22 - 1copyright 2008, the national underwriter company standard provisions of individual disability...

22 - 1Copyright 2008, The National Underwriter Company

Standard Provisions of Individual Disability Income Insurance

What is it? Policy that provides benefits if the insured becomes disabled

Disability may result from accident or illness

The benefit is intended to replace the insured salary during the period of disability

The policy can be obtained through the individual’s employer or it may be purchased as an individual policy by the insured

Chapter 22Risk Management For Financial Planners


When it the use of this tool indicated? Important component of an individuals protection coverage A vital component for the self employed Statistics

Only 27% of American income earners have disability income insurance

82% of American workers either have no long term disability coverage or believe the coverage they do have is not sufficient




Advantages Policy will provide benefits equal to a percentage of the

insured’s salary for the duration of a benefit period as specified in the policy.

Provides a income for the insured to meet living expenses

Disadvantages Individually purchased polices can be expensive




Tax Implications Policy purchased by an individual with after tax dollars

Premiums are not income tax deductible Benefit payments are income tax free




Benefit features – Standard provisions Occupational definitions and applications

Total disability – “Own Occupation” definition Best definition from the policyholder standpoint Unable to perform the substantial and material duties of one’s own

occupation One could work in other field and still be considered totally

disabled and continue to receive full disability benefits Policy uses Own Occupation for the first several years After that, definition changes.

To continue to be classified as totally disabled the insured must not be working in an occupation reasonable suited by his/her education training or experience




Benefit features – Standard provisions (cont’d) Occupational definitions and applications (cont’d)

Partial disability Insure cannot perform some of his duties of his/her occupation, but

can perform others After a period of total disability, the insured can return to work and

perform some of his/her duties and the policy will pay a partial benefit (such as 50% of the total benefit)





Residual disability Pays a benefit based on the percentage of income lost 60% loss of income means benefits paid equal to 60% of the total

policy benefit per month Some policies use a “Sliding Scale” (Based on % of the full

benefit) If Income loss less than 20% - Policy pays $0 If income loss between 20% and 50% - policy pays 50% If income loss between 50% and 80% - policy pays

percentage loss If income loss greater than 80% - Policy pays 100





Recurrent disability Insured has been totally disabled Then insured ‘s condition improves and they recover If the insured suffers a subsequent disability within 6 months of

when the prior disability ended, then the insured does not have to satisfy a new elimination period

Benefit period The period of time when benefit payments are made Elected when the policy is purchased Typically 2 years, 5 years, to age 65 (or 67), lifetime The longer the benefit period, the more expensive the policy





Elimination period The time after disability begins until the disability income policy

begins paying benefits Typical choices are 30 days, 60 days, 90 days, 120 days, 180

days, 360 days, 720 days The longer the elimination period, the less expensive the premium Most common election is 90 days





Benefit amount The amount of disability benefits the insured will receive each month

in the event they become disabled In selecting a benefit amount, consider other sources of income

Social security disability Worker’s compensation Income earned by the spouse





Renewability Whether and at what premium the policy may be renewed Noncancelable

policyholder has the right to renew coverage at the same rate usually until age 65

Premiums will not increase These policies are more expensive than others without this

feature





Renewability (cont’d) Guaranteed Renewable

Similar to the noncancelable except the insurance company can increase the premium in the future

Increases cannot be made on an individual basis, but rather for all policies within a certain category or class

Conditionally renewable The insurance company imposes conditions that the

policyholder must meet in order to renew coverage Example – Policyholder must be employed full time in order

to renew coverage





Riders Waiver of premium

Policyholder can stop paying premiums once he/she starts receiving disability benefits

Premiums paid during the elimination period will be refunded as well

Alternatives Self insuring Purchasing a critical illness policy Social security disability benefits



22 - 1copyright 2008, the national underwriter company standard provisions of individual disability...

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