INSURANCE 101: Health Insurance Portability and Accountability Act (HIPAA)

Enacted in 1997, the Health Insurance Portability and Accountability Act, also referred to as HIPAA, provides for the portability of group insurance between employer group insurance plans and from an employer-sponsored plan to an individual policy if the individual becomes self-employed.

HIPAA includes several common components, one of which is that a new employer must offer continual coverage to a new employee if the employee is switching from a prior employer’s coverage and was insured for at least the previous 18 months on the prior group plan.

Another component of HIPAA includes its length of coverage.  Insurance portability through HIPAA is mandated for 63 days between employment periods to allow sufficient time for an employee to switch insurance coverage. Individual insurance through self-employment is considered portable from group insurance as well.

INSURANCE 101: The Mental Health Parity and Addiction Equity Act

As defined by the Centers for Medicare & Medicaid Services, the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) is a federal law that generally prevents group health plans and health insurance issuers that provide mental health or substance use disorder (MH/SUD) benefits from imposing less favorable benefit limitations on those benefits than on medical/surgical benefits.

MHPAEA originally applied to group health plans and group health insurance coverage and was amended by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the “Affordable Care Act”) to also apply to individual health insurance coverage.

The US Department of Health and Human Services (HHS) has jurisdiction over public sector group health plans (referred to as “non-Federal governmental plans”), while the Departments of Labor and the Treasury have jurisdiction over private group health plans.

Insurance 101: Taxation of Life Insurance Benefits

Favorable Tax Treatment of Personal Life Insurance and Annuities

The Internal Revenue Service administers and regulates taxation on life insurance, annuities, endowments and other retirement funds, including individual retirement accounts.  Having a basic understanding of the various taxes involved with these contracts is important in understanding their structure and how they qualify (or don’t qualify) for favorable tax treatment by the IRS.

Knowing how taxation is levied on each type of contract can be understood through how the money within these contracts is exchanged.  When a ‘taxable event’ occurs, the IRS levies an ordinary income tax on the money being exchanged as these events result in actual income being earned on behalf of a policyowner or beneficiary (based on the death benefit payout) and distributed as income payments.

Policy Funding and Accumulation
Neither life insurance nor annuity premiums are tax deductible for any type of life insurance policy or annuity, except for a percentage of an individual’s contribution in an individual retirement account or individual retirement annuity.

Interest earned on a life insurance policy is part of the policy’s ‘cash value accumulation,’ and is considered deferred income, taxed only when policy funds are distributed from the investment.  Allowing interest to grow at a compounded rate without taxation over the policyowner’s lifetime provides a much greater return on the invested funds.

Similarly, while in the accumulation period, an annuity accumulates earnings on a tax-deferred basis since funds are reinvested into the annuity and not distributed to the policyowner.  Again, the annuity accumulates cash value through principal and earned interest and is considered deferred income, tax-deferred until the fund annuitizes and begins distributing income to the annuitant.

Cash Value Increases
Compared to most investments which are taxed as ordinary income on an annual basis, life insurance provides individuals a means of tax-deferred growth.  In addition, most investment distributions are taxed as ordinary income to the beneficiary of the contract in the event of the contract owner’s death.  Life insurance, in comparison, provides the policyowner’s beneficiary with a tax-free distribution of the death benefit. 

Although most individuals purchase life insurance to provide future financial protection for their survivors’ well-being, it provides an attractive return on investment, in addition to receiving favorable tax treatment, and can be misused as a ‘tax shelter’ for funds that should otherwise be taxed as earned income. 

To curb the increase in life insurance as an investment vehicle and tax shelter, Congress has created a set of tests for a life insurance policy to qualify for a tax advantage and avoid the tax-shelter scenario.

CVAT vs. GPT

Cash Value Accumulation Test (CVAT)
Using the cash value accumulation test, the policy’s cash value must not exceed the amount that would be required as a lump-sum premium to fully pay off the policy based on the policy’s face amount, based on the age of the insured.

Guideline Premium Test (GPT)
Using the guideline premium test, the policy’s premiums cannot exceed the amount that would be required to fully pay off the policy based on the policy’s face amount, as well as the age of the insured.

The primary difference between the cash value accumulation test (CVAT) and the guideline premium test (GPT) is that the CVAT pertains to cash value limits relative to the policy’s death benefit, while the GPT pertains on premium limits relative to the policy’s death benefit.  If the cash value or premiums paid exceed the amount allowable under either test, the policy is no longer considered life insurance and is taxed the same as an investment (as ordinary income).

Again, these tests are guidelines to ensure that a policy continues to qualify as life insurance and receive favorable tax treatment.  If a policy does not pass one of the two tests required by the IRS, it is not considered to be true life insurance and is taxed the same as a non-qualified investment plan; although, most insurers provide notice to their policyowners before such an event occurs to avoid this taxation issue.

While most individuals never contribute amounts high enough to require the use of these tests, the IRS uses these tests to prohibit investors from potentially exploiting the tax advantages associated with true life insurance.

Dividend Returns
Dividends paid out to participating policyowners in a mutual life insurance contract are considered to be a reimbursement of premium paid to the insurer and are paid back on a tax-free basis; however, any interest paid to policyowners in addition to the premium reimbursement is considered to be income and is taxable.

Policy Loans
Another tax advantage associated with life insurance is the ability to withdraw funds in the form of a policy loan without being taxed.  Since a loan must be paid back, including accrued interest, it is not taxed; however, if the policyowner surrenders his or her policy, an income tax is levied against any gain in the policy’s loan value amount. 

If the policyowner dies before repayment of the loan, the policy’s death benefit is reduced by the amount of outstanding loan and accrued interest, with the remainder lump sum being tax-free for the beneficiary (unless a recurring payment option is selected). 

Policy Settlement Options

Policy surrenders
In the event that a policyowner surrenders his or her policy to the insurer, proceeds equaling the premium paid into the policy are tax-free, while policy surrender proceeds that exceed the cost of the policy are taxable by the IRS.  Any pre-tax premium payments and interest earned before forfeiting the plan are taxable as earned income.

Accelerated benefits and Viatical settlements
Under current laws, as long as a policyowner is considered to be chronically or terminally ill, both accelerated benefits and policy proceeds from a viatical settlement are paid out on a tax-free basis.

