Chapter 4

Chapter Four

Other Disability Income Sources

Who Else Is Paying?

An issue of primary concern for commercial disability income insurers is who else might pay DI benefits if a particular insured is disabled. The importance of avoiding over insurance is a theme that recurs in any discussion of DI insurance. Insurers always want to know if there are other DI benefits which, if combined with the benefit an insurer has been asked to provide, might act as a disincentive for the insured to return to work.

Part of an agent's field underwriting responsibility is to discover what other DI benefits are even potentially available to the applicant. These include other commercial DI policies the applicant holds, disability riders attached to life insurance policies, group DI plans, and benefits from corporate pension plans business associations arid government- sponsored plans for which many people are eligible. While Social Security and workers compensation are the most universally available benefits, various other government programs provide disability benefits for thousands of current and former government employees.

In this chapter we'll discuss other sources of DI benefits and focus on:

*What the sources are

*How the plans work

*When benefits might be available

*How easy or difficult it is to qualify for benefits

*Effect on eligibility for a commercial Dl policy

The major thrust of this chapter is government sponsored benefits and non-government sources other than business and employment-related benefits. The two chapters following this one cover business uses for disability policies and group DI coverages.

Social Security-The Pride of Uncle Sam

Without question, the Social Security system is the best-known source of benefits for U.S. citizens. In 1992, more than four million people were receiving DI benefits from Uncle Sam in spite of the relative difficulty of qualifying. While Social Security is generally associated with the retired, many benefits are available to younger people who meet certain

requirements. Unemployed family members of workers covered by Social Security, including children, are among those who may receive certain Social Security benefits.

Since this course concerns employed adults who are your potential prospects for disability income insurance, however, we're interested in Social Security regulations that affect only that group of people. The rules governing Social Security are wide-ranging and complex, but this chapter takes a "broad brush" approach, providing you with the essential information you need in order to work through the implications of Social Security for people who are prospective purchasers of the DI policies you sell.

General Eligibility Requirements

Let's briefly-and superficially-discuss the general eligibility requirements every employed person must meet to receive any type of Social Security benefit. An individual must have worked and paid Social Security taxes for a long enough time and during a recent period to have earned a specific number of work credits. For any particular individual, this calculation is based on the unique facts of that person's work history. The general rule for all people is that the younger the person is, the fewer the credits required for eligibility and vice versa. You should also know that some people who have never paid into the Social Security program or who have few work credits might be eligible if their incomes are low enough, however, these people are not good prospects for commercial DI insurance in any event.

Uncle Sam's Definition of Disability

Even after a working person has enough work credits to be generally eligible for Social Security benefits, it is fairly difficult to qualify for disability payments. The reason is the extremely narrow definition of disability. The exact wording under federal law is quoted below. We have broken down this very long sentence into separate parts for easier understanding:

"The Inability to engage in any substantial gainful activity

by reason of any medically determinable physical or mental impairment

which can be expected to result in death or

has lasted or can be expected to last for a continuous period of not less

than 12 months

or, in the case of a child under the age of 18, if he suffers from any

medically determinable physical or mental impairment of comparable severity."

For our purposes, you can ignore the final part of the definition, which is printed in plain type instead of boldface type. This portion concerning children is not pertinent to this course of study.

Notice, first of all, the reference to any substantial gainful activity. “Any” does not take into consideration what the individual is suited to do by training, education or experience as commercial insurance policies generally do. Neither does the definition consider whether or not employment is actually available where the individual is located. In recent years we've seen pockets of the U.S. where job openings simply did not exist.

“Substantial gainful activity” does not necessarily mean full-time work: neither does it mean profitable work. For Social Security disability eligibility, it simply means the individual is not earning more per month than the ceiling stipulated by law. Figure 4-1 shows the separate limits for people who are legally blind and for all other people in 1993. These figures are adjusted periodically for inflation.

