Assignment 2 - Individual and Group Life Insurance Alternatives Flashcards Preview

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Flashcards in Assignment 2 - Individual and Group Life Insurance Alternatives Deck (32):

 What were some of the problems of disability policies written in the early days of the history of these programs?

  • early contracts used a flat rate structure, applying the same rate to all ages
  •  missing underwriting safeguards that are common today, such as a maximum age beyond which benefits cannot be received.


Types of disability income in the public sector (6)

  • a. Social Security (SSDI/SSI)
  • b. Workers’ compensation
  • c. Veterans’ benefits
  • d. State retirement systems (disability features)
  • e. State-mandated (short-term) plans
  • f. Public sector benefits changes on the horizon


Types of disability income in the private sector (5)

  • a. Sick leave
  • b. Short-term disability (STD)
  • c. Long-term disability (LTD)
  • d. Integrated disability
  • e. Voluntary disability


Elements in plan design

  •  1. Group size
  • 2. Age
  • 3. Preexisting conditions
  • 4. Gender
  • 5. Occupation
  • 6. Other plan design considerations
  • 7. Funding
  • 8. Limiting exposure
  • 9. Disability management


What are the five (5) conditions that must be met to qualify for Social Security disability income (SSDI)?

  • (1) The person is insured. Generally, this means the person has worked under Social Security for at least five of the last ten years before disability. 
  • (2) The person is under the age of 65.
  • (3) The person has been, or is expected to be, disabled for at least 12 months or has a disability that is expected to result in death.
  • (4) The person has filed an application for disability benefits. 
  • (5) The person has completed a five-month waiting period or is exempted from this requirement.


Is based on a person’s taxable earnings averaged over the number of years worked before becoming eligible  for benefits.

Primary Insurance Amoint (PIA)


 The Social Security disability benefit generally equals the worker’s __________ as defined by Social Security

Primary Insurance Amount  (PIA)



 Old-Age, Survivors, and Disability Insurance


the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.

 OASDI definition of disability


 About ______ of the applications for disability benefits under the Social Security program are approved

one third, 1/3


The SSDI program is funded by both _________ while the SSI program is funded through __________. 


As for eligibility, nearly all workers are eligible for disability income under the ____ program. The ____ program, however, is a need-based program that makes cash payments to disabled individuals who fall under designated income thresholds 

  • employers and employee contributions
  • general revenue of the federal government


  • SSDI
  • SSI


  • SSDI
  • SSI

  • Social Security Disability Income
  • Supplemental Security Income



Members of the military are provided with a noncontributory pension plan that provides for retirement after ___ years of service. A member who is disabled before retirement is eligible for veterans’ compensation if the disability is ________.

  • 20
  • service connected


are established by the individual states usually as a substitute for the OASDI program from which state and local governments may opt out if they have programs of their own. These programs frequently have a disability component to protect disabled members.

 public employee retirement systems (PERS) programs


 The four important features of the disability portion of the PERS programs are:

  •  (1) the eligibility point for disability benefits varies from immediate up to five years of service
  • (2) the benefit levels frequently are based on a service-type formula
  • (3) benefits usually are paid to the age of 65 
  • (4) the definition of disability usually is permanent and total disability, similar to that of Social Security.


 the compulsory state (6) disability income programs

  • California
  • Hawaii
  • New Jersey
  • New York
  • Rhode Island
  • Puerto Rico

have modest programs that provide or require employers to provide benefits for shortterm disabilities (STDs) to all workers.


There are three major benefit approaches in the private sector to address group disability concerns

  • sick leave
  • Short-term disability. STD
  • Long-term disability. LTD


 Employers often provide a program that continues an employee’s full salary for time missed when ill. It usually covers a relatively short period of, say, ten days, and most often is funded by the employer

Sick Leave


designed to pick up after sick leave for employees who have been ill a certain number of days or were in a non-job-related accident. The waiting periods before benefits begin will vary among employers. The waiting periods along with the levels of income replacement tend to be structured to discourage malingering. Most plans pay a portion of income up to 26 weeks.