Death Benefit Proceeds
Death benefit proceeds are paid income tax-free to a policy’s beneficiary if it is paid out as a lump-sum amount.  If the beneficiary elects to receive continual income payments, or ‘installments,’ from the death benefit, instead of the lump-sum amount, only the interest that accrues from the principal is taxed as ordinary income to the beneficiary, but not the actual death benefit amount.

Group Life Insurance
Group life insurance includes certain tax advantages for businesses as a means of promoting group insurance for employees.  Premiums paid by the employer are tax deductible for the employer as a form of business expense.

In a group life policy, employee premium contributions are not tax deductible; however, employees do not need to report their employer-paid premiums as income as long as their policy coverage is $50,000 or less.  This is due to the fact that policy premium payments by the employer are not considered income to the employee up to the first $50,000.  If, however, the policy coverage exceeds $50,000, the employee is taxed on any excess premium above this limit, as this amount is considered taxable annual income.

Group policy death benefit proceeds are similar to individual policies where the benefit is tax-free if taken as a lump-sum by the beneficiary.  If installment benefits are chosen by the beneficiary, any interest earned on principal is considered earnings and is taxed accordingly.

Values Included in an Insured’s Estate
Upon the death of an insured individual in a life insurance policy, federal and state inheritance estate taxes are mandated for policy proceeds that are included in the estate of the insured. 

To avoid this estate tax, the insured can transfer ownership of his or her life contract to the designated beneficiary, but the transfer must be completed at least three years before the death of the insured.  Under the ‘three-year look back’ rule, the IRS can still levy estate taxes on the insured’s estate if a transfer of ownership to the beneficiary occurs within three years of the insured’s death.

INSURANCE 101: Omnibus Budget Reconciliation Act (OBRA)

Enacted in 1989, the Omnibus Budget Reconciliation Act, also referred to as OBRA, extends COBRA continuation benefits from 18 months to 29 months for disabled employees at the time of the qualifying event or who become disabled during the first 60 days of COBRA coverage who do not already qualify for 36 months under COBRA.

The Omnibus Budget Reconciliation Act (OBRA) also clarified Medicare as an ‘entitlement’ program which allows eligible Medicare recipients to sign up for Medicare coverage before becoming disqualified and thus losing continuing health coverage through COBRA or OBRA.

INSURANCE 101: Consolidated Omnibus Budget Reconciliation Act (COBRA)

Enacted in 1985, the Consolidated Omnibus Budget Reconciliation Act, also referred to as COBRA, extends group health coverage to former employees and their families for up to 18 or 36 months after termination of employment. Under this federal law, an employer group must consist of at least 20 employees.

The premium rate under COBRA remains the same for the terminated individual as it was while the individual was covered under the group policy; however, the terminated employee typically begins paying the entire premium, often paying more than when he or she was covered under the group policy.  Often times this increase in payment is confused for an increase in the premium rate, but in actuality, the increased amount paid by the individual is a result of the employer ceasing contributions to the individual’s premium once he or she is terminated from group coverage. Under COBRA, the terminated employee is responsible for paying the entire premium rate for his or her policy.

Terms and Limitations of COBRA
Qualifying for COBRA occurs when the employee, spouse, or dependent child becomes ineligible for coverage under the group insurance. Examples include family coverage after the death of a covered employee, termination of employment or reduction of hours under full-time status, Medicare eligibility, legal separation spousal coverage, child ineligibility on the group plan, or if the employer declares bankruptcy and employment ends. Employee termination resulting from misconduct does NOT qualify under COBRA.

A qualified beneficiary is considered to be anyone covered under the group policy the day before the qualifying event occurs and normally includes the employee, spouse, and dependent children.

A written eligibility notification, also known as a Notification Statement, must be given to employees, their spouses and any other dependents on the policy by the employer when the employee group becomes eligible for COBRA coverage, or when a qualifying event occurs.  Federal law requires a 60-day period to elect COBRA coverage, after which the employee is no longer eligible.

The purpose of continuation coverage is to provide time for the terminated employee to either apply for new coverage under a new group plan or apply individually (or become eligible for Medicare).

Qualifying Events for 18 Months of COBRA

• Termination of employment (most common)
• Hours of employment are reduced

When an employee’s position within a company is terminated, or when an employee’s hours are reduced below the minimum required to be eligible through the employers’ group policy, he or she is removed from the company’s group health policy.  The additional 18 months provided under COBRA provides this employee with time to find new coverage.

Qualifying Events for 36 Months of COBRA

• Coverage for surviving dependents of a deceased employee
• Former spouse of an employee after legal separation or divorce
• Dependent children that no longer qualify as dependent

COBRA coverage ends when a disqualifying event occurs such as failure to pay premium, Medicare entitlement, or once new insurance is issued.

INSURANCE 101: Pregnancy Discrimination

Enacted in 1973 as a result of the Civil Rights Act, the Pregnancy Discrimination Act, prohibits employers with fifteen (15) or more employees, as well as all state and local government employees, from discriminating against pregnant women in regards to childbirth or related medical conditions.

Women who are pregnant or are affected by pregnancy-related medical conditions are covered under this law.  As an exception to this law, costs associated with abortion are not required to be covered, unless the life of the mother is endangered.

Under this law, pregnant employees must be able to continue to work for as long as they are able to perform their work duties, and employers are prohibited from requiring any set period of time off after childbirth before allowing the woman to return to work.

Employer-sponsored health insurance must cover expenses for pregnancy-related conditions on the same basis as for other medical conditions and cannot require any additional or increased deductible amount.  Employers must provide the same coverage for the spouse of a male employee as they do for the spouse of a female employee.

INSURANCE 101: Family and Medical Leave Act (FMLA)

Enacted in 1993, the Family and Medical Leave Act, also referred to as the FMLA, provides ‘eligible’ employees with the ability to take an unpaid leave of absence of up to twelve (12) workweeks during any 12-month period for certain qualified medical, family and military reasons.  An employee becomes eligible for FMLA protection upon being employed by the same employer for at least one (1) year and has worked for 1,250 hours over the previous 12 months.

Under this Act, employers are required to maintain the employee’s health coverage under the employer’s group health plan as well as any other employment benefits in the absence of the employee.  In addition, an employer must accept an employee back to the company after a qualified FMLA period of absence for the same or an equivalent job position as before taking such leave of absence.

