Figure 2-1

Elimination and Benefit Periods

(60 Days and Two Years Illustrated)

Selecting the Right Benefit Period

Insureds naturally want the longest possible benefit period, but longer periods require higher premiums. Normally, agents attempt to sell the DI policy with the longest period for which the individual is eligible and that is a good starting point. However, since premium savings can be achieved by shortening the benefit period, this option offers a means to reduce the premium if necessary. A valuable service agents can offer clients is the ability to illustrate premium differences based on different benefit periods and to explain the consequences. For example, although the odds of suffering some period of disability are relatively high, most disabilities last one year or less, so a shorter benefit period can be quite adequate for the

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average person. A potential client might object that he or she could be one of the few who suffer longer disabilities, which is correct, but the chances are relatively small. If a shorter benefit period allows the individual to purchase the policy, agents can stress that receiving disability income payments for a short period is more beneficial than receiving no income at all if disability does occur.

Contemporary DI policies usually offer identical benefit period options for disability associated with both injuries and sickness, but some policies might have different periods. For example, all individuals disabled by accidental injury might be offered benefit periods for a lifetime, whereas if the disability results from sickness, a benefit period might extend no later than the insureds age 65.

Most insurers offer the longest benefit periods only to the very best classes of risks. For example, an insurer might offer its best classes a lifetime benefit period for both sickness and accidents. While you'll learn more later about how insurers classify risks, for now, you just need to know that "white collar" professionals such as physicians and attorneys are in the best classification. These, then, would be eligible for a lifetime benefit period, assuming the insurer offered such a period. On the other hand, certain occupations that are not considered "white collar," such as professional hair stylists and non-professionals, might be eligible for benefit periods extending no more than five or ten years, depending on the particular insurer.

Total Disability

The condition that triggers DI benefit payments is the insureds total disability, a condition that each policy defines precisely. Insurers carefully develop the policy wording to say exactly what total disability means. Over the years, the definition used in commercial DI policies has generally become more liberal, especially for policies offered to those the insurer considers the best risks, such as the "white collar" professionals described previously.

Own Occupation Definition

The most liberal definition recognizes total disability in a person who is unable to work in his or her own regular occupation.  Definitionsof this type are often referred to as“own occupation” or “your occupation," or “regular occupation,” and they take into account only the insureds regular line of work, rather than any other type of work the insured might be able to do in another field. As we proceed through this section, you'll see more clearly bow beneficial this definition can be to the insured.

Following is typical wording for this most liberal definition of total disability.

Total disability means that, because of injury or sickness, you are unable to perform the substantial and material duties of your regular occupation.

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Some definitions slightly revise "substantial and material duties" to refer to "any and every duty" or "the material duties" or "the regular duties of your occupation" or similar wording, while maintaining the intent. What this means is that a person is considered disabled and eligible to receive DI benefits if he or she cannot do the same work as before the injury or sickness that caused disability-even though the person might actually be capable of doing some other type of work. Here's an example.

Denise Valier was a right-handed surgeon before an automobile accident caused her right arm to be amputated. Eighty-five percent of Valier's occupational effort was spent in actually performing surgery, so surgery represents the substantial and material duties of her regular occupation, which she can no longer perform. Under this most liberal definition, Valier is considered totally disabled and eligible for DI benefits even though she is able to generate income by other means. For example, by retraining to perform many functions with her left limb, Valier can still examine and diagnose patients. In fact, with no additional training, she can probably earn income through consultation and performing other valuable services in the medical field. Nevertheless, because she can no longer perform the primary duties that generated income for her before the injury, Valier will receive the full monthly DI benefits.

Own Occupation-Not Working

A slightly less liberal version of the "own occupation" definition begins in the same way as the definition just described, then adds a qualifier:

Total disability means that, because of injury or sickness, you are unable to perform the substantial and material duties of your regular occupation  and you are not working in any gainful occupation.

In order to retain DI benefits under this definition-which may be called limited or modified own occupation the insured must not be working for income at all.  Dr. Valier in the previous example would lose her DI benefits when she resumed working as described above.  And, because this definition refers to any gainful occupation, her benefits would cease if she decided to do gainful work completely unrelated to her former profession. in actual practice, this definition probably would not apply to the best professional risks, but to a somewhat more risky group of people.