STD income benefits


 plans usually provide income replacement after 13 or 26 weeks under a two-part definition of disability.

  • The first part of the definition applies to the initial two years that LTD benefits can be paid and concerns the employee’s own occupation.
  •  The second part of the definition usually covers the period after the initial 24 months; and benefits continue to be paid until retirement age as long as the employee is unable to engage in any work or occupation for which he or she is reasonably fitted byeducation, training or experience. The percentage of income replaced is normally a percentage of gross salary.

Long Term Disability (LTD)


 tax treatment of short-term benefits

 payments are considered wages and are subject to income, Social Security and unemployment taxes, provided that the premiums are paid by the employer or with pretax dollars by the employees.


are subject to those taxes when the premiums are employer paid. In the circumstances where the employees paid for a disability plan with their own after-tax (post tax) dollars, benefits are tax free.

Long Term Benefits


What are common replacement ratios for

  • (a) short-term disability (STD) and
  • (b) longterm disability (LTD) income plans?

  •  (a) Most STD plans replace between 50% and 66.6% of income. Some plans determine benefits as a percentage of take-home pay. 

  • (b) Benefits under LTD plans vary. While benefits rates ordinarily range from 50% to 80% of gross predisability salary, the majority of plans offer a 60% replacement rate.


is a popular way for companies to manage their disability programs and is seen as having the potential for real savings. By paying attention to an employee’s on-the-job injury as well as his or her nonoccupational risk, this coverage can promote an organization’s productivity and competitiveness by integrating disability plan designs to offer a single point of entry to the benefits process for employees, making coverage more seamless.

 Integrated disability coverage


those insurance products offered by the employer and fully paid for by employees.  Has increased in popularity, as workers better understand disability risks.

Voluntary coverages


Group size as a factor in  disability income plan design

  • individuals and extremely large groups tend to produce the highest incidence of disability.
  • Small numbers and antiselection (adverse selection) play a significant role in incidence in small groups
  • lower level of employer contact and control are the attributable factors for large groups.

Many LTD carriers may require at least ten participants in a group plan and apply individual underwriting to small groups


Age as a factor in  disability income plan design

 Age has a direct correlation to the incidence of disability, and the age of a group is the key factor in determining its disability income rates. Not only do younger workers experience fewer incidences of disability than do older workers, they also have greater motivation for both rehabilitation and retraining.


 Preexisting condition exclusion clauses in LTD plans are used to

 minimize the risk of antiselection


 Explain how gender and occupation are related to claim frequency in disability income plans.

  • Women have a higher incidence of disability than do men at younger ages but a lower incidence at older ages.
  • The relationship between occupation and claim frequency is less delineated, and claim frequency varies from one occupation to another. Blue-collar workers, for example, face more physical hazards on the job


 What factors should employers consider in funding LTD income benefits?

  •  (a) Size of the employee group. The high predictability of experience in a large group is important in evaluating the risk of any self-insured or partially self-insured plan.
  • (b) Structure of the plan. An LTD plan should be structured to make its exposure more predictable. For example, the employer might consider self-insuring only the first two years of a claim.
  • (c) Stop-loss insurance. When employers have special design components, stop-loss insurance is a good option. For example, stop-loss insurance can be applied to one or a small number of highly paid employees with very high maximum benefits.


requires employers to use an accrual method instead of a pay-as-you-go method for liabilities associated with self-funded disability plans (and other welfare plans). Therefore, employers contemplating a self-funding arrangement should consider the financial impact of recognizing accrued LTD expenses as opposed to just paying premiums to an insurance carrierand avoiding ___ requirements.

 Financial Accounting Standard No. 112 

(FAS 112)


 Disability income benefits provided under ________ often apply in lieu of participation in the Social Security disability income system with equivalent replacement ratios and claim approval rates.

state retirement systems