Chapter 14: Disability Income Insurance

Question 1

Short term disability plan

Answer 1

Short-term disability income plans provide benefits for a limited period of time, usually 6 months or less.

Question 2

Long term disability

Answer 2

Long-term disability income insurance
provides extended benefits (possibly for life) after an employee has been disabled for a period of time, frequently 6 months.

Question 3

sick-leave plan

Answer 3

Sick-leave plans (often called salary continuation plans) are usually uninsured and generally fully replace lost income for a limited period of time, starting on the first day of disability. In contrast, short-term disability income insurance plans usually provide benefits that replace only a portion of an employee’s lost income and often contain a waiting period before benefits start, particularly for sickness.

Question 4

Common Eligibility Requirements for Group Disability Income Insurance

Answer 4

• Be a member of a covered class of employees.
• Work full-time.
• Be actively at work.
• Satisfy any probationary period.
• Show any required evidence of insurability.
• Authorize withholding of any required employee contributions.

Question 5

Under certain circumstances, disability income benefits are not paid even if an employee satisfies the definition of disability. Common exclusions under both short-term and longterm disability income contracts specify that no benefits will be paid:

Answer 5

• for any period during which the employee is not under the care of a physician
• for any disability caused by an intentionally self-inflicted injury
• unless the period of disability commenced while the employee was covered under
the contract
• if (or to the extent that) benefits are payable under workers’ compensation or
similar laws

Question 6

Typical Benefit Periods

Answer 6

Short-term plans—13 weeks or 26 weeks subject to a 1- to 7-day waiting
period for sickness

Long-term plans—2 years to life, subject to a 3-month or 6-month waiting
period

Question 7

Long-term disability income benefits are usually coordinated with benefits provided under
the following:

Answer 7

• Social Security
• workers’ compensation laws
• temporary disability laws
• other insurance plans for which the employer makes a contribution or payroll
deduction
• pension plans for which the employer has made a contribution or payroll deduction to the extent that the employee elects to receive retirement benefits because
of disability
• sick-leave plans
• earnings from employment, either with the employer or from other sources

Question 8

Buy up plan

Answer 8

Supplementary plan

Question 9

Carve out plan

Answer 9

carve-out plans to provide benefits for certain
employees, typically key executives. For example, an employer might design one plan to
cover most of its employees, but it might cover top executives with another group plan
that provides enhanced benefits in the form of a larger percentage of earnings and a
more liberal definition of disability

Question 10

Rehabilitation and rehab provision

Answer 10

As an incentive to encourage disabled employees to return to active employment as soon as possible, but perhaps at a lower-paying job, most insurance companies include a provision for rehabilitation benefits in their long-term disability income contracts. This
provision permits the employee to enter a trial work period of 1 or 2 years in rehabilitative employment. During this time, disability benefits continue but are reduced by some percentage (varying from 50 to 80 percent) of the earnings from rehabilitative employment.

Question 11

Deductibility of disability contributions

Answer 11

Employer contributions for an employee’s disability income insurance are fully deductible to the employer as an ordinary and necessary business expense. Contributions by an individual employee are considered payments for personal disability income insurance and are not tax deductible.

Question 12

Fully Contributory Plan

Answer 12

Under a fully contributory plan, the entire cost of an employee’s coverage is paid by after-tax employee contributions, and benefits are received free of income taxation.

Question 13

Noncontributory Plan

Answer 13

Under the usual noncontributory plan, the employer pays the entire cost, and benefits are included in an employee’s gross income. Some persons who are permanently and totally disabled may be eligible for a tax credit, but this credit is relatively modest.

Question 14

partially contributory plan

Answer 14

Under a partially contributory plan, benefits attributable to employee contributions are received free of income taxation. Benefits attributable to employer contributions are includible in gross income, but employees may be eligible for the tax credit described previously.

Question 15

Total disability

Answer 15

Definitions of total disability fall into two broad categories: any occupation and own occupation.

Question 16

Any Occupation

Answer 16

With an any-occupation definition of disability, total
disability is defined as a condition that prevents a person from performing the duties of any occupation for which that person is reasonably suited by education, training, and experience

Question 17

Own Occupation

Answer 17

With such a definition, an insured is considered totally disabled if he or she is unable to perform the substantial and material duties of his or her regular occupation at the time of disability. Even if the person returns to work in another occupation, the insurer will still pay the full disability income.

Question 18

Modified own-occupation

Answer 18

One variation is to terminate benefits at any time that the insured returns to work in any gainful employment position for which he or she is suited by education, training or experience. However, partial or residual disability income benefits may become payable at this
time.

Question 19

Partial Disability

Answer 19

The inability to do some of the specific duties relating to a job. Its purpose is to pay limited benefits to an insured who is attempting to return to work after a minimum specified period of total disability. Typically, the benefit is equal to 50 percent of the basic total disability benefit and is only paid for a limited period, such as 3, 6, or 12 months.

Question 20

Residual Disability Benefits

Answer 20

Residual Disability Benefits. Partial disability benefits are not as common as they once were and have largely been replaced by residual disability benefits. Residual benefits focus on the loss of income rather than on the physical limitations of the disability. The benefits can be paid if the
insured returns to either full-time or part-time employment. Residual benefits continue until the end of the benefit period specified in the policy as long the insured continues to meet the definition of disability.

Question 21

Residual Disability Example

Answer 21

Herb is an attorney who previously earned $240,000 per year, or $20,000 per month. For several months, he was totally disabled because of a serious heart attack. Eventually, he was able to return to work on a part-time basis, at an annual salary of $150,000, or $12,500 per month. Herb suffered a residual loss of income of
$90,000 on an annual basis, or $7,500 on a monthly basis.