The second portion of the definition indicates that the reason for the disability must be a physical or mental impairment that can be determined medically. This appears to be fairly straightforward-but beware the common condition of a backache for which a physician might have difficulty locating the cause. Back problems are quite common and can, in fact, be debilitating-as can other conditions-even when no medical explanation is apparent.

The remainder of the impairment section is even more difficult. The condition must be expected to result in the individual’s death or is long-term, meaning lasting continuously for 12 months or more. Remember the earlier statistics-most disabilities extend for less than a year. Think about a middle-income worker who is severely injured in an

Figure 4-1

Eligibility for Social Security Dl Benefits

1993 Income Limits

accident that leaves her disabled for nine months. In all ways except the 12-month period, she meets the requirements of this definition, but that alone disqualifies her. Many people would be hard-pressed to survive for nine months without income-but no Social Security disability benefits are available to this person.

Uncle Sam's definition of disability is probably the strictest in existence, more so than other government-sponsored disability programs and considerably more stringent than most private insurance plans. A quick review of the definitions in Chapter Two will confirm that fact for you.

Five-Month Waiting Period

Individuals must be disabled for five months before they will be considered for Social Security disability benefits. Unfortunately, the approval process often extends many more months. It's not uncommon to wait as long as 12 months following injury to receive approval. If approved, benefit payments are retroactive to the sixth month and payable as long as disability continues. Figure 4-2 Illustrates the Social Security DI benefits waiting period and potential approval period.

As you can see, a full year may pass during which an individual has no income and no benefits, while expenses continue. In addition, the rejection rate is high. Various sources indicate that from one-half to two-thirds of all applicants for Social Security DI benefits are rejected-the higher figure coming from the Social Security Administration's own statistics. Claims finally approved are often denied initially and go through an appeal process, further lengthening the period when the individual receives no benefits.

The typical 12-month delay before benefits are either approved or denied was the impetus for insurers to develop the supplemental Social

Figure 4-2

Social Security DI Benefits Waiting & Approval Periods

Security rider discussed in Chapter Three. As you can see, most wage earners will find it difficult to qualify for disability benefits from the Social Security program. Those who do qualify are often in lower income groups that are not prime prospects for the policies you offer. As a result, the possibility of receiving Social Security DI benefits should not pose a major obstacle to your DI policy sales. On the contrary, you are in an excellent position to explain the requirements to your prospects, most of whom won't know how difficult the process is. As you describe the hazards of counting on Social Security to breach the income gap during disability, your sales potential should be enhanced rather than hampered, because the need for personal disability insurance becomes quite apparent.

Workers Compensation

Another source of disability benefits is the workers compensation system, which is administered separately by the individual states. While workers comp laws provide other benefits in addition to disability, we're concerned here only with the latter. Workers compensation benefits are available only to individuals who suffer occupational injury or illness. Disabilities resulting from causes that do not arise from and in the course of employment are not covered by workers comp. For example, a person who is injured in and disabled from an auto accident while not working could not receive workers comp disability benefits, but could receive benefits from an individual DI policy.

State Differences

While the basic principles of workers compensation are uniform among the states, the actual details-waiting periods, benefit amounts and periods, maximums, and so forth-vary widely from state to state.

Waiting and Retroactive Periods

For example, waiting periods, which are the equivalent of elimination periods, range from one to seven days, after which disability parents begin. Many state laws provide that, if the person is disabled for a certain length of time-called the retroactive period-benefits will be paid for each day from the first day of disability. Among the states, this period ranges from one day to six weeks.

Benefit

Benefit amounts differ from state to state, though they are typically based on the individual's average weekly wage for the previous year. The actual weekly benefit for which an individual is eligible is equal to a certain percentage, ranging from 60% to 75% in most states, with 66b% being the most common figure. Generally, both a weekly minimum and maximum also apply. A few states deviate from the common formulas for determining

benefits, using instead 80% of the worker's "spendable earnings." a term defined in the law. Typically, this would be after-tax income. A few states pay a greater percentage for a short period followed by a reduced percentage if the disability continues. Most states stipulate that if the person's actual earnings are less than the minimum, the actual wage is paid.