An important element of this definition is that the insured may choose whether or not to seek a different occupation. If not, the DI benefits continue. If so, the benefit for total disability may end-but more liberal policies are likely to pay part of the benefit if the insured returns to some type of work. This is called a residual benefit, which you'll learn more about shortly.

Any Occupation Definition

The most restrictive way insurers generally define total disability is referred to as "any

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occupation" or "gainful occupation." A typical definition of this variety reads as follows:

Total disability means that, because of injury or sickness, you are unable to perform the material duties of any gainful occupation for which you are reasonably suited by training, education or experience.

Usually used with policies written for people in more hazardous occupations, this definition does not refer at all to the insureds specific regular occupation before the disability began. However, the "reasonably suited" wording does take into account the particular insureds history and experience, unlike earlier versions, which required the inability to work in any occupation, whether or not the insured was suited for other work. For example, under the later version, no insurer would expect a disabled unskilled laborer to attempt work as a data entry clerk since the laborer is unlikely to have training, education or experience in that field.

Policies that use this definition typically take into account the insureds prior earnings as well. For example, the definition would not be strictly applied without consideration for income where the disabled person formerly earned $700 per week and the only job available for which he or she is presently suited pays $300 per week. You will learn more about how the insurer takes into account the ratio of current to former earnings.

Dual Definitions

Some DI policies are written with dual definitions of total disability, with one definition applicable when the insured first becomes disabled and the second coming into play at a specified later time. In this case, it's common for the most liberal “own occupation” definition to apply before the more restrictive “any occupation” definition is required.  While the length of time this first definition is used varies, here is how such a provision might read:

Total disability means that, because of injury of sickness, you are unable to perform the substantial and material duties of your regular occupation.

After you have received benefits under this insurance for a period of   (10) years, total disability shall mean that you are unable to perform the material duties of any gainful occupation for which you are reasonably suited by training, education or experience.

Depending on the insurer and the class of risk for whom the policy is written, the length of the benefit period during which the first definition applies might range from as short as one year to as long as the insureds age 55 or 60. After the stipulated period, the individual must meet the second, more restrictive definition in order to continue receiving benefits. According to the sample definition above, the insured person who is still unable to perform her regular duties after ten years must seek other gainful work for which she is suited. Only if she cannot perform that other gainful work is she still eligible to receive the DI benefits, assuming the benefit period has not been exhausted.

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Physician's Care

Regardless of the particular definition used, DI policies require the individual to be under a physician's care in order to qualify for total disability benefits. Policies also stipulate that benefits will be paid for as long as the benefit period extends, provided the individual remains disabled and is under a physician's care. Having so stated, in fact most policies continue to pay when there is no question about disability whether or not the insured is under continuous care of a physician. As a practical matter, some totally disabled people do not need frequent medical attention. As a general rule, however, extended disability claims require periodic medical exams on a schedule specified by the insurance company.

Presumptive Total Disability

Certain physical conditions are viewed as being so very serious that an individual suffering such a condition might be considered disabled whether or not the person is actually able to work. Many DI policies recognize this concept of presumptive total disability. Policies that embrace presumptive disability pay the full monthly DI benefit when the insured person loses certain bodily members, generally these:

*  Loss of or loss of use of both hands

*  Loss of or loss of use of both feet

*  Loss of or loss of use of one hand and one foot.

*  Loss of sight in both eyes

*  Loss of hearing in both ears.

*  Loss of speech

Where presumptive benefits apply, the insured might be able to perform some type of gainful work, but for purposes of receiving the DI benefits. any work actually performed is ignored. For example, suppose an interior decorator suffered an injury that resulted in blindness. Eventually, this person is retrained as a phone sales person, using specially adapted equipment, and is able to earn a living. In most policies that pay presumptive disability benefits, the insured is still eligible for the full monthly DI benefit for the entire benefit period. In addition, the elimination period is likely to be waived for a presumptive disability, with monthly benefit payments beginning immediately.

Residual Disability Benefits

One of the goals of DI insurance is to pay a fair benefit when the insured qualifies, but also to encourage the insured to return to work when possible. In the past, as soon as a formerly disabled person began working again, DI benefits stopped, whether or not the individual was able to work as many hours as before or earn a comparable income. You can easily see the dilemma an individual faced: Return to work for, perhaps, 50% of former Income or not return to work and receive, perhaps, 70% of former income in DI benefits. Contemporary

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policies take this situation into account by providing residual disability benefits. These are partial DI benefits for which the insured becomes eligible upon returning to work at a reduced income.

