Individual and commercial insurance companies provide disability income coverage that provides a specified, periodic income replacement benefits to an insured that becomes unable to work because of an illness or an accidental injury.
Definition of Total Disability.
Each disability income policy specifies the definition of total disability that the insurer uses to determine whether a covered person is entitled to get the disability benefits.
Any Occupation: At one time the disability was defined as the state where the covered person becomes disable to perform any sort of occupation. Because of the strict sense of the definition most of the covered person will never be entitled to the benefits. Thus the insurance companies now use a more liberal definition.
Current Usual Definition: This provides that an insured is considered totally disabled if at the start of disability, the disability prevents him from performing the essential duties of his regular occupation. At the end of the specified period,
usually two or five years, an insured is considered as totally disabled if his disability prevents him from working at any occupation for which he is reasonably fitted by education, training, or experience. Policies that use this definition however may state that the insured will not be considered as disabled if he voluntarily returns to any occupation.
Own Previous Occupation: This definition which is generally included in individual policies rather than group policies, states that the policy will pay disability benefits if the insured becomes unable to perform the acts of her own previous occupation. Thus even if the insured starts working at any other gainful occupation different from his previous occupation, he is entitled to receive the benefits.
Income Loss: This definition is generally included in disability coverage known as income protection coverage. The definition of total disability for the insured states that the insured is disabled if he suffers an income loss for his disability. As a result, the insurer pays the benefit both while the insured is totally unable to work and while he is able to work but his disability has reduced his income. The policy specifies both (1) a maximum benefit amount that will be paid when an insured will be completely unable to work and (2) a method of determining the amount of lost income when the disabled insured is working.
Presumptive Disabilities: A presumptive disability is a stated condition that, if present, automatically causes the insured to be considered totally disabled; thus the insured will receive the full benefits even he resumes his original occupation.
This generally includes total and permanent blindness, loss of the use of any two limbs, and loss of speech or hearing.
Benefit Period.
Benefit period is time for which the insurer pays the disability income benefits.
Based on this the policy can either be classified into short term or long term.
Short-term group disability income coverage provides a maximum benefit period of less than one year; such coverage commonly specifies maximum benefit period of 13, 26, or 52 weeks. Long-term group disability income coverage provides a maximum benefit period of more than one year; the maximum benefit period commonly extends to the insured’s normal retirement age or to age 70.
Individual disability income coverage is seldom offered with a maximum benefit period of less than one year. Thus, short-term individual disability income coverage provides a maximum benefit period of one to five years. Long-term individual disability income coverage provides a maximum benefit period of at least five years. The benefit period in this case may extend until the insured reaches 65years of age; in some cases, benefits are provided for the insured’s lifetime.
Elimination Period.
An elimination period is the waiting period for which the insured has to be
disabled to receive the benefits. The elimination period reduces the cost for providing the benefits for disability that lasts for very short periods. Longer the elimination period shorter will be the cost of the coverage. The length of elimination period for both short and long-term individual disability income coverage last from 30 days to 6 months. Most short-term group life disability income coverage contains no elimination period for disability due to accidents and an elimination period of 1 week for disability for sickness.
Most long-term disability coverage has an elimination period of 30 days to 6 months.
Benefit Amount.
As a general rule, the benefit amount available through disability income
coverage is not intended to replace fully an individual’s predisability income. Instead the benefits are limited. Disability income amounts however should not be so low that the insured faces a drastic income loss. The insurer generally uses either of the following two methods to determine the benefit amounts. The methodology depends on whether the policy is a group policy or individual policy or on whether the policy is a short-term or long-term policy.
Income Benefit Formula: This is generally used for group disability income benefit policies. Here the insurer states the benefit as some percentage of the insured’s predisability income. The insurer considers all sort of disability income.
For group long-term disability income coverage the benefit generally amounts to 65-75 % of the predisability income. For example, the insurer may state that the insured will receive 70% of his predisability income and the benefits will be reduced if he receives disability income form any other sources. Group short-term disability income coverage has this percentage as 90-100%.
Flat Amount: This is generally used for individual policies. Here the insurer mentions a flat amount to be paid when the insured becomes totally disabled. The amount of the benefit depends on the insured’s earnings at the time he purchased the policy. But here the benefit does not depend on earnings form any other source. The insurer carefully limits the maximum benefit for which the insured can buy the policy. The insurer generally considers the following factors while setting up the maximum benefit from the policy:
-1. The amount of the applicant’s usual earned income, before tax.