The table following shows the wide variations among several states in a recent year. These figures change as states amend their workers comp laws or when automatic indexing occurs in some states. Where the state provides figures in dollars-and-cents, this table drops the cents. For your comparison and enlightenment, we've included at the end of the table the figures for federal government employees.

Workers Compensation Benefit Variations

in Selected States

Percent Weekly Weekly

State of Wages Minimum Maximum

Arkansas 662/3% $ 20 $226

Idaho 60% or more* $150 $300

Illinois 662/3% $100-124** $618

Iowa 80% of spend $123 $703

able earnings

New Jersey 70% $ 99 $370

Puerto Rico 662/3% $ 10 $ 65

U.S. Gov't. 662/3% or

Employees 75%*** $171 $1,110

*Up to 90% depending on number of dependents.

**Based on either temporary or permanent disability.

***Based on civil service grade level.

Table adapted from U.S. Department of Health and Human Services bulletin.

Some states have different minimums and maximums depending on whether the disability Is temporary or permanent. In some cases, the law provides for the benefit to be based on what is called the state average weekly wage (SAWW) for jobs similar to the individual's when computations based on actual wages do not provide what the particular state considers an adequate benefit to meet basic income needs.

All states currently provide rehabilitation benefits to pay for medical or physical rehabilitation services, such as physical therapy, and for vocational rehabilitation to retrain disabled workers for new jobs.

While most states pay benefits for the person's lifetime when disability is permanent and total, several states specify maximum benefit periods and/or dollar maximums. Maximums

might apply only to temporary disabilities only both temporary and permanent disability. The maximum benefit period is typically expressed in weeks. This next table provides a few examples, again illustrating the wide variation.

Maximum Benefits In Selected States

State Maximum Period and/or Amount

Florida 260 weeks (temporary disability only)

Indiana 500 weeks or $147,000

Kansas $100,000

Mississippi 450 weeks or $92,970

New Mexico 700 weeks

Tennessee 550 weeks or $92,400: after 400 weeks

benefit reduced to statutory minimum

Table adapted from U.S. Department of Health and Human Service bulletin.

Many states have one or more unique twists concerning how and in what amounts benefits are paid, but discussing these Is beyond the scope of this course. Find out how workers comp benefits apply where you do business because, the amount of those benefits can affect the benefit amount you may offer in a DI policy.

Disability Definitions

Workers compensation laws define four different types of disability:

Temporary Total Disability: An individual is currently unable to perform any duties of the regular occupation, but will eventually be able to perform all such duties. Most disabilities are at least initially classified as temporary total.

Permanent Total Disability: An individual is unable to perform the duties of any occupation and will never be able to do so. This definition may include certain presumptive disabilities such as loss of limbs or eyesight, without regard to the actual ability to work.

Temporary Partial Disability: An individual can perform some of the duties of the regular occupation or can perform duties on a part-time basis and will eventually be able to perform all duties full time.

Permanent Partial Disability: An individual is permanently disabled, but is able to perform some duties of the regular occupation or some other job.

These definitions, which control how and in what amounts workers comp benefits are paid, appear to be unambiguous. However, subtle differences in wording and interpretation have contributed to a significant body of state and federal case law about workers compensation, indicating the terms are not as clear as they seem. As a result, determining eligibility and benefit amounts can be complicated.

Uncle Sam and Workers Comp

For the most part, workers compensation is a state-regulated program. However, tile federal government is involved in the workers compensation system in the District of Columbia and in the U.S. possessions-Guam, Puerto Rica, the Virgin Islands and American Samoa. Additionally, federal regulations apply to certain occupational groups including all civilian employees of the federal government wherever they are physically located: longshore and harbor workers: and employees such as miners and railroad workers whose jobs are highly hazardous.