Eligibility

Insurers use one of two different methods to determine that an insured is eligible for residual benefits. Under the first method, if the insured returns to work for earnings that are a certain percentage less than earnings before the disability began, a residual benefit will be paid. Usually, earnings must be at least 15% or 20% less. For example, assume James Abbott formerly earned $3,000 per month. When he is ready to return to work, Abbott's former employer is not hiring, but another employer in the same field hires Abbott for similar work at only $2,100 per month. This is $900 less than Abbott earned before-a 30% loss of monthly income. If his policy requires that earnings be at least 20% less, Abbott qualifies for a residual benefit under this method of eligibility.

The second method of gauging residual disability requires a similar loss of a specific  percentage of  earnings  and in addition, requires that the insured be unable to work as completely as before the disability occurred.  Here are two ways this method might work.

1.  The insured can perform some, but not all, of the material duties of the regular       occupation and is earning at least 20% less than pre-disability earnings, or

2.  The insured can perform all of the material duties of the regular occupation, but      can do so only part-time and is earning at least 20% less than pre-disability           earnings.

In the previous example, Abbott was able to collect a residual benefit simply by virtue of his reduced earnings, but that would not be the case when the policy requires one of the two conditions described for the second method. Under this method, Abbott would have to be working only part-time or performing only a portion of former duties in order to be eligible.

Let's suppose, instead, that Abbott's former employer rehires him, but Abbott now works shorter hours because lingering effects of the injury that caused his disability tire him quickly. Abbott can do all of his former duties, but for no more than five hours each day, for which he earns $2,100 instead of $3,000 monthly. Under these circumstances, Abbott qualifies under this more stringent method of determining residual disability.

The Percentage of Income Loss

Not every worker earns a steady, fixed amount of income every month.   And, while many people's highest monthly earnings came in the most recent months just prior to disability, that is not the case for everyone. People whose incomes fluctuate might have had lower earnings just before disability, whereas monthly earnings were higher just a few months previous to disability. Earnings of self-employed professionals and commissioned sales people are good

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examples. So, just how does the insurer decide what percentage of income the insured lost after returning to work? Two common methods are used.

Method No. 1

The first method simply calculates the monthly average earnings for the 12 months immediately before the onset of disability, like this example that assumes disability begins in June:

Month             Earnings

May                $3,500

April               $3,100

March             $4,000

February                    $3,950

January                      $3,200

December                   $5,300

November                  $5,000

October                      $4,500

September                  $4,000

August                        $3,000

July                 $2,800

June                $2.700

Total                         $45,050

             Average: $45,050      ¸     12        =      $3,754/month

The average earnings of $3,754 per month are considered the pre­disability earnings against which earnings are compared after the insured returns to work. So let's suppose this person returns to work and earns only $2,700 per month-$1,054 less than before. Here's how to calculate the percentage loss:

$1,054       ¸     $3,754    =      .28    or    28%

Determining the Residual Benefit Amount

To determine the dollar amount of the monthly residual benefit, the percentage of loss-28% for our example-is then applied to the total DI monthly benefit the policy provides. Let's say this person's policy pays a monthly benefit of $3.000. The rest of the calculation is simple multiplication:

$3,000    x    .28    =    $840 monthly residual benefit

As another example, if the policy had paid a total DI benefit of $4,000 per month and the

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percentage of lost income remained the same, the residual benefit would be 28% of $4,000 or $1,120.

Method No.2

The second method looks back farther than 12 months and selects the 24 consecutive months of highest monthly average earnings. The insurer decides exactly how many months will be examined, but some insurers look back as far as five years. In the interest of space, we will not show an example that uses that many months. When the 24 months are selected, the average is determined in the same manner as described for Method 1. Calculations for both the percentage of income loss and the amount of the residual benefit payment are performed in exactly the same way. Let's use rounded figures and go through those final calculations one more time.

We'll assume that the highest average monthly earnings during the 24-month period were $3,000 per month for the insured, Darcy. After being disabled, Darcy returns to work and is now able to earn only $2,100 per month or $900 less than before. The total disability monthly benefit under Darcy's policy is $2,000.

