Unit 15 - Disability Income Insurance

Question 1

Pure Loss of Income / Income Replacement Contracts

Answer 1

An income replacement contract pays a benefit if the insured experiences a loss of income as a result of suffering a covered illness or injury.
If the insured can do part of the job this would pay the difference from what he/she makes now vs. what he/she made before.

Question 2

Presumptive Disability

Answer 2

Is a condition that automatically qualifies insureds for disability benefits whether or not they can work.
Conditions generally include:

• loss of or loss of use of any two limbs
• total and permanent blindness in both eyes
• total loss of speech
• total loss of hearing in both ears

Question 3

Physician Care Requirement

Answer 3

Some older policies required that the insured be confined to the house and under the treatment of a doctor. This is called medically defined disability.

Question 4

Benefits Monthly Indemnity

Answer 4

When an individual qualifies for benefits, disability income plans pay a monthly amount to make up for lost earnings due to the insured’s inability to work.

The benefit is referred to as an indemnity - it returns the insured to their original financial condition before the loss.

Question 5

Elimination Period / Waiting Period

Answer 5

• The time period an insured must be disabled before benefits begin. Like a time deductible.
• When the elimination period is satisfied, benefits begin and are not paid retroactively
• Elimination periods may be 30, 60, 90, or 180 days or longer, depending on the time period selected.
  
  • Longer would reduce the premium

Question 6

Benefit Period

Answer 6

Benefits are paid during the disability period or until the end of the specified period of time.

• Typical periods are 1 year, 2 years, 5 years, and to age 65
• The longer the benefit period, the higher the policy premium

Question 7

Waiver of Premium

Answer 7

This feature eliminates the need to pay permiums during any period of disability.

• Waives further premium payments after initial waiting period
• Refunds any premiums paid during the waiting period (usually 90 days)

Question 8

Additional Monthly Benefit (AMB) Rider

Answer 8

Government programs have long waiting periods.

The AMB rider pays an additional benefit amount with the regular monthly benefit for a limited period of time, usually 6 or 12 months.

Pays even if the insured receives government benefits.

Question 9

Social Insurance Supplements (SIS)

Answer 9

• The SIS rider is a monthly benefit.
• Fill gaps left by government programs
• Pays when social benefits are not being paid
• Makes up the difference between the government benefit and the amount of the rider
• Pays only during the policy benefit period

Question 10

Occupational vs Non-Occupational Coverage

Answer 10

• Occupational - both job related and non-job related
• Non-Occupational - only non-job related

Question 11

At-Work Benefits

Answer 11

Insurers offer reduced benefits for individuals who are impared, but not totally disabled, and return to work.

Question 12

Partial Disability Benefits

Answer 12

Means the person can perform some, but not all, of the essential duties of his/her occupation.

• Returns to work in a reduced capacity
• Usually pays 50% of total benefit
• Usually no longer than 3 to 6 months

Question 13

Residual Disability Benefits

Answer 13

Another alternative for partial disability, based on amount of income lost rather than 50% of the total disability benefit.

• Paid whether insured is able to work full or part time
• Benefit is based on reduction of income
• Pays as long as the reduction in income continues

Question 14

Recurrent Disability

Answer 14

This provision protects employees who return to work, but become disabled again for the same or related cause. If this situation occurs within a certain period of time, the insured is considered still disabled from the original disability and is not subject to a new elimination period.

Question 15

Cost-of-Living Adjustment (COLA) Rider

Answer 15

The benefit received by a disabled insured is increased authomatically to match increases in the Consumer Price Index (CPI).

Typically adjustments are made every 12 months.

Question 16

Future Increase Option (FIO) Rider

Answer 16

Allows insureds to buy additional amounts of disability income insurance coverage at stated future times without having to provide proof of insurability.

• Rate for additional coverage will be based on the insured’s attained age at the time of purchase, not age when policy was originally issued.
• Insured’s income must have increased
• No evidence of insurability is required
• Number to purchase option dates is limited, usually rider provides option dates every 3 years from ages 25 to 50.