2. The amount of the applicant’s unearned income, such as dividends and the interest, that will continue when the insured become disabled.
3. Additional income during disability, such as income benefits from group policy and government sponsored policy.
4. The applicant’s current tax bracket.
In general, the maximum amount of disability income benefit that insurer will provide is 50 to 70 % of his pre-tax earnings.
Supplemental Benefits.
We shall now describe certain supplemental benefits that are usually added to disability income coverage. These are either added automatically with the policy or are added as an option by paying extra premium for such benefits.
Partial Disability Benefits: In this case certain benefit is provided to the insured if he has partial disability—a disability that prevents the insured from performing certain acts of his own occupation or prevents him from being a full time employee of his present occupation. This amount is typically either a flat amount or often 50% of the total disability benefit. Using the formula method the benefit may vary depending on the insured’s loss of income due to partial disability.
Future Purchase Option Benefit: In case of flat benefit the insurer may provide a future purchase option, which grants the insured to increase the benefits as his income increases. The option is generally provided if the insured can show that his income will increase considerably in the future. However the increment of such benefits is limited. The insurer does not need to provide proof of insurability to increase the benefit amount.
Cost of Living Adjustment Benefit: COLA benefit states that the insured will provide the disabled insured a benefit amount that increases to reflect the increase in cost of living. Generally the increment depends on certain standard indices such as CPI.
Exclusion: Following are the exclusion criteria for the disability income benefits: -1. Injuries or sickness that result from war, declared or undeclared.
2. Intentionally self-inflicted injuries.
3. Injuries receive as a result of active participation in a riot.
4. Occupation-related disabilities or sickness for which the insured is entitled to receive income benefits under some group or government disability program.
Specialized Types of Disability Coverage.
These coverage are designed to provide benefits, other than loss in come if the insured gets disabled. In Chapter 4 we described that a closely held business will suffer from a financial loss if the key person or any of the partners dies. Likewise the business may suffer from a loss of income if the key person or any of the partners gets disabled.
Key Person Disability Coverage: This coverage provides benefits to offset the losses that a business suffers if the key person gets disabled. The benefit goes to the company.
Disability Buyout Coverage: This for the BSA. Here the benefits are provided to buyout the partner’s or owner’s interest should he become disabled.
Business Overhead Expense Coverage: Should the owner gets disabled, still he might incur expenses to operate his business. For example office rent, mortgage payments, etc. This coverage provides disability benefits to cope up with the overhead expenses. Insurers describe overhead expenses as the usual and necessary business expense including employee’s salary, rent, telephone, electricity, gas, and other expenses that are required to keep the business open.
Government-Sponsored Disability Income Programs.
United States: U.S. workers who are under age 65 and who have paid a specified amount of Social Security Tax for a prescribed number of quarter-year periods are eligible to receive Social Security Disability Income (SSDI). For this the disability is described as a person’s inability to work because of a physical or mental sickness or injury that have lasted or expected to last at least for one year or might lead to death of the insured. The monthly benefit is equal to the amount of retirement benefit that the person would have received. The benefit does not begin until the insured is disabled for 5 months. Hence approximately the benefits start after 6 months. The benefit continues up to (1) 2 months after the disability ends; (2) the insured dies; (3) the insured reaches 65 years of age when he becomes entitled to receive retirement benefits. The disability plan might also provide dependent benefits. However there is a limit to the maximum family coverage.
Canada: Short-term income benefits are available under the federal Unemployment Insurance Act. This is given to all workers who have worked for a specified no. of weeks in the preceding 52 weeks period. The benefit begins after a short waiting period if the absence from work is result due to an accident or sickness or pregnancy. The plan is financed by compulsory contribution of the employee and the employer. The employer can reduce his contribution by getting insured through private plans. In this case the private plans are the first payor. Long-term disability is available from CPP and QPP. To qualify the worker must (1) have made contribution for a stated period; (2) be under 65 years of age; (3) be afflicted with severe and prolonged disability. Severe disability prevents the worker from engaging himself into any gainful occupation and prolonged disability states that the disability is going to last long or might cause the covered worker’s death. The amount of the benefit depends on the worker’s predisability wage and his contribution to the plan. The benefit continues the disability is recovered, or till the insured reaches an age of 65 years or till he dies. Dependent children benefit is also present in these plans.