correct appearance or a disfigurement would be considered as a total disability because of sickness. 

 

The wording of this benefit will vary by those companies offering it.  It immediately raises the question as to whether cosmetic surgery coverage would include such (frivolous to many) surgery as breast implementation.  One must remember that there is an elimination period involved, and since it would be treated as a “sickness,” the insured would be deemed to have been “cured” in most cases.  However, in the case of reconstruction augmentation surgery because of breast cancer, it fulfills an important personal and social function.

 

A rather simple provision contained in some policies might state:

 

“Transplant Donor Benefit. Disability which results from the transplant of a part of the Insured's body to another person's body will be considered caused by a sickness.”

 

PRINCIPAL SUM BENEFIT

 

As in many other types of life and health policies, this benefit pays a lump sum accidental death benefit amount if the insured is killed in an accident.  The death must be caused by injury, both directly and independently, and it must occur within (usually) 90 (or 180) days of the accident.

 

It also pays a dismemberment or loss of sight benefit in the form of a lump sum, typically 12 times the monthly indemnity plus any additional indemnities.  If sickness or injury results in the dismemberment or loss of sight, however, the insured must survive the loss for 30 days.  This payment is in addition to any other indemnity payable under the policy and will pay the benefit for two such losses during the lifetime of the insured.  However, it is generally limited to the irrecoverable loss of one eye, or the complete loss of a hand or foot because of severance above the wrist or ankle.

 

OPTIONAL BENEFITS

 

Most insurers offer optional or supplemental benefits as discussed below.  Some insurers may include one or more of these benefits in their Disability Income insurance policy, but usually they are available for an additional premium in the form of “Optional Benefit Riders” that are attached to the policy in rider form.  Benefits and premiums of these riders are (usually) shown on the schedule page.

 

RESIDUAL DISABILITY BENEFIT

 

As briefly discussed earlier in this text, this benefit provides a lower monthly indemnity in proportion to the insured’s loss of income, when the insured returns to work at lower earnings.  If the policy’s definition of total disability is “own occupation,” the residual benefit is paid only when the insured has returned to work in his “own occupation.”  It is interesting to note that about 35% of all Disability Income insurance claims either start or end in a residual claim.

 

In most Disability Income insurance policies, the insured may be either totally or residually disabled for purposes of the elimination period and waiver of premium.

 

In order to determine residual disability, most policies use test of time and duties, combining both occupational and income requirements.  Typical wording is as follows:

 

“Residual disability means that due to injuries or sickness:

1. you are not able to do one or more of your important daily business duties or you are not able to do your usual daily business duties for as much time as it would normally take for you to do them;
2. your loss of monthly income is at least  25 percent of your prior monthly income; and
3. you are under the care and attendance of a physician.”

 

Some insurers define residual disability a little differently, using only a pure income test and determined only by the loss of earnings amount.  It would state, in effect, that residual disability means that (the insured) is engaged in (the insured’s) regular occupation, and (the insured’s) income is reduced because of accident or sickness by at least  (typically) 20% of (the insured’s) income.  Wording would be similar to the following:

 

“Residual disability means that due to injuries or sickness:

1.  The insured satisfied the elimination period; and

2.  Loss of monthly income is at least 20 percent of prior monthly income; and

3.  The insured is under the care of a physician, which is appropriate for the condition causing the disability.”

 

The “specialty” definition of total disability is often used during residual disability in those situations where the insured is considered as totally disabled for his professional specialty, but is at work earning a lower income in a general practice.  Usually, the specialty type of definition is used only for regular occupations to avoid equivocation when the definition of total disability is based upon the “own occupation” provision.

 

Typically, a prior period of total disability sustained is not required prior to claiming the residual benefits, therefore it is possible for a residual claim to commence on the date of the claim and the reduced indemnity is payable at the end of the waiting period and will continue for the length of the benefit period.  Until recently, there was a “qualification period” which was a period of time  (30 to 90 days usually) that the insured had to have been totally disabled.  Today, most policies allow the insured to combine periods of total and / or partial disability to satisfy any qualification period.  Practically, however, residual claims nearly always follows a period of total disability, but in any event, they make up a very small percentage of disability claims, either from incurrence date or following a period of total disability.