$900   ¸   $3,000    =    30%

$2,000    x    .30    =    $600 monthly residual benefit

Monthly Adjustments

Since the amount an insured earns after returning to work might fluctuate, the insurance company recalculates the percentage of loss each month that a residual benefit is paid. Suppose Darcy from the previous example has only a 25% loss of former income during the following month. The insurer then pays a residual benefit of $500 for that month-25% of $2,000.

Inflation Adjustment

On long-term disability claims, insurers may make an inflation adjustment to the pre-disability earnings in order to pay a residual benefit that bears some relationship to economic conditions. For example, if the disability had not occurred, the insureds earnings would likely have increased somewhat in response to inflation.  In addition, without an inflation adjustment, residual benefits would remain flat and not keep pace with inflation, placing the insured in an ever-worsening financial position if disability continued during inflationary periods.

The inflation adjustment might be a flat percentage or it might be tied to the Consumer Price

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Index (CPI). It is generally applied annually after a certain period of disability, probably no less than a year. Let's assume an insurer guarantees to adjust the pre-disability earnings figure by the greater of 3% or the CPI. Insured Biggs has a policy paying a total DI monthly benefit of $2,700. Biggs earned $4,000 per month before disability and has now returned to work, earning $2,000 per month-a 50% loss of income. The first residual disability benefits are therefore 50% of $2,700 or $1,350. As time passes, Biggs continues to earn only $2,000 monthly (50% of his former income). Without an inflation adjustment, the insurer will pay no more than $1,350 per month as a residual benefit even though inflation might be eroding

Biggs’ purchasing power.

Here's what happens when the inflation adjustment is made, assuming the 3% figure applies. Three percent of $4,000 (the pre-­disability  earnings is $120. so the adjustment changes the pre­disability earnings figure to $4,120 ($4,000 plus 3% of $4,000). Biggs is still earning $2,000 monthly, which is $2,120 less, rather that only $2,000 less, than former earnings. Computing the residual benefit figures as we did previously, we see the difference:

                                                    Adjusted                 Percentage

             Income                       Pre-Disability              of Income

               Loss                                        Earnings                                    Lost

             $2,120                ¸                         $4,120                  =         .515 or 51.5%

           DI Monthly                               Percentage                           New Residual   

              Benefit                                      Of Loss                             Benefit Amount                     

  $2,700                x                        .515                       =                 $1,391

As the result of the inflation adjustment to pre-disability earnings, Biggs now receives a $41 monthly increase in residual benefits, assuming no change in actual monthly earnings. At the next annual inflation adjustment the insurer will apply the 4% factor to $4,120 instead of the original $4,000, again resulting in an increased residual benefit if Biggs’ actual earnings do not increase (or increase less than inflation.)

Increased Residual Benefit Provision

Some policies include a provision that could temporarily provide the insured with a higher residual benefit payment during the first six or 12 months after returning to work. This provision allows the insured to be paid a monthly benefit equal to either 50% of the total disability benefit or the actual percentage of loss, whichever is greater.

For example, suppose a previous insured, Darcy, has a DI policy that pays the higher residual benefit for 12 months. Remember that Darcy's benefit for total disability is $2,000. When Darcy returns to work, she has a 30% loss of income that results in a $600 residual benefit.

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Under this provision, however, Darcy will instead receive 50% of the total disability benefit, or $1,000 for up to 12 months.

On the other hand, suppose that during the 12 months Darcy's income fluctuates, and at one point she has a 60% loss of income. In this case, the actual percentage of loss produces a higher residual benefit $1,200 than the 50% provision, so the insurer pays Darcy $1,200 instead of $1,000.

When you sell policies with this feature, be sure you know whether the increased residual benefits apply for six months or for 12 months.

Residual Benefit Period

How long can the insured enjoy residual benefits? As long as the insured earnings are reduced, the residual benefit period extends to the end of the benefit period contracted for when the policy was purchased. In other words, if the policy benefit period is ten years. The residual benefit will be paid until that ten-year period expires.  Caution:     This is not ten years after the insurer starts paying the residual benefit, but, instead, is incorporated into the overall benefit period. For example, if an insured is totally disabled for one year before returning to work and before residual benefit payments begin, only nine years remain in the benefit period. Therefore, if the relevant loss of income continues throughout the benefit period, the residual benefits are paid for a total of nine years.

