Benefits and Provisions | Disability Income Insurance

Disability income insurance can solve the financial problem presented by disability. This type of health insurance provides monthly income benefits if the insured becomes unable to work to earn a living because of sickness or injury.

There are some logical restrictions placed on disability income insurance. To discourage malingering (faking an illness or disability to collect insurance benefits), insurers impose strict controls on the amount of disability income a person can receive. Generally, an insurer will restrict the amount of disability income benefit to something less than 100% of the insured’s gross income. Since the benefit paid from any policy on which the insured pays the premium is not taxed, insuring one’s net earned (after-tax) income is sufficient. Policy limits seldom exceed 70% of your gross income, since allowing more may violate the principle of indemnity.

Elimination Period

The elimination period, also called the waiting period, is the amount of time that must elapse after a disability begins, before benefit payments begin. Conceptually, the elimination period is similar to the deductible in other policies; the purpose in both cases is to keep claims, and thus premiums, at a minimum by requiring the insured to absorb relatively minor claims.

Benefit Period

Disability income policies contain a provision that spells out the length of time benefits will be paid. While almost any benefit period is available, it is most common that benefits are payable until the insured reaches age 65. Short-term policies are defined as having a benefit period of less than 2 years, while a long-term policy has a minimum benefit period of 2 years.

It is common for an insured to have two disability income policies (short-term and long-term). The short-term disability will typically have a waiting period of 7 days before coverage begins and pay the insured up to 13, 26, or 52 weeks. The long-term disability policy is designed to take over when short-term benefits end and to continue benefit payments for a specified period of years, to age 65, or for life.

A typical disability income policy will pay benefits when the insured becomes totally disabled. As the name implies, total disability is the inability to perform the duties of one’s occupation. There are two definitions of total disability; one is less restrictive than the other and, accordingly, is more expensive. The policy’s definition of disability is very important.

An “any occupation” policy defines total disability as the inability of the insured to perform any duties of any gainful employment for which he or she is suited by way of education, training, or experience. With this definition, a person must be so disabled that he/she cannot engage in any employment that they might reasonably be expected to perform.

The second, less restrictive definition of disability is known as “own occupation.” An own occupation policy defines total disability as the inability to perform any duties of one’s own occupation. It’s easy to see how this is less restrictive (to the policy owner) than the “any occupation” definition. Let’s assume a dentist buys a policy and subsequently loses a hand. The dentist will never again be able to perform his own occupation, but he could easily be expected to take on any number of other occupations. With an own occupation policy, benefits would be payable; an any occupation policy would not provide benefits in this case.

It is common for policies to combine these concepts and define a total disability as the inability to perform one’s own job for the first 2 years after onset of the sickness or injury and any job for which you are reasonably suited by education, training, or experience thereafter.

Definitions of disabilities

Other Definitions of Disability

Partial Disability

The recovery from many disabilities is such that a person may enter a period of partial disability before they fully recover. During this period, the person may be able to return to work on a limited basis. A policy with a partial disability provision will pay reduced benefits to the insured during this period. Partial benefits are typically limited to a brief period of time to discourage malingering. While it is more typical for a partial disability to follow a total disability, it is not uncommon for partial disability benefits to be paid at the onset of the disability.

Residual Disability

With residual disability provisions, benefits are tied to the proportion of earnings lost while the insured is disabled. Unlike the partial disability provision, which pays if the insured can only work limited hours, the residual benefit amount is based on the percentage of pre-disability income the insured is not receiving. Let’s assume an insured is able to return to work full time, but in a lessened capacity, earning only 60% of his/her pre-disability income. Under the residual disability provision, the policy might pay 40% of the total disability benefit (since the policy owner’s earnings have been diminished by 40 %).
The objective of the residual benefit is to encourage people to return to work, even on a partial basis, without fear that they are going to lose income. An important feature of residual benefits is that the policy owner can return to work in any occupation, even a low-paying job, without losing all disability income benefits.

Recurrent Disability

It is not uncommon for a disability to recur after the policy owner has seemingly recovered. If a disabled individual returns to work, and within 90 days suffers a relapse, it will be considered a continuation of the original disability and a new elimination period will not be imposed.

Presumptive Disability

In most cases, disability income benefits are payable only as long as the insured is under the care of a physician. It is common for an insurer to require any disabled insured to provide a physician’s statement regularly, supporting the continuing disability. There are some situations, however, in which the insured is presumed to be totally disabled by the nature of the disability. Examples of presumptive disability include the loss of sight, the loss of use of 2 limbs, or the loss of hearing and speech. In such cases, the insured is not required to provide continuing proof of disability.