The Department of Labor provides 12 weeks of unpaid, job-protected coverage under FMLA for the following reasons:

• The incapacity of the employee due to pregnancy, prenatal medical care or child birth as well as to care for the employee’s child after birth, or adoption
• A serious health condition that makes the employee unable to perform the essential functions of his or her job
• To care for the employee’s spouse, child or parent who has a serious health condition

As defined under the FMLA, a ‘serious health condition’ is an illness, injury, impairment or physical or mental condition that involves either an overnight stay in a medical care facility, or continuing treatment by a health care provider for a condition that either prevents the employee from performing the functions of the employee’s job, or prevents the qualified family member from participating in school or other daily activities.

Enforced by the Department of Labor, all State and Federal agencies and employers, as well as private employers with 50 or more employees within 75 miles of the employer must provide such employment protection.  Eligible employees are responsible for providing sufficient information and documentation pertaining to a need for a leave of absence and should provide advance notice, when possible, of 30 days before needing to take such leave from employment.

INSURANCE 101: Taxation of Health Insurance

Taxation of Individual Health Insurance

Medical Expense Insurance Premiums and Benefits
Medical expenses that are covered through an insurance policy, such as an operation or the cost of services for a doctor’s visit, are considered ‘reimbursed’ medical expenses and cannot be deducted from a policyholder’s annual income.

Medical expenses that are not covered through an insurance policy, such as policy premiums, deductibles, copays, coinsurance amounts, and medical expenses not reimbursed through the policy, are considered ‘unreimbursed’ medical expenses.

Unlike reimbursed medical expenses which cannot be deducted, unreimbursed medical expenses can be deducted only if the policyholder’s annual unreimbursed medical expenses exceed 10% of his or her adjusted gross annual income.  If he or she exceeds this 10% threshold, only the excess of 10% will be considered tax deductible.

Example 1

Tim’s unreimbursed medical expenses equal $4,500 and his adjusted gross income for the year is $50,000.  Based on his adjusted gross income, he would not be able to deduct any unreimbursed medical expenses because he did not exceed the 10% or $5,000 ($50,000 x 10% = $5,000) threshold.

Remember, if the policyholder’s annual unreimbursed medical expenses do not exceed 10% of his or her adjusted gross annual income, none of the unreimbursed medical expenses are deductible.

Example 2

Tim’s unreimbursed medical expenses equal $4,500 and his adjusted gross income for the year is $40,000.  Based on his adjusted gross income, he would exceed the 10% ($40,000 x 10% = $4,000) threshold and would be able to deduct $500 ($4,500 – $4,000 = $500) of his unreimbursed medical expenses.

Note: Individuals born before January 2, 1950 can deduct annual unreimbursed medical expenses that exceed 7.5% of their adjusted gross annual income, as opposed to 10% for individuals born on or after this date.

Medical expense policy benefits are received tax-free by the insured; however, it is important to note that medical expense benefits cannot exceed actual medical expenses incurred by the insured.

Long-term Care Insurance Premiums and Benefits

Both medical expense and long-term care policy premiums are considered medical expenses, and are included in annual deductions when meeting the 10% or 7.5% unreimbursed medical expense thresholds.

LTC benefits are received income tax-free by the insured up to the amount of incurred expenses.  Any benefits exceeding the actual costs by the insured are considered taxable, as is the case under a fixed benefit LTC policy when daily benefits payable exceed daily expenses incurred.

The 10% and 7.5% expense limits apply to medical expense and long-term care policies, but do not apply to disability insurance.

Disability Insurance Premiums and Benefits

Premiums paid for individual disability insurance are not tax deductible from a policyholder’s annual income; however, disability income payments are received income tax-free by the insured and are usually expressed as a percentage of the insured’s pre-disability income amount.

Disability benefits cannot exceed pre-disability income levels and are often paid out as a percentage of the insured’s actual pre-disability income amount to encourage the individual to return back to work as soon as possible to reach his or her full pre-disability earnings.

Individuals who are considered chronically ill must be re-certified as such by their insurer on an annual basis to continue to receive disability benefits on a long-term basis.

Taxation of Group Health Insurance
Employer-based group health insurance represents the majority of the health insurance in America.  Many employers provide health insurance in the form of medical expense coverage, LTC and disability income policies for employees as a benefit of employment.

Group Medical Expense Insurance Premiums and Benefits

Employee-paid premium contributions in a group medical expense policy are not tax deductible; however, employer-paid premium contributions in a group policy are not taxable to the employee and are not included in an employee’s annual income, thus lowering the employee’s taxable income.

Employee medical expense benefits are received income tax-free, but benefits cannot exceed actual expenses.

Similar to personal excess medical expenses, if an employee’s annual unreimbursed medical expenses exceed 10% of his or her adjusted gross annual income (7.5% for individuals born before January 2, 1950), any unreimbursed medical expenses that exceed this 10% (or 7.5%) are deductible from the employee’s annual income.

Group Long-term Care Insurance Premiums and Benefits

Employee-paid premium contributions in a group long-term care policy are not tax deductible; however, employer-paid premium contributions in a group policy are not taxable to the employee and are not included in an employee’s annual income, thus lowering the employee’s taxable income.

LTC benefits are received income tax-free by the insured up to the amount of incurred expenses.  Any benefits exceeding the actual costs by the insured are considered taxable, as is the case under a fixed benefit LTC policy when daily benefits payable exceed daily expenses incurred.

Similar to personal excess LTC expenses, if an employee’s annual unreimbursed LTC expenses exceed 10% of his or her adjusted gross annual income (7.5% for individuals born before January 2, 1950), any unreimbursed LTC expenses that exceed this 10% (or 7.5%) are deductible from the employee’s annual income.

Group Disability and AD&D Insurance Premiums and Benefits

Employee-paid premium contributions in a group or franchise disability or AD&D policy are not tax deductible; however, employer-paid premium contributions are not taxable to the employee and are not included in an employee’s annual income, thus lowering the employee’s taxable income.

Employee AD&D benefits are received income tax-free; however, an employee’s disability income (DI) benefits are received income tax-free in proportion to the benefits that represent the employee’s premium contributions.  This means that the employee’s disability income benefits are taxed as income to the employee in proportion to the benefits that represent the employer’s premium contributions to the policy.

As an example, If an employer pays 100% of the group disability insurance premium for its employees (100% employer contribution), then benefits are 100% taxable as income to the employees; if however, the employer pays 50% and the employee pays the other 50% of the premiums, only the portion of benefits that is attributed to the employer’s premium payment is taxable as income to the employee.  Although employees’ premium contributions are not tax deductible from annual income, their 50% paid portion of disability income benefits is received income tax-free.