 

 

While the provisions for residual disability closely follows the definition used for total disability, by necessity they also contain some more technical definitions – principally so as to define prior and current income and to describe how the proportionate benefits are determined.

 

The following equation provides the amount of monthly benefit (See above Consumer Application):

 

Loss of Monthly Income          X       Monthly Benefit for Total

Prior Monthly Income                                       Disability

 

Loss of income as used in this formula, means the difference between the insured’s prior income and current income.  In many policies, a loss of income of 75% or more is considered to be a 100% loss.  Income refers to earned income and excludes any unearned income (savings, investments, real estate, etc.).

Prior income is the average monthly income for the taxable year, including the highest earnings in the two (or three) years immediately before the date of disability of the insured.  Generally, prior income is indexed at the end of every year of claim, therefore adjusting for increases in the cost of living.

Current income is simply defined as the earned income of the insured every month while residually disabled.  Insurance companies differ as to how current income is treated, but usually it is calculated as cash actually received, or some accrual method which excludes income that was earned but not collected before the disability began. 

 

 

At this time it would appear that many insurers apply this formula during the entire benefit period.  Several insurers, though, use the exact amount of current income to compute the first (typically) six months of claim, and then average the current income at 6-month intervals for the remainder of the claim.  Some insurers will guarantee a minimum benefit during the first six months of a residual claim by paying either a residual amount according to the formula; or 50% of the total disability monthly indemnity amount.  Obviously, for sales purposes, the latter system is more easily presented and understood.

 

Residual disability payments are payable for the policy benefit period, or until the loss of income is less than 20% (or 25%) of the insured’s prior income.  Residual disability payments usually cease at age 65.

 

Practically speaking, of the two major types of residual claim – loss of income only, or loss of time and duties – most experts feel that the loss of income type of residual claim provision is better for the consumer, as under the loss of time and duties, benefits cease when the insured returns to work.  However, many people that return to work after disability, do not immediately start making the income that they did prior to the disability.  While in some occupations, such as technical and some professional jobs, a person is able to immediately start at the same income after a disability, but if, for example, the insured is in marketing or sales, it will take some time for him to return to his previous level of performance after a disability.  

 

 

 

PARTIAL DISABILITY BENEFIT

 

There is a distinct similarity between the Partial Disability Benefit and the Residual Benefit, and most policies have replaced the partial benefit with residual benefit provisions for professional and white-collar occupations.  However, many insurers maintain a partial disability provision for less-favorable occupations.

 

Typically, the Partial Disability Benefit provides 50% of the monthly benefit amount payable for total disability, and is paid for the lesser of (1) six months, or (2) the remainder of the policy benefit period, provided the insured has returned to work on a limited basis after a period of covered total disability. 

 

Partial Disability is usually defined in terms of occupation, and refers to both time and duties.  A rather typical provision in a Disability Income insurance policy, would read as follows:

 

“Partial disability means that you are at work, but because of sickness or injury:

1. you are unable to perform one or more, but not all of the major duties of your occupation; or
2. you are not able to be present at work for more than one-half of the time required in your usual workweek.”

 

Referring to a typical policy definition of Residual Disability, while there is a similarity between partial and residual disability, the difference is such that it is quite obvious why the residual disability would be more attractive, especially to the professional and white-collar workers.

 

SOCIAL INSURANCE SUPPLEMENT (SUBSTITUTE)

 

The Social Insurance Supplement (SIS) was created in response to problems in underwriting Disability Income insurance because of the disability benefits available through workers’ compensation insurance, or for disability and/or retirement under Social Security.  These benefits can be substantial and most insurers take these amounts into account in arriving at a benefit amount.  Most companies limit the amount of Disability Income insurance that will be available to those with incomes of less than $35,000 per year and in particular, those in less-favorable occupations.

 

These riders are usually issued in amounts of $600, $800, or $1,000 per month.  Keep in mind that this rider is designed to provide additional income if the client CAN NOT QUALIFY for Social Security benefits. 