DI Policies and Workers Comp

The impact of the workers compensation system on the DI policies you sell differs from case to case. You'll recall that many commercial policies include the nonoccupationa1 injury provision, which excludes coverage for injuries covered by workers compensation and similar employment-related disability benefits. For workers who earn up to as much as $30,000 per year, workers camp DI benefits alone can effectively replace enough income to prevent severe financial problems during disability. Remember, however, that workers compensation benefits are payable only when disability results from injury or sickness arising out of and in the course of employment. Therefore, the need still exists for an individual DI policy to cover disability from causes not related to employment.

Social Security and Workers Comp

Another consideration is how workers camp benefits are integrated with Social Security benefits. As a general rule, someone receiving workers compensation DI benefits will not receive Social Security DI benefits at the same time. Workers comp would be paid for the full benefit period allowed by law and if the person is still disabled, Social Security DI would take over from that point. However, when workers camp benefits are very small, the two types are sometimes and paid at the same time to provide up to 80% of the individual's average earnings. Still, workers comp is primary, paying the maximum available, with Social Security supplementing the benefit up to 80% of earnings.

The potential benefits from both of these programs must be considered when determining the monthly benefit available under a personal disability policy. As indicated earlier, a social insurance offset rider can help prevent over insurance by coordinating the policy benefits with government-sponsored programs such as these.

Temporary Disability Benefits

Currently, five states and Puerto Rico provide short-term benefits covering nonoccupational disabilities excluded from workers comp coverage. The five states are California, Hawaii, New Jersey, New York and Rhode Island. Among the jurisdictions, these benefits are variously called temporary disability, state cash sickness or nonoccupational disability benefits.

These plans have no provision for permanent, long-term disability. Their benefit periods are loosely related to the lag time associated with qualifying for Social Security DI benefits. Maximum benefit periods range from 26 to 52 weeks, depending on the state. Benefits generally are paid after the individual has been disabled for seven days. In California and Puerto Rico, no elimination period is required if the individual is hospitalized from the first day.

Benefit levels in each state correspond roughly with the state's workers compensation benefits, generally replacing at least half of the individual's weekly earnings, subject to minimum and maximum amounts. Note that, while these benefits cover disability from injury and sickness not associated with employment, eligibility is based on past earnings or employment. Individuals who have not been employed for some time lose their eligibility for these temporary benefits.

Definition of Disability

In most cases, disability is defined as the inability to perform the duties of the individual's regular occupation. However, in New Jersey the person must be unable to perform any gainful work to qualify for temporary benefits.

A social insurance rider attached to an individual disability income policy can address temporary disability benefits. However, at lower income levels, these benefits, coupled with other government-sponsored benefits, can replace an adequate portion of the worker's income. Again, such individuals would not be prospects for commercial DI policies.

Miscellaneous Government Sources

As you seek prospective customers for disability income policies. It is important for you to know that your greatest "competitor" may be government. Virtually every government

employee-whether at the federal, state or local level-is potentially eligible for some type of

disability benefit. In some cases, the benefits may be so small that they are negligible in terms of eliminating the need for a separate DI policy. On the other hand, certain programs, especially those sponsored by the federal government, are generous enough to eliminate the need for other DI coverage. Some insurers, in fact, will not consider applications for individual policies from people who are eligible for these federal benefits. The major federal programs (other than Social Security) are associated with the following groups and laws:

*Veterans Administration

*Armed Services

*Civil Service

*Federal Employees Compensation Act

*Railroad Retirement Act

*Longshore and Harbor Workers Compensation Act

These programs cover virtually everyone who has worked or currently works for the federal government, plus certain non-government employees who have received special attention from the federal government. Check with your insurers about their own procedures for applications from people covered by any of the programs mentioned above. If you want more information about the programs themselves, you can phone or write the various agencies. Check your phone directory for listings of the governmental offices in your community.