Question 22

presumptive-disability provision

Answer 22

Many disability income policies include provisions setting forth specific losses that qualify for permanent total-disability status. They are referred to as presumptive-disability provisions, because the individual is presumed to be totally disabled even if he or she is able to
return to work or gain employment in a new occupation.
A presumptive-disability provision generally includes loss of sight, loss of speech, loss of hearing, or the total loss of use of or the severance of both hands, both feet, or one hand and one foot.

Question 23

Recurring Disability

Answer 23

Most disability policies have provisions setting forth a specified period of recovery (usually measured by return to work) that automatically separates one disability from another. This period is typically either 6 or 12 months. For disability policies with a limited benefit period, it can be advantageous to have each relapse classified as a new disability— which then starts with a new benefit period—rather than a recurring disability.

Question 24

Ways to Keep Up with Inflation Before Becoming Disabled

Answer 24

• Purchase new policies periodically (requires evidence of insurability).
• Purchase a guaranteed insurability (guaranteed purchase) option.
• Purchase a rider that automatically increases the benefit amount periodically.

Question 25

Policies may exclude benefits for disabilities in one or more of the following situations:

Answer 25

• occurring while the insured is a member of the armed services • during the period an insured is incarcerated • arising from intentional self-inflicted injury • arising from attempted suicide • arising from the use of drugs or alcohol • sustained during the commission of a felony • caused by, contributed to, or which results from the suspension, revocation, or surrender of the insured’s professional license or certification

Question 26

Rehabilitation Provision

Answer 26

Perhaps the most common provision is a rehabilitation benefit. This provision is often rather general and states that the insurer, at the insured’s request, will consider joining in a program of rehabilitation. Even if a policy does not have a rehabilitation provision, the insurer may pay for rehabilitation benefits if it feels these benefits will lower the amount of a claim because the insured will return to work sooner.

Question 27

Transition Benefit

Answer 27

Some policies contain what is often referred to as a transition benefit. With such a provision, benefits continue to survivors for a short period after an insured’s death. The insured must have been receiving disability benefits at the time of death for a minimum period, often 24 months. The duration of the transition benefit is usually in the range of 3 to 6 months.

Question 28

Capital Sum

Answer 28

Some policies pay what is usually called a capital sum. This is a lump sum payable if the insured suffers a serious injury, such as the loss of sight in one eye with no possibility of recovery or the severance of a hand or foot above the wrist or ankle. It is payable if the insured survives the loss for a certain period, such as 30 days. The amount of the capital sum is typically either 6 or 12 times the policy’s basic monthly disability benefit.

Question 29

Incontestable

Answer 29

The laws of all states require that disability income policies contain incontestability provisions. Generally, the incontestable clause specifies that the policy will remain contestable for 2 years after the date of issue during the lifetime of the individual insured.

Question 30

Social Security Offset Rider

Answer 30

Many insurance companies offer an optional provision in the form of a Social Security offset rider that requires a separate extra premium to cover additional benefits payable when the individual is disabled under the base policy but does not qualify for Social Security disability benefits.

Question 31

return-of-premium rider

Answer 31

It refunds all or a portion of the premium paid if the insured’s claim experience is favorable. This is appealing to persons who are reluctant to purchase disability income policies because they feel they will get nothing if they pay significant premiums for many years and have no claims. However, its purchase may increase the cost of a policy by anywhere from 25 to 100 percent.

Question 32

pension supplement completion rider

Answer 32

It provides an additional benefit to fund retirement income for the applicant. Many persons allocate a part of their income to retirement funding. When they are disabled, this income may no longer be available and can be replaced by the rider.

Question 33

catastrophic benefit rider

Answer 33

It provides an additional benefit in certain situations in which in insured is so severely disabled that he or she is likely to incur significant extra expenses because of the disability. The events that trigger such a benefit vary among insurers but often include the insured having a significant cognitive impairment (such as Alzheimer’s disease) or a presumptive disability, or being a paraplegic or quadriplegic.

Question 34

Chance of becoming disabled

Answer 34

Any employee may miss a few days of work from time to time; however, there is a tendency to underestimate both the probability and the potential severity of disabilities that last for longer periods. At all working ages, the probability of becoming disabled for at least 90 consecutive days is much greater than the chance of dying. About half of all employees will have a disability that lasts at least 90 days sometime during their working years, and one out of every ten persons can expect to be permanently disabled before reaching age 65.

Question 35

Which definition of disability is more restrictive: Social security or individual disability policy

Answer 35

The Social Security definition of disability is more restrictive than that in most individual or group insurance policies.

Question 36

Limitation of benefits to salaried employees

Answer 36

Long-term disability plans often limit benefits to salaried employees, because claims experience has traditionally been less favorable for hourly paid employees.

Question 37

Disability resulting from pregnancy

Answer 37

It was once common for disabilities resulting from pregnancy to be excluded. Such an exclusion is now illegal under federal law if an employer has 15 or more employees.

Question 38

Most sick-leave plans are coordinated with social insurance programs.

Answer 38

True

Question 39

Group disability income contracts typically specify that no benefits will be paid unless the employee is under the care of a physician.

Answer 39

True

Question 40

Group long-term disability income contracts often exclude benefits for disabilities that result from preexisting conditions.

Answer 40

True

Question 41

Group STD waiting periods are typically how long

Answer 41

Group short-term disability income contracts typically have no waiting period for disabilities that result from accidents, but a waiting period of 1 to 7 days for disabilities that result from sickness.

Question 42

Benefits from a fully contributory group disability income insurance plan are not included in a recipient's gross income.

Answer 42

True

Question 43

Key employee disability policies

Answer 43

Benefits from key employee disability policies are payable to the business entity when the insured key employee is disabled. These policies are not designed to provide continuance of salary for the key employee.