As a final example, if the employees contribute 100% of the premium payments toward their group disability policy, then 100% of the disability income is received income tax-free for the employees.

FICA Taxation
As is the case with ordinary income, employees are also responsible for paying Social Security FICA taxes on the portion of disability income earned under the DI policy that was funded by the employer’s premium contributions for a 6 month period following the beginning of the DI benefit period, since this portion is considered to be earned income by the employee and would otherwise be taxed as part of the employee’s payroll under FICA.

Group Sponsor Taxation

Employer Taxation
Employer-paid premium contributions for group medical expense, disability and AD&D policies are all deductible as a business expense for the company because they serve as otherwise ordinary income that would be paid to the employee.  Except for cafeteria plans or flexible spending accounts, LTC policies are also deductible as a business expense for the company.

Small business overhead expenses (BOE) are tax deductible as a business expense whether it is a self-employed sole proprietorship, partnership, or corporation.

Self-Employed Taxation
Self-employed individuals, sole proprietors, and partnerships can deduct 100% of their annual unreimbursed medical expenses, however, disability insurance taxation rules apply the same as they do for individual DI policies (taxable premiums and tax-free benefits).

Key Person Taxation
In regards to a ‘key person’ disability income policy or a partnership ‘buy-sell’ disability policy, since the business is providing protection for itself against the loss of one of its key executives or members, the company’s premiums are not tax deductible as a business expense; however, benefits are received income tax-free to the business.

Taxation of Health Spending Accounts

Health Savings Account (HSA)
An HSA is a popular type of medical expense savings account is used both personally, as well as in a group health policy to help control premium costs and to provide better management of an individual’s health needs.   Pre-tax employer contributions, as well as after-tax personal contributions are deposited into the HSA, enabling it to grow tax free just like an ordinary savings account.  Pre-tax contributions are taxable as income upon distribution followed by the reimbursement of any after-tax contributions.

Employer contributions to an employee’s HSA are excluded from an employee’s taxable income, thus lowering the employee’s taxable income.  In addition to the tax-deferred earned interest of an HSA, an insured can withdraw funds from the account on a tax-free basis for ‘qualified’ medical expenses such as unpaid hospital or Medicare expenses, doctor’s fees and prescription costs, as well as other costs outlined in the HSA contract.

Unqualified withdrawals from an HSA before the age of 65 years old are subject to ordinary income taxation, as well as a 20% ‘early withdrawal’ penalty tax.  HSA distributions made once the individual reaches 65 years old are only subject to ordinary income taxation for the year in which they are received by the insured.

Health Reimbursement Account (HRA)
The IRS levies similar taxation on an HRA as it does with an HSA.  Employer contributions to an employee’s HRA are considered to be tax deductible as a business expense for the company because they serve as otherwise ordinary income that would be paid to the employee.

Employee-paid premium contributions in an HRA are not tax deductible; however, employer-paid premium contributions in an HRA are not taxable to the employee and are not included in an employee’s annual income, thus lowering the employee’s taxable income.  Employee benefits received through the HRA are received income tax-free.

INSURANCE 101:Consumer-Driven Health Plans (CDHP)

With the evolution of the healthcare marketplace, many insurers have begun to shift the risk of health insurance from the insurer to the insured.  Essentially, this means that insurers are requiring insured members to take control of their healthcare decisions.  This approach is becoming more commonplace in reducing or eliminating unnecessary procedures and expenses and improving the overall quality of health care.

Franchise Insurance
Health insurance can be provided for groups too small to be considered a group by most state standards.  Generally, this type of insurance is marketed to the employees of a small business or members of an association or professional society.  It provides members with a lower premium group policy with similar provisions for each member; however, each member can customize certain benefits based on his her needs.

Small Employer Plans
Groups of usually 50 or less employees have become expensive to insure with the rising costs of health care.  Recent developments by several states include mandating insurance to be offered to small employers, limits on waiting periods, and guaranteed coverage regardless of pre-existing health concerns.  Plans cannot be canceled due to a rise in health claims, but can be canceled if premium is not paid by the employer.

Health Reimbursement Arrangement (HRA)
Considered a dominant form of consumer-directed health plans, an HRA is a high-deductible health plan associated with a tax favored saving account that an employer creates for each employee.  The plan allows members to use the savings account to pay for health care costs including deductibles, coinsurance, and other covered health care expenses.  Any unused funds in the employer account is usually rolled over and saved for the next year.

IRS 125 Plan (Cafeteria Plan)
Also known as a Flexible Benefits Plan, it is a benefit program under Section 125 of the Internal Revenue Code that offers employees a choice between permissible taxable benefits, including:  cash, and nontaxable benefits such as life and health insurance, vacations, retirement plans and child care. Although a common core of benefits may be required, the employee can determine how his or her remaining benefit dollars are to be allocated for each type of benefit from the total amount promised by the employer. Sometimes employee contributions may be made for additional coverage.

Flexible Spending Account or Arrangement (FSA)
Accounts offered and administered by employers that provide a way for employees to set aside, out of their paycheck, pre-tax dollars to pay for the employee’s share of insurance premiums or medical expenses not covered by the employer’s health plan. The employer may also make contributions to a FSA. Typically, benefits or cash must be used within the given benefit year or the employee loses the money. Flexible spending accounts can also be provided to cover childcare expenses, but those accounts must be established separately from medical FSAs.

Medical Savings Account (MSA)
Savings accounts designated for out-of-pocket medical expenses. In an MSA, employers and individuals are allowed to contribute to a savings account on a pre-tax basis and carry over the unused funds at the end of the year.

FSA vs. MSA
One major difference between a Flexible Spending Account (FSA) and a Medical Savings Account (MSA) is the ability under an MSA to carry over the unused funds for use in a future year, instead of losing unused funds at the end of the year.  Most MSAs allow unused balances and earnings to accumulate.  Unlike FSAs, most MSAs are combined with a high deductible health insurance plan.

High Deductible Health Plan (HDHP)
A type of health insurance plan that is associated with an HSA or MSA and is named after the typically high deductible amounts attached to such plans.  Deductible amounts determine the policy’s premium rate, so the higher the deductible, the lower the premium payment.

Health Savings Account (HSA)
A Health Savings Account (HSA) is a tax-advantaged medical expense savings account that works in conjunction with a qualified high deductible health insurance plan (HDHP) as a means of helping policyholders reduce their overall healthcare costs. It is a relatively new type of savings account that has replaced Medical Savings Accounts (MSAs).