A disability income policy may distinguish between a confining and a non-confining disability. A confining policy requires confinement of the insured in a hospital or other facility to be entitled to income benefits. Most policies are non-confining. If the insured meets the policy’s definition of disabled, there are no requirements as to confinement.

Types of disabilities

Disability income policies have varying definitions of “accident.” A policy with an accidental means clause will cover accidents only if the cause was unintentional. This can be a restrictive clause. For example, you are riding a bus that is pulling up to the curb but has not come to a complete stop. You elect to jump from the bus and break your leg. Since you intended to jump, if you owned a policy with an accidental means clause, you would not be covered. However, had you slipped and fallen off the bus, the act that led to your injury would have been unintentional and you would be covered.

Most policies contain an accidental bodily injury clause, which is less restrictive. Any injury that is the result of an accident is covered, even if what led to the injury was intentional.

Lesson Summary

Disability income insurance is designed to provide financial assistance if the insured becomes unable to work due to sickness or injury. Below are the key features and considerations of disability income insurance:

Restrictions on Disability Income Insurance:
- Benefits are typically limited to less than 100% of the insured’s gross income to deter malingering.
- Policy limits usually do not exceed 70% of gross income to adhere to the principle of indemnity.
Elimination Period:
- The waiting period before benefit payments begin after the onset of disability.
- Similar to a deductible, it aims to minimize claims and premiums by making the insured wait.
Benefit Period:
- Specifies the duration for which benefits will be paid.
- Most common benefit period lasts until the insured reaches age 65.
Types of Disability:
- Total Disability: Inability to perform one’s occupation, with variations like “any occupation” or “own occupation.”
- Partial Disability: Allows for reduced benefits during recovery.
- Residual Disability: Benefits are tied to the earnings lost while disabled.
- Recurrent Disability: Covers relapses of the original disability without imposing a new elimination period.
- Presumptive Disability: Provides benefits without requiring ongoing proof of disability for certain conditions like loss of sight or limbs.

Chapter Vocabulary

Definitions

Accidental Bodily Injury: Bodily injury resulting from an accident.
Accidental Means: An unforeseen and unexpected cause of an accident that results in an injury. The cause of the action and the result must be unintentional, or there will be no coverage.
Confining Disability: Requires confinement of the insured in a hospital, or in a sanitarium to be entitled to collect disability income benefits.
Disability: A physical condition that makes an insured incapable of performing one or more duties of his/her occupation, or, in the case of total disability, that prevents him/her from performing any other type of work for remuneration.
Disability Income: A policy designed to compensate insured individuals for a portion of the income they lose because of a disabling injury or illness.
Disability Income - Long-Term: Policies that provide a weekly or monthly income benefit for more than five years for individual coverage and more than one year for group coverage for full or partial disability arising from accident and/or sickness.
Disability Income - Short-Term: Policies that provide a weekly or monthly income benefit for up to five years for individual coverage and up to one year for group coverage for full or partial disability arising from accident and/or sickness.
Earned Income: Gross salary, wages, commissions, fees, etc., derived from active employment. This does not include non-earned income, such as income from investments, rents, annuities, insurance policies, etc.
Elimination Period: A period of time after the inception of a disability during which benefits are not payable (commonly referred to as the waiting period). An elimination period must be satisfied for each separate disability occurring.
Lifetime Disability Benefit: A provision in some disability income policies to recoup lost wages for the term of disability or the remainder of the insured’s life in case of permanent disability.
Malingering: Prolonging a disability in order to collect greater insurance benefits.
Partial Disability: An illness or injury that prevents an insured from working full time. Usually pays 50% of the total disability benefit.
Recurrent Disability Clause: A provision that specifies a period of time during which the recurrence of a condition is considered a continuation of a prior disability.
Residual Disability: In disability income insurance, a concept that has sometimes replaced partial disability in terms of determining what benefit will be paid. Uses a formula that requires the insured’s earnings to have dropped a certain percentage from prior to disability levels.
Total Disability: A degree of disability from injury or sickness that prevents the insured from returning to work. The actual wording of definitions varies by policy.
Waiting (Elimination) Period: The period of time between the beginning of the insured’s disability and the commencement of the period for which benefits are payable.