Below the federal level, government-sponsored disability benefits, aside from workers comp, might be less than adequate for income replacement. If you want to sell DI insurance to these other government employees, you can ask about the level of DI income in their plans and suggest an additional benefit through a commercial DI policy that will provide a higher level of replacement income.

Miscellaneous Non-Government Sources

You've seen that various levels of government provide numerous potential sources for disability income benefits. DI benefits are available from several non-government sources as well. One source is commercial DI policies available from your direct competitors to cover individuals, businesses, and groups such as employers, trade and professional associations, and labor unions.

Life Insurance Policy Rider

A disability income rider can be attached to a life Insurance policy. You might have written any number of such contracts yourself. DI riders generally offer a monthly benefit equal to a percentage of the life insurance policy face amount. For example, the benefit might be 1% or $10 for each $1,000 of life insurance. On a $100,000 policy, the DI benefit would be

$1,000, limited by both a maximum dollar amount and a specified percentage of the insureds earned income.

Typically, a disability rider requires coordination with any other DI benefits available-such as the individual policy you're trying to place with the insured. DI riders usually require total and permanent disability, with the “permanency” requirement being fulfilled after six months of disability. The same six months may represent the rider's elimination period. Some insurers offer a four-month elimination period.

How Do They Stack Up Against Individual Policies?

With the exception of other individual DI policies and life insurance riders, coverage from any of the other sources mentioned in this section has certain drawbacks. The coverage is likely:

1. To be cancelable at the insurance company's option.

To end when the individual's relationship with the group ends.

3. To end if the group or association plan is terminated voluntarily.

4. To be subject to premium increases at the insurance company's discretion.

While you must consider other potential sources of DI benefits when attempting to place your policies, in most cases the benefits the others provide are neither adequate nor secure enough to be the individual's sole source of income replacement. We'll discuss group disability income insurance in more depth in another chapter. Later you'll also learn how to coordinate other DI benefits with benefits provided by your policies. Before you continue your study, complete this short review.

Chapter 4 Review Questions

1. The eligibility requirements for Social Security DI benefits require the individual's

inability to perform which of these?

a. His or her regular occupation.

b. Any gainful work.

Either the regular occupation or any other occupation, depending on the state where the individual resides.

2. How long is the waiting or elimination period for Social Security DI benefits? (one to seven days/one to six weeks/five months/12 months)

3. The Social Security Administration estimates that it rejects as many as what proportion of applicants for DI benefits? (one-fourth/one-half/two-thirds/three-fourths)

4. What insurance company rider helps offset the Social Security waiting and approval periods during the first year of disability? (supplemental Social Security rider/life

insurance policy DI rider/social insurance offset rider).

5. Workers compensation DI benefits are available for disabilities associated with which of the following?

a. Employment.

b. Injury (not sickness).

c. Sickness (not injury).

d. Nonoccupational injury or sickness.

6. The percentage of earnings most commonly used as the basis for workers compensation DI benefits in the various states is (50% / 60% / 602/3% / 70%).

7. When an individual would otherwise be eligible for both workers compensation and Social Security DI benefits, which program takes precedence? (workers compensation/Social Security)

8. Five states and Puerto Rico provide short-term disability benefits under temporary disability or state cash sickness programs, covering disabilities that are (occupational/

nonoccupational either occupational or nonoccupational).

9. As a general rule, individuals associated with which of the following would not be good prospects for commercial DI insurance?

a. Local government employment.

b. Federal government employment.

c. Professional associations.

d. A group DI plan.

10. When DI benefits are provided in the form of a rider to a life insurance policy, the benefit is generally expressed as a (flat dollar amount/percentage of the policy face amount / percentage of average monthly earnings).

Answers

1. b is correct

2. five months

3. two-thirds

4. supplemental Social Security rider

5. a is correct

6. 662/3%

7. workers compensation

8. nonoccupational

9. b is correct

10. percentage of the policy face amount