WHAT IS DISABILITY INCOME INSURANCE?

Disability income insurance provides benefits to replace lost income when an insured becomes unable to work because of illness and/or injury. Disability income insurance can be offered through a group policy, i.e., employer group or association group arrangements covering eligible employees or members, and may also be offered by means of individual policies issued directly to covered individuals. Disability income insurance benefits are generally based upon an insured’s actual earnings received from their occupation and maximum benefits are generally limited to a percentage of their gross salary or wages.

DEFINITION OF TOTAL DISABILITY

To qualify for benefits, an insured must meet the policy’s definition of disability in order for the claim to be approved. Common disability terms, provisions and definitions are:

Own Occupation

Generally, an “Own Occupation” disability definition provides benefits when an insured is unable to perform the regular and customary duties of their own occupation as a result of covered illness or injury. Short term disability income policies usually base benefits on an “own occupation” disability definition, and long term disability income policies usually base benefits on an “own occupation” definition during the first year or two of the initial disability period.

Any Occupation

Under an “Any Occupation” definition, an insured is generally considered eligible for benefits only if the insured is disabled to the extent that he or she is unable to perform the duties of any occupation for which he/she is qualified according to his/her education, training and prior experience. Long term disability income policies usually base an insured’s eligibility to receive continued benefits (after the first year or two) on an “any occupation” definition. For some, it is considerably more difficult to qualify for benefits when subjected to an “any occupation” definition instead of the more lenient “own occupation” definition.

Presumptive Disabilities

“Presumptive Disabilities” are conditions stated in the policy contract that, when present, automatically render and presume the insured to be totally disabled and, therefore, eligible for benefits regardless of whether they continue working. These conditions may include the loss of two limbs or total loss of sight, hearing or speech.

ELIMINATION OR WAITING PERIOD

The elimination period is a specified period of time, stated in the policy contract, following the beginning of disability during which benefits are not payable. A waiting period is similar to an elimination period; however, benefits are often retroactively paid to the beginning of the waiting period. The time period may vary from contract to contract and company to company. Generally, policies with longer elimination or waiting periods cost less than policies with shorter periods. Elimination or waiting periods may range from a few days to a year or longer.

BENEFIT AMOUNT

The benefits provided by disability income insurance are not intended to replace 100 percent of the insured’s pre- disability income. If income were fully replaced, there would be no financial incentive for an insured to return to work, which could result in higher claims costs and higher premium costs. However, we recommend that individuals attempt to purchase sufficient coverage to avoid incurring any substantial reduction in income and lifestyle should they become disabled.

Two methods typically used to determine the amount of disability benefits that will be paid are:

Income Benefit Formula

The income benefit formula typically expresses the amount of benefit to be paid to the insured as a percentage of pre-disability wages and may take into account other sources of income that the disabled insured receives such as social security or worker’s compensation benefits. The percentage varies from policy to policy and may range from 50 to 75 percent. The policy may also state a specified maximum benefit.

Flat Amount

The benefit amount may be an established dollar amount specified in the policy. This amount is determined when the policy is purchased. Typically the amount is paid