Qualification Period

Policies that pay residual disability benefits often require the insured to fulfill a qualification period of total disability before becoming eligible for residual benefits. Depending on the insurer, the qualification period is likely to be either 30,60, 90 or 180 days and runs concurrently with the elimination period. For the least hazar­dous occupations-white collar professionals again-no such qualification period is usually required, however.

Let’s see how this works, assuming a certain insured is required to fulfill a qualification period of 60 days under a policy with a 30-day elimination period.  Figure 2-2 (on page 25) shows two different scenarios for this same insured.  Under the first scenario, the qualification period is fulfilled, so the insured is eligible for residual benefits upon returning to work.  Under the second scenario, however, the insured returns to work before the end of the 60-day qualification period, so no residual benefits are paid. While this may appear at first blush, to be punitive to the person who returns to work quickly, consider that a short period of disability typically suggests a less severe injury or illness-one that is not likely to reduce the insureds earnings ability upon returning to work.

Differentiating Residual from Total Disability

When determining whether residual benefits will be paid, insurers often recognize a point

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at which income loss is considered to be 100% even though the percentage is actually somewhat less. For most insurers, a 75% or 80% loss of income is treated the same as a 100% loss. For example, if an insured formerly earned $3,000 per month and can now earn only $750 monthly-75% less-the insurer would pay the full monthly total disability benefit, rather than paying a residual benefit. A few very liberal DI policies make this distinction when the income loss is as little as 50% of former earnings, but these are rare.

Figure 2-2

Qualification Period - Residual Benefits

Partial Disability

Before the concept and practice of paying residual disability benefits gained favor, DI insurance policies often paid partial disability benefits-and some policies still follow this tradition. This is a considerably simpler way of paying a reduced benefit to an insured who is able to return to work, but earns less than before the disability occurred in this case, “simpler" is not necessarily better because the typical policy pays a partial disability benefit that is a uniform 50% of the total disability benefit without regard to the actual reduction in earnings.

The 50% partial disability benefit has an inherent unfairness that could operate two ways. First, the insured whose income loss is greater than 50% will not receive a partial benefit that bears any relationship to his or her actual financial loss. For example, assume former earnings of $4,000 monthly and a policy paying a $2,500 total disability benefit. The insured

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returns to work, earning only $1,000-a 75% loss. The partial disability benefit is $1,250 (50% of $2,500), resulting in total income of $2,250. This insured is still suffering a loss of nearly 44% of pre­disability income-a significant reduction in earnings and consequently, in the standard of living the insured can now expect.

Here is the second way the inherent unfairness may be manifested by payment of the partial disability benefit. The insured whose income loss is less than 50% may receive a partial benefit that is great enough to discourage an active attempt to earn the same amount of pre-disability income. Let's assume the same insured described previously returns to work and earns, not $1,000 monthly, but $3,000 monthly-only a 25% loss. But the policy will pay the same 50% partial disability benefit of $1,250. Now, the insured is receiving $4,250 monthly-$250 more than before he was disabled. There is not much incentive to work harder or longer to regain the $4,000 earnings in this case.

Benefit Period

For a scenario such as the one just described partial disability benefits typically include one mitigating factor: the benefit period is much shorter than that of a residual benefit. You'll recall that residual benefits, when applicable, are paid to the end of the regular policy benefit period. Partial disability benefits, however, are limited to three or six months as a general rule, occasionally extending as long as 12 months. Nevertheless, many people would be tempted to receive more than their usual income for three months while working on a reduced schedule. This brings us to the eligibility requirements for receiving partial disability benefits.

Eligibility

A typical definition of disability that qualifies the insured for partial DI benefits includes these element

The insured is unable to perform one or more duties of his or her own occupation,

or

The insured is unable to be at work for more than half of the time required for his or her former regular full-time workweek.

Under the second portion of the definition, if full-time work was considered to be 40 hours each week, the insured must be unable to work for more than 20 hours. If a full-time Job involved 36 hours weekly, the insured would be eligible if unable to work more than 18 hours. Currently, a 40-hour workweek is considered the norm, but numerous businesses follow a slightly shorter workweek, which would be taken into consideration.

Partial disability benefits are typically paid only after a specified period of disability. This is similar to the requirement for residual DI benefits, but the period may be the length of the elimination period. The elimination period still must be fulfilled as is the case with residual

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benefits. For example, assume a 30-day elimination period. The insured must be totally disabled and receiving DI benefits for another 30 days before returning to work in order to receive the partial disability benefit.