 

Many times the insured will not qualify for the social insurance benefits because, for instance, a loss is covered by workers’ compensation insurance.  In addition, the requirements for total and permanent disability under Social Security are very restrictive.  This would mean that if the insurer had limited the benefit amount under a Disability Income insurance policy, the insured could be underinsured each month by several hundred dollars – or even more. 

 

The Social Insurance Supplement benefit meets this gap in coverage as it provides a monthly benefit amount that approximates the amount of Social Security Disability benefits for total disability.  Obviously, the SIS is paid when the insured is totally disabled according to the policy definition, but is not receiving benefits from any social service plan.  Benefits are paid at a fixed amount, but if at a later date, the insured starts receiving income from a social service plan, the insurer will either terminate the benefit payments, or terminate the benefits on a dollar-for-dollar basis with the social insurance plan.  If the latter method is used, there usually is a “floor” below which the SIS benefit will not be reduced while the insured is on total disability. 

 

In actual practice, purchasing this rider is more cost-effective than purchasing the same amount of base disability coverage.  Therefore, since the insured will probably never receive Social Security Disability Benefits, the insured can receive additional income at a lower premium.

 

As far as the insurance company is concerned, this rider can help protect the company against overinsurance.  An insured could (conceivably) receive 60 percent of income in benefits in addition to Social Security Benefits.  This would hardly provide an incentive for an insured to return to work.

 

Some insurers now offer Social Insurance Substitute Benefits that operate in the same fashion except they cover other federal, state or local benefits the insured receives, such as Civil Service or Workers’ Compensation, etc., benefits.

 

INFLATION PROTECTION

 

The Cost of Living Adjustment (COLA) benefit under a Disability Income insurance plan provides for benefits to be adjusted each year during a Long-term claim, to reflect the changes in the cost-of-living from the time that the claim started.  Various methods of determining the COLA are used, but the most typical are those using the U.S. Consumer Price Index.  Originally, using fixed percentage increases provided the inflation protection, but these plans could increase the benefit amount faster than the rate of inflation, leading to the overinsurance moral hazard problem. 

 

The calculation itself can be rather complex, but simply put; the index for the current claim year is compared with the index for the year in which the claim began.  If the index increased or decreased since the claim period began, the benefits for the next 12 months are adjusted by whatever percentage change there was in the index.  This percentage change would be limited to a specified rate of inflation, generally ranging between 5 and 10 percent (compounded annually).

 

With these calculations depending upon an index that can rise or fall with the economy, the adjusted benefits of the policy can increase or decrease each year, however the policy provides that the benefits cannot be reduced beyond an amount stated and specified in the policy on the policy issue date.  Some policies are capped so as to limit the increase in benefits to a maximum of 2 or 3 times the original benefit amounts, but others have no limit on the amount that the benefits can increase before insured reaches age 65. 

 

Many professional Disability Income insurance agents will not recommend this rider if the insured is over age 45, as after that age, an individual is not as much at risk for inflation as at the younger ages, when a permanent disability would be tragic.

 

Effect of Inflation on Disability Benefits

How inflation reduces the value of a $2,000 per month ($24,000 annually) disability income benefit

End of Year				4% inflation				7% inflation
1				$23,040				$22,320
3				21,120				18,960
5				19,200				15,600
10				14,400				7,200
$2,000 End of Year			MONTHLY DISABILITY BENEFIT WITH COLA RIDER 4% COLA rider						7% COLA rider
1			$2,000						$2,000
2			2,080						2,140
3			2,160						2,280
4			2,240						2,420
5			2,320						2,560
6			2,400						2,700
7			2,480						2,840
8			2,560						2,980
9			2,640						3,120
10			2,720						3,260
Year		No COLA rider				CUMULATIVE    TOTALS 4% COLA rider				7% COLA rider
1		$ 24,000				$ 24,000				$ 24,000
2		48,000				48,960				49,680
3		72,000				74,880				77,040
4		96,000				101,760				106,080
5		120,000				129,600				136,800
6		144,000				158,400				169,200
7		168,000				188,160				203,280
8		192,000				218,880				239,040
9		216,000				250,560				276,480
10		240,000				283,200				315,600
	COLA rider percentage may accumulate depending upon the insuring company’s procedures by simple accumulation or compounded accumulation.  Many companies have limits on the use of the COLA rider such as applying the lesser of ½ of CPUI or the COLA rider percentage, or by applying the COLA rider for a maximum of up to five years.

