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 RidersDisability 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 PeriodThe 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’ OccupationBenefits 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.
No comments:
Post a Comment