Often set up by employers for their employees or by the self-employed, an HSA provides tax advantages for both contributions to the account and withdrawals from the account for qualified medical expenses that are not covered by the HDHP. It is established through a bank or other financial institution often provided to the policyholder by the insurance company responsible for the HDHP. Withdrawals from the account are made through HSA debit cards or financial institution checks associated with the HSA.

HSA Contributions
In addition to the policyholder, anyone can contribute to a policyholder’s HSA including the policyholder’s employer, family members, and friends.  Contributions made by the policyholder are 100% tax deductible up to his or her annual self-only or family contribution limit.  Contributions made by family members or friends must be payable to the account holder, who in turn, deposits it into his or her HSA account.

Employer contributions and self-employed income contributions are deposited into an HSA with pre-tax dollars and is not considered to be taxable income for the employee or self-employed policyholder.  These pre-tax contributions are not treated as income to the policyholder and therefore are not included in his or her annual taxable income amount.  Unlike a Health Reimbursement Arrangement (HRA), the HSA policyholder controls the account and once deposited into the HSA, contributions become the property of the policyholder, even if he or she changes employment.

Annual Contribution Limits (Self-Only & Family HDHP Coverage)
All contributions, regardless of its source, count towards the annual maximum limit. Annual limits have increased each year since the inception of the HSA in 2004.  The 2018 contribution limit for self-only coverage is $3,450, up from $3,400 in 2017, and for family coverage the 2018 contribution limit is $6,900, up from $6,750 in 2017. Unlike an FSA, funds in an HSA roll over each year and accumulate over time.

Policyholders age 55 and older may make additional annual deposits, called ‘catch-up’ contributions of up to $1,000 on top of the annual contribution limit.

Funding an HSA is similar to funding an IRA in that contributions are invested and grow tax-free over time.  An HSA is also portable from one HDHP to another and if the policyholder dies, the HSA is transferable to the policyholder’s spouse tax-free.  If no spouse exists, the account will pass on to a named beneficiary designated at the inception of the policy; however, unlike transferring to a spouse, the HSA will end on the date of the policyholder’s death and the distribution of the account will be taxed as income to the beneficiary. If no beneficiary exists at the time of the policyholder’s death, the account will be distributed to the policyholder’s estate and taxed as such.

HSA Withdrawals (Qualified vs. Unqualified)
HSA funds are withdrawn from the account through an HSA debit card or checking account that is provided at the time the account is established. Prior approval to withdraw funds is not required and may be done so anytime the policyholder needs to access the account.

HSA withdrawals are either qualified or unqualified, meaning the funds can be withdrawn tax-free or subject to income tax (and an additional penalty tax).

Tax-free qualified medical expenses are those that are not already covered by the HDHP such as the policyholder’s deductible, coinsurance and co-pay expenses.  Several additional medical expenses that are payable using HSA funds include bandages, birth control pills, chiropractor visits, dental treatments, eye exams and elective surgery, stop-smoking programs, prescriptions and certain over-the-counter drugs, as well as many other HSA-qualified medical expenses. However, the HDHP’s policy premium is not a qualified HSA expense.

Withdrawals for non-qualified medical expenses, as well as any other withdrawal, is taxed as ordinary income, and if withdrawn prior to age 65, is also subject to a 20% early withdrawal penalty tax. After age 65, withdrawals made for non-qualified expenses, or any other withdrawals, are taxed as ordinary income but are not subject to the 20% penalty tax.

Self-Insured Plans
Large corporations, labor unions and other qualified groups ‘self-insure,’ paying the more common and less expensive medical expenses incurred by their employees or members to reduce the premium costs involved with providing insurance.  However, an employer usually covers employee claims up to a predetermined stop-loss amount, at which point an insurance company pays the remainder of the claims. This stop-loss is intended to limit the employer’s responsibility for an excessive amount of claims. Although claims are funded by the employer, the employer may still use an insurance company for administrative purposes and claims processing, known as Administrative Services Only (ASO) or Third Party Administrator (TPA). Employees often pay premiums in the form of dues to their employer or group.

Multiple Employer Trust (MET)
Multiple employers within a similar industry or field join and receive health insurance from a series of trusts that are established and maintained to provide insurance to employees of multiple companies at a lower and more affordable rate.

In order to obtain coverage through a MET, an employer must become a member of and subscribe to a trust that brings together a number of small, unrelated employers for the purpose of providing group health coverage.  An insurer or third party administrator (TPA) creates and administers the insurance for the various employers, and all claims are paid through the series of trusts that the insurance was established through.  METs can also be set up as noninsured, meaning that no insurance company is used and claims are paid directly from the trusts.

Multiple Employer Welfare Association / Arrangement (MEWA)
Similar to a MET, a ‘MEWA’ is the technical term under federal law that is used to define any arrangement not maintained pursuant to a collective bargaining agreement (other than a state-licensed insurance company or HMO) that provides health insurance benefits to the employees of two or more private employers.

Essentially, these types of arrangements are usually established by trade associations or other similar groups of employers to combine the purchasing power of several employers in an effort to self-insure employees.  This allows smaller employers with a means of offering more affordable health coverage through participation in the MEWA.

HMO VS PPO: Which is best for you

Although HMOs and PPOs are both considered to be service providers, they differ in many respects:

• HMOs require members to choose a primary care physician (PCP) to authorize and coordinate the member’s medical needs and are limited to a much smaller geographical area in which to choose from available HMO providers
• PPO insurers do not require a PCP and provide a larger network of physicians and hospitals, usually encompassing providers within several states, or throughout the country
• HMOs pay a fixed monthly capitation fee per member to medical providers in exchange for services rendered to HMO members, regardless of the amount of services rendered
• PPO insurers pay a fee-for-service to medical providers for actual services rendered, in comparison to a fixed capitation fee
• HMOs are highly regulated by both the states and federal government
• PPO insurers are less stringently regulated by the government

INSURANCE 101: Health Insurance Basics

One of the biggest debates in America today involves our nation’s increasing need for managed health care, the costs associated with these needs and the current systems in place to manage these costs.

Managed Health Care
Managed Care is defined as any healthcare system that is established to manage the costs of medical care through a network of physicians, hospitals urgent care centers and home health care providers that are contracted with an insurer, or the government, to provide medical services to members within the network.