 

Many Disability Income insurance professionals feel that COLA benefits are crucial, primarily because of the chance that the insured may become disabled and can remain disabled for a considerable period of time.  If a person is age 42, as an example, and becomes disabled and stays disabled for a period of two years, the chance that he will remain disabled for five more years is 56.6%. 

 

(See table above).  With 4% inflation on a $2,000 a month disability payment, by the end of the 10^th year, the purchasing power of that $24,000 annual income will have diminished to $14,400!  However, with the Rider, a 4% COLA benefit would increase that $2,000 monthly benefit to $2,720 by the end of the 10^th year.  Another way to look at this is that the insured would have received $43,200 more over ten years than would have been paid without the COLA rider.

 

Not only is the method used to calculate the increase important – some use the Consumer Price index, others use a flat 5 or 10% per year until the amount either doubles of triples – but also other factors in this rider are important.

 

The increase can be computed and adjusted annually, but preferably more frequently.

 

Compounding is very important.  There is a large difference between “simple” and “compound” of percentage.  Simply put, with compounding as used by some companies, the increase may compound on top of all past adjustments.  Therefore there are considerably higher benefits over the long haul.

 

Some COLA riders are “capped,” usually at double or triple the monthly amount, but other COLA riders allow benefits to increase until the insured is age 65.

 

There can be a “buy-back” provision, i.e., if the insured returns to work after suffering a disability and receiving monthly benefits, which increases according to the COLA benefits.  If the client returns to work and then suffers another disability, the monthly benefit payment would return to the original amount (prior to COLA increases).  With the buy-back provision, the coverage for the new disability can be what he was receiving under the previous disability with the COLA advances, by paying an additional premium (depending upon his age).

 

 

 

SUPPLEMENTAL PROVISIONS FOR INCREASED FUTURE BENEFITS

 

AUTOMATIC INCREASE BENEFIT PROVISION

 

    This benefit provides for increased benefits as provided by a specified table, in the monthly benefit payment.  Usually these increase in each of 5 consecutive years, at a published fixed rate (usually 5% or 6%).  There are increases in premiums also, with each increase in benefit being paid for at the attained age rate (for the portion of the benefit that was increased).  Usually the insured has the choice of accepting or rejecting each increase over the five-year period.  If he does so, he usually has the option of continuing the automatic increase over another five-year period.  This option is often provided with no extra charge on policy issue date but other companies may charge an additional premium for the rider. 

 

When (if) the insured recovers, the benefits usually revert to those that were in force on the policy issue date.  Some insurers allow the insured after recovery, to continue permanently the adjusted benefits that he received during the last claim payment year, but the insured will have to pay the required premium for the age and amount.

 

GUARANTEED INSURABILITY OPTION

 

This option, also referred to as a “Future Increase Option,” is similar to that offered in life insurance, i.e., it allows the insured to purchase additional Disability Income insurance at future policy anniversary dates without evidence of insurability.  This type of option would be expected to have some anti-selection elements, as it would more often be purchased by those who expect to suffer claims and among those whose insurability is questionable.  The increase in benefits available under this rider varies greatly among insurers, but usually is limited to twice the monthly indemnity the insured has in force among all insurers on the original policy issue date.

 

The purchase options are available annually to the insured, on the policy anniversary date, usually until age 50 or 55.  The amount of the benefit is limited to the insurer’s limitations of disability income in relation to the earned income, and can also be limited by amount – such as $500.  Some policies allow the purchase of all or part of the total purchase option, on any policy anniversary date prior to the insured’s age 45 – annual increases thereafter are usually limited to a maximum of one-third of the original total.