Question 17

Relation of Earnings to Insurance Provision

Answer 17

The insurer can reduce the benefit paid to a disabled insured if the insured’s income is less than when they bought the policy.

• Insurer will base the amount of benefit on the insured’s average income over a previous 24 month period.

Question 18

Accidental Death & Dismemberment (AD&D)

Answer 18

The AD&D rider pays the principal sum, the full benefit, if the insured dies or loses two limbs or the sight in both eyes in an accident. The capital sum, one-half of the principal sum is paid if the insured loses one limb or sight in one eye.

Death benefit might be stated as a sum equal to 48 times the monthly disability benefit.

Question 19

Rehabilitation Benefit

Answer 19

Pays for vocational trainign to prepare insured for a new occupation when they are totally disabled and unabl to return to their normal occupation.

Pays as long as the insured is disabled and stays in the program.

Question 20

Medical Reimbursement Benefit (Non-Disabling Injury)

Answer 20

This benefit does not pay a disability benefit but instead reimburses the insured for medical expenses incurred to treat a non-disabling injury.

Question 21

Short-Term Disability (STD)

Answer 21

• These policies have shorter elimination periods, sometimes just a few days or none at all.
• Benefit period is normally 6-24 months
• Benefit amounts are generally 60% or 70% of the employee’s compensation

Question 22

Long-Term Disability (LTD)

Answer 22

• Designed to begin paying a benefit when the short-term disability benefit ends
• Elimination period usually the benefit period of the Short-Term Disability
• Benefit period are from 2 years up to age 65
• Benefits are usually with benefit payments from worker’s compenation and Social Security

Question 23

Key Person Disability Insurance

Answer 23

The key person’s economic value to the business is determined in terms of the lost business income that would occur to replace the key personal for an extended period of time.

• Benefit may be paid in lump sum or monthly installments
• Elimination period: 30-90 days
• Benefit period: 1-2 years

Question 24

Business Overhead Expense (BOE) Policy

Answer 24

The purpose is to cover certain overhead expenses that continue when the business owner / partner is disabled.

• Will cover business expenses: rent, taxes, insurance premiums, utility bills, and employee’s compensation (NOT the owner or partner’s salary)
  
  • The average eligible overhead expenses of the business determine the benefit amount
• Elimination period: 15-30 days
• Benefit period: 1 or 2 years

Question 25

Disability Buy-Sell Insurance

Answer 25

Can be used to fund an agreement to buy out the interest of a business owner or partner who becomes disabled and can no longer contribute to the business.

• Can be lump sum or monthly installments
  
  • monthly, usually the benefit period will not exceed five years
• Elimination period: 1 or 2 years
  
  • At the end of the elimination period the buyout is irreversible.

Question 26

Qualifying for Benefits (Social Security)

Answer 26

To qualify for Social Security benefits:

• Must have paid social security payroll (FICA) taxes to earn at least 6 credits during the last 13 quarters to be currently insured.
• The number of needed credits increases with age up to 62.
• Fully insured status is achieved when someon has paid into Social Security for 10 years, earning 40 credits.

Question 27

Social Security Benefits Available

Answer 27

• Person must have at least 6 credits in the last 13 quarters
• Number of credits required increases with age up to age 62
  
  • Fully insured earned 40 credits
• 5 month waiting period for benefits
• Not retroactive to cover first 5 months
• Disability must last 12 months
• Amount of benefit based upon the person’s Primary Insurance Amount (PIA)
• Spouse and children may receive benefits

Question 28

Worker’s Compensation

Answer 28

Benefits cover:

• medical treatment
• rehabilitation
• income lost due to disability or death

Question 29

The total Social Security family benefit amount is capped at a certain amount based on

Answer 29

The workers’ average earnings

Question 30

What is the most important factor in underwriting disability income insurance?

Answer 30

The insured’s occupation