Managed care is provided through various companies and associations in the form of health insurance.  While some companies provide members with limited health insurance coverage, most insurance companies provide comprehensive health insurance coverage to members, as well as offer financial incentives for members who utilize the providers attached to the network.  Health care is also managed through various programs provided to qualified U.S. citizens by state governments, as well as the federal government.  Examples of managed care include:

Commercial Insurers (Stock and Mutual companies)

• Blue Cross and Blue Shield companies
• Health maintenance organizations (HMOs)
• Preferred provider organizations (PPOs)
• Exclusive provider organizations (EPOs)
• Multiple Employer Trusts (METs)
• Multiple Employer Welfare associations (MEWAs)

Quite simply, both Health and Disability Insurance provide financial protection against loss resulting from illness or bodily injury.  It is designed to indemnify an insured for medical treatment or financial loss in the event of an accident, illness, or disease.  The indemnity is the amount of coverage payable, based on the policy’s schedule of benefits, to the health care facility and doctors to help cover medical expenses incurred by the insured.

Whether referred to as ‘accident and sickness’ insurance, ‘accident and health’ insurance, or simply, ‘health’ insurance, our nation’s medical needs and costs are managed through a complex relationship between medical care providers and the financial entities that fund such services.

Several types of health insurance coverage exist and are marketed by insurers throughout the country to individuals as well as employers.  Health insurance can be purchased through a commercial insurer, such as a stock, mutual, or multi-line company.  It can also be purchased by a service provider, such as a Blue Cross Blue Shield company, an HMO or a PPO insurer.  Health care coverage can also be self-funded through a business, or provided by state or federal programs such as Medicaid, Medicare, OASDI and other state or federal programs.

Essentially, though, all health care can be categorized into three broad areas:  ‘medical expense’ insurance, ‘disability income’ insurance and ‘accidental death and dismemberment’ insurance.

Categories of Health Insurance

Medical Expense Insurance
Considered to be an ‘indemnity’ type of contract, medical expense insurance, simply known as ‘health insurance,’ provides financial coverage for medical expenses resulting from injury and illnesses. Typical expenses covered under a medical expense insurance plan include hospitalization and surgical fees, doctors’ fees, prescription costs, nursing care, and any other rehabilitative costs associated with one’s health.  Purchased individually or as part of a group, through an employer, medical expense insurance is a necessity!

Disability Income (DI) Insurance
Considered to be a ‘valued’ contract, the primary purpose of disability income insurance is to replace a certain percentage of an insured’s income that would otherwise be lost due to a debilitating event that prevents a normal wage-earner from earning normal wages.  In other words, if an insured individual becomes disabled and cannot work to earn his or her normal wages as a result of the disability, this type of insurance will pay a guaranteed amount of benefit on a regular basis to help maintain the insured’s standard of living during the disability period.

Accidental Death and Dismemberment Insurance (AD&D)
As with disability income insurance, AD&D is also considered to be a ‘valued’ contract.  If death or bodily dismemberment were to occur as a result of an accident to the insured, an AD&D insurance policy would pay the insured, or the designated beneficiary, a lump-sum benefit.  The Principal Sum (face amount) pays out if death occurs, and the Capital Sum (a percentage of the principal sum) pays out if dismemberment or loss of vision occurs.

The Changing Economy and Insurance
Health insurance has long been associated as a benefit of one’s employment, providing health coverage for employees and their families.  Signing up for a health insurance plan was as simple as filling out employment papers during company orientation.  Less attention was focused on medical expenses as they occurred because insurance covered them for the most part.

Unfortunately, today’s society of benefit cutbacks and high unemployment has led many people to have to find health insurance for the first time.  Due to its high cost, many employers no longer provide health insurance coverage, leaving employees to find it in the open market. As many people have already experienced, getting health insurance outside of one’s employer is completely different than as a benefit through the employer.

Though the economic outlook for many companies looks bleak in a bad economy, the insurance industry remains a vibrant and growing industry, both in profit and employment.  The insurance industry can be looked at as ‘recession proof’ because, no matter how bad the economy gets, people still need insurance.  The demand for insurance is actually higher in a bad economy due in part to the need to change plans because of rising insurance premiums, or the loss of group insurance, or worse, the loss of a job.

In any event, insurance is still needed – even more so – to provide financial protection against medical expenses and healthcare costs.  Again, many people have already lost, or soon will lose their health coverage and will be looking for a replacement policy.  As such, the employment outlook for health and life insurance agents, according the U.S. Bureau of Labor Statistics, is projected to increase 12% over the next 7 years and will be in demand as the population continues to increase in size, as well as age.

Determining Health Insurance Needs
Health insurance coverage can vary greatly between insurers and the plans they market.  For example, some health plans provide members with coverage for doctor’s visits through a co-payment, while other plans require the member to pay all expenses until the policy’s deductible is fulfilled before benefits are paid.

One of the benefits of the individual insurance market, as opposed to an employer’s group insurance plan, is the wide variety of products available to consumers from which to choose in order to find the correct plan based on plan benefits and associated premium costs.

The responsibility of an insurance agent is to listen to and understand the needs of the client and to help choose the policy that best fits those needs.  A family with children will have different insurance needs than an older couple looking towards retirement.  While many questions arise when choosing a health insurance policy, a few general questions should be reviewed including:

Which insurance company should be chosen?
Everyone has their own unique needs, so choosing an insurance policy to fit those needs is important to ensure proper coverage is provided.  Insurance can be purchased through one’s life insurer, a Blue Cross and Blue Shield company, an HMO, or a PPO.  Or if qualified, health insurance can be provided through government-sponsored programs, such as Medicare, Tricare, Medicaid, or Social Security Disability.

How much coverage is adequate and affordable?
In addition to selecting the provider, it is important to understand the depth of coverage provided by each health plan.  Some plans cover much more expense than others, and some plans require the insured to cover a larger amount of cost, while other plans cover more cost with less out-of-pocket expense for the insured.  It is also important to realize that a policy’s cost to the insured increases with its level of benefits; therefore, it is wise to choose a policy that is within one’s budget and can be maintained throughout the calendar year.

What are the policy’s Limits and Exclusions?
It is also important to understand the limits on what a policy insures against, as well as the potential exclusions.  Understanding the policy’s limits and exclusions is one of the most important aspect of choosing the correct health insurance policy.  As an insurance agent, it is of the utmost importance to collect and review an applicant’s medical conditions and history in order to properly promote an insurance policy for what it can and cannot do for the insured.