 

If the insured is disabled on an option date, the insured can purchase the additional monthly indemnity but the additional amounts will not apply to the current claim.  If the insured is disabled on the date that they could exercise the increased benefit option, the future increase options are immediately payable.  Income requirements, in these situations, are based upon earned income at the start of the claim, and immediate benefit payments are subject to an elimination period, beginning on date of issue of the additional insurance coverage. 

 

SUMMARY OF INCREASE OPTIONS

 

Cost of Living Adjustments adjusts (read increases) the benefits while the insured is on claim so that the insured will not suffer loss of income due to increases in the cost of living from the start of the disability, provided the claim lasts at least one year.  Automatic Increases keep insurance benefits current with changes (increases) in earned income, financial needs because of usual or modest annual salary increases, or the increase in the cost of living because of inflation while the insured is NOT on claim.  (It should be noted that one insurer combines the automatic increases and the cost of living adjustment into one benefit rider – therefore, the adjustments occur annually whether the insured is healthy or disabled.) 

 

On the other hand, Guaranteed Insurability or Future Increase Riders adjust the insurance benefits for those insureds who are logically anticipate and expect a substantial increase in annual income growth, generally above the average national rate for salary increases, or for those who expect periodic substantial changes in income as they become more proficient in their business or professional occupations.

 

ACCIDENTAL DEATH AND DISMEMBERMENT OPTION

 

This option pays a lump sum if the insured dies in an accident or loses an extremity.  This is the same option offered in life and other types of insurance.

 

LIFETIME EXTENSION OPTION

 

This option extends the coverage from the typical “to-age-65” provision, to lifetime benefits, provided certain conditions are met. 

 

STUDY QUESTIONS

 

1.  The longer the elimination period,

      A.  the higher the policy premium.

      B.  the lower the policy premium.

      C.  the less time the insured has to wait for benefits to start.

      D.  the longer the claims period.

 

 

 

2.  Most experts feel that the elimination period must be satisfied with

      A.  only total disability.

      B.  only residual disability.

      C.  the grace period.

      D.  either the total disability or residual disability.

 

3.  The longer the benefit period,

      A.  the lower the premium.

      B.  the higher the premium.

      C.  the less time the insured has to wait for benefits to be paid.

      D.  the longer the elimination period.

 

4.  The principle that an insured should not profit from a loss nor be put at a monetary disadvantage, is

      A.  the indemnity principle.

      B.  the interlocutory principle.

      C.  called the ab initio principle.

      D.  is no longer used in health insurance.

 

5.  The benefit amounts are important in order to avoid

      A.  anti-selection against the company.

      B.  losing commissions.

      C.  having a policy disapproved by the state insurance department.

      D.  a long wait before benefits can be paid.

 

6.  A document that determines the maximum monthly benefit in relation to the applicant’s income, is

      A.  a justification chart.

      B.  an occupation guide.

      C.  a participation chart.

      D.  an elimination period chart.

 

7.  After the elimination period, benefits will be paid while the insured is totally disabled

      A.  annually on the policy anniversary date.

      B.  on the first and 15^th of each month.

      C.  at the end of each month.

      D.  only to the Loss Payee.

 

8.  If premiums have been paid during an elimination period

      A.  the premiums will remain with the insurance company.

      B.  the premiums will be refunded for that period of time.

      C.  the state insurance department can fine the insurance company.

      D.  commissions will be charged back against the agency.

 

9.  Loss of monthly income                                        Monthly benefit for

     Prior monthly income                  X                           total disability

      is the formula for determining the monthly benefit for

      A.  total disability.

      B.  adjusted gross income for taxing disability benefits.

      C.  residual disability benefits.

      D.  peripheral disability.

 

10.  Partial disability is usually defined

      A.  in terms of occupation.

      B.  as a function of pain and suffering indemnification/

      C.  as applying to only Buy-Sell agreements.

      D.  as Short-term disability policies only.

 

ANSWERS TO STUDY QUESTIONS

1A    2D    3B    4A    5A    6C    7C    8B    9C    10A