Additional Sources of Coverage to Consider
In addition to the private health and disability insurance policies available for individuals to purchase, employers and other qualified groups often provide health and disability insurance coverage for their employees or members of the group.

Federal and state health and disability programs are also available to individuals who qualify for coverage based on age, health, financial status or military involvement.  The following sources of coverage should be considered when determining a family’s health or disability insurance needs:

Employment related benefits

• Workers’ Compensation
• Social Security
• Medicare
• Medicaid
• Tricare

With the variety of health and disability insurance policies to consider, it is important to understand the types of benefits, associated costs and potential qualifications required when choosing the correct health insurance policy to fit the needs of the client, be it an individual, family, group of employees, retirees or individuals with special medical needs.

INSURANCE 101: Disability Insurance Defined

While health insurance is designed to protect against financial loss in the event of medical expenses, it does not replace lost income during a period of disability.  Health insurance does not cover monthly mortgage payments, auto and home utility expenses, food or any other daily consumption expenses.  Disability is not just physical.  Loss of work and financial security are just as detrimental as becoming physically disabled.

Medical emergencies such as heart attacks, strokes, and physical accidents can cause victims to become dependent on the help of others for extended periods of time and can cause a significant gap in employment and wage earning.  These short or long-term medical incapacity scenarios, coupled with the high costs of medical care necessary to recover from such events are the main causes of financial loss.

Simply referred to as ‘DI’ insurance, Disability Income Insurance is considered to be ‘income protection,’ and is commonly referred to as ‘income replacement insurance.’  In its most basic form, this type of insurance is designed to provide continual, periodic (monthly) payments to an insured in the absence of regular working income, due to a qualified disabling illness or injury.

Disability can vary from total to partial, as well as from temporary to recurrent or permanent, and benefits are paid accordingly.  It is important to understand the provisions, features and uses of DI insurance, and how it is used for both personal financial security, as well as to protect businesses against the financial loss of a key executive.

Eligibility and Rate Factors
A disability insurance policy is underwritten just the same as a health insurance policy would be underwritten in that the insurer rates the applicant based on his or her age, gender, health (past and present), job classification and his or her personal avocations.  In addition, a disability insurance policy considers the income requirement of an individual in determining premium rates and benefit amounts.

The eligibility and premium rates associated with higher risk applicants who might be in poor health or involve high risk professions or avocations, are determined by the insurer’s underwriting guidelines.

Eligibility and premium rates are also based on the characteristics of the DI policy, such as its probation and ‘elimination,’ or waiting periods.  DI insurance benefit payments typically require a brief elimination period before benefits are paid to the insured.

Delayed Disability
Due to the fact that a disability can develop after an injury occurs, most DI insurers provide for a ‘window’ of time, usually 60-90 days, following an injury in which the insured is still qualified for DI benefits.

Cause of Disability
Disability income insurance benefits are only payable as a result of an accident or illness.  An important factor that helps determine whether or not benefits are to be paid to an insured is based on how the disability actually occurred.  A DI policy is written with either an ‘accidental means’ or ‘accidental bodily injury’ provision in determining whether or not benefits are payable to an insured:

Accidental Means Provision
This provision states that the cause of an injury must be unexpected and accidental.  For instance, if an individual is partaking in a behavior that is considered risky by an insurer (such as rock climbing), and an accident occurs, benefits will usually not be paid.

Accidental Bodily Injury Provision
In comparison, this provision states that the result of an injury must be unexpected and accidental.  So in the rock climbing incident, if the insured falls and their policy contains this provision, chances are they will be provided benefits.

Based on various court decisions, most DI policies are now written using the accidental bodily injury provision because it is not as restrictive as the accidental means provision.

Characteristics of Disability Insurance

Impairment Riders
Disability insurance excludes benefits for injuries or illnesses that are considered to be pre-existing by the DI insurer.  Depending on the condition, the DI insurer can also deny an individual from receiving any coverage.  However, by adding an exclusionary rider called an ‘impairment’ rider to the policy, the DI insurer can specifically exclude the disqualifying condition in order to still allow the individual to qualify for the DI policy.

An impairment rider can be very beneficial because it enables certain individuals to purchase disability insurance (with the exclusionary rider) when normally the individual would be refused coverage (due to the pre-existing condition).

Minimum and Maximum Benefits
DI policies contain both a minimum monthly benefit amount to ensure that the insured receives at least a minimum monthly benefit payment, as well as a maximum monthly benefit amount, regardless of its percentage of lost income to the insured.

Notice of Claim
As with health insurance, in a DI insurance policy, a claimant has the same 20 days in which to submit notice of a DI claim.  In addition, most insurers require an insured to submit a ‘Notice of Continued Disability,’ usually every 6 months during the disability period, as well.

Proof of Loss
In a DI insurance policy, proof of loss follows the same time frame as prescribed by the National Association of Insurance Commissioners, requiring a claimant to provide proof of disability within 90 days of loss, or if due to extenuating circumstances, at the latest, within 1 year.

Physical Exam Requirement
If deemed necessary, a physical exam can be requested by the insurer to ensure the validity of the insured’s disability claim.  This can also be requested as often as the insurer feels necessary throughout the disability period, with exam expenses covered by the insurer.  Again, this is to ensure the continued validity of a disability claim, and is requested as needed to verify the validity of the DI claim.

Proof of Earnings
In addition to providing the insurer with proof of loss, the claimant must also provide prior and current earnings to the insurer so that the DI benefit amount accurately reflects actual lost earnings.  This proof is usually provided through the claimant’s Federal Income Tax returns or other official records deemed acceptable by the insurer.

Limitation of Benefits
Disability income insurance is not designed, nor does it replace 100% of an individual’s pre-disability income.  Insurers place limits on the amount of disability benefits, most commonly providing a pre-determined payment amount that is less than what would equal 100% of the individual’s normal income on an individual basis, or in a group policy, by providing a percentage, typically 60-70%, of an individual’s pre-disability income level.  Often, the lower amount of income encourages a quicker return to work; however, it is also of importance for the insurer to curb potential insurance fraud.

Stages of DI Coverage

Stage 1 – Probationary Period
The probationary period is the initial stage of DI coverage which begins on the DI policy’s effective date, and often lasts for 15 to 30 days. This period is established to prevent pre-existing conditions that might require immediate benefits, and therefore, no benefits are payable during this period. This period applies to sickness, but does not apply to injuries that result from an accident.

Stage 2 – Elimination Period
Also known as a ‘time deductible,’ the elimination period begins immediately after a disability begins, in which time benefits are not payable to the insured.  This elimination period is similar to a health policy’s deductible amount in a medical expense plan because both require an insured to incur some expense before benefit payment begin.  In the case of disability, coverage does not provide for lost income until after the elimination period has expired.

A DI policy’s elimination period is chosen by the insured based on the policy’s premium charged.  The longer or shorter the policy’s elimination period, the lesser or more expensive the policy’s premium are for the insured.  Elimination period choices range from 30 days to 1 or 2 years; however, the most common DI elimination period is 90 days.

Stage 3 – Benefit Period
The benefit period represents the period of time in which DI benefits are payable to the insured.  Benefit periods are classified as either ‘short-term’ or ‘long-term.’  Similarly, the longer the benefit period, the higher the policy’s premium.

Benefit amounts are paid to the insured as a percentage of actual pre-disability income, and payment amounts are calculated based on the Current Income Level of the insured at the time of policy issuance.  This can be of concern for individuals who expect to increase their income in the future; as a result, most insurers provide for additional coverage to be purchased through an ‘added rider’ to the DI policy to ensure the correct benefit amount based on the insured’s increase in income.

Total Disability
In order for an insured to receive benefits for lost income under a DI policy, he or she must be deemed ‘totally disabled,’ according to the terms and conditions stated in the disability policy.  Determined by one of two methods, becoming total disabled is required element in order to receive DI benefits through a disability insurance policy.

Based on whether or not the insured individual has lost the ability to earn gainful employment, each insurer defines total disability according to an employee’s ‘own occupation’ or, in some cases towards ‘any occupation,’ or any type of gainful employment.

Methods to Determine Total Disability

‘Own’ Occupation
Benefits are payable upon the inability of an insured to complete the job requirements at his or her own occupation.  The majority of DI policies follow the ‘own’ occupation method of determining total disability.

‘Any’ Occupation
Although not as common, a more restrictive method of determining the total disability of an insured is based on the insured’s ability to perform the duties of ‘any’ occupation in which the insured can be trained to perform such duties.  Under this method, if the insured can be trained and employed through an alternative occupation, regardless of wage differences, he or she would not qualify for DI benefits under this method.

Policy Wording Regarding Professional Specialties
In most ‘own’ occupation policies, benefits are paid to the insured in the event that he or she cannot perform the specific duties of his or her recognized professional specialty in which he or she had previously earned income.

Total Temporary vs. Total Permanent Disability
Again, to qualify under total disability, an insured must meet the definition of total disability as defined in the DI policy.  Once qualified, based on the medical outcome, an insured will either continue to receive DI benefits up to the maximum amounts stated in the policy; or over time, he or she will heal, at which point the insured is no longer considered to be totally disabled.

A ‘temporary’ total disability qualifies an insured for total disability benefit levels, but is expected to last temporarily with the insured’s recovery over time.  A ‘permanent’ total disability qualifies an insured for total disability benefit levels and is expected to be paid up to the maximum time limit available under the policy due to both the total and permanent disability of the insured.

Presumption of Disability
Common with most DI policies, the Presumption of Disability Provision states that an insured is automatically determined to be totally disabled in the event that, as the result of an accident, he or she becomes blind, deaf, loses his or her speech, or suffers the loss of two (2) or more limbs.  Presumptive disability benefits are paid as a lump-sum to the insured, even if he or she is able to continue working.

Accident Only vs. Sickness Only Disability
While most DI policies provide coverage for both injury and illness related disability claims, some policies are more restrictive in nature, and distinguish between DI benefits to either injury or illness related injury claims, but not both.  Though not as common, these types of DI policies are also referred to as ‘total accident’ or ‘total sickness’ policies due to the specific coverage that is provided to the insured.

Short-Term Disability
Coverage includes a short (30 days or less) elimination period and provides benefits usually lasting around 6 months to 2 years with disability benefit income amounts equal to 60-70% of the insured’s pre-disability income.

Long-Term Disability
Coverage includes a longer (90 days to 6 months) elimination period and provides benefits lasting several years, up to age 65.  It also provides benefit amounts equal to 60-70% of the insured’s pre-disability income.

Recurrent Disability
Disabilities can and often do reoccur.  Aware of this fact, disability insurers provide provisions that account for such recurrences.  To avoid a new elimination period, a recurrence of the same disability is covered under the previous disability claim if it occurs after such period ends.

Dependent on each insurer, recurrent eligibility periods range from 90 days to 6 months after the initial benefit period ends.  Any recurrence thereafter is covered under a new disability claim, requiring the insured to go through a new elimination period.

Partial (Residual) Disability Benefits
Partial disability is defined as the ability to perform one or more normal job duties, but not all normal duties, or the inability to continue to work on a full-time basis, resulting in a decrease in an individual’s normal income level due to a disability.  Partial disability typically follows a total disability benefit period, though it can also manifest itself due to a disability that does not qualify for total disability coverage.

Also called ‘residual’ disability, partial disability can be temporary or permanent, depending on the insured’s disabling condition.  As is the case for total disability, a residual disability can be permanent, with benefits paid out to the insured up to the policy’s benefit limits, or the insured can heal over time, thus only requiring temporary benefits.

An insured qualifies as partially disabled when he or she can perform one or more of his or her normal occupational tasks and duties, but cannot perform all of the normal duties performed before the disability, thus resulting in a decrease in income.  The partial disability payout is intended to help replace a portion of this lost, and is usually calculated as a percentage of the total disability payout amount.

Most insured individuals return to work on a part time basis after their total disability benefit period expires. Similarly, because of this decrease from full time to part time, an individual’s income also decreases to match the part time schedule.

Illness generally does not qualify as partial disability except for major medical events such as heart attacks, strokes or other ‘disabling’ illnesses.  An individual can become totally disabled, and then, over time heal enough to qualify as only partially disabled, thus allowing the ability to contribute (though at a lesser amount) to his or her wages.

Partial disability typically pays either a ‘flat’ 50% of the total disability benefit amount, or it provides residual benefits that match the actual loss of income by the insured.  Unlike the flat benefit method, many DI insurers now provide ‘residual’ disability benefits because it better matches pre-disability income to actual lost income.

Under a residual benefit policy, payments reflect the percentage amount of actual lost income, though most insurers do not provide DI benefits for earnings that account for less than 20-25% of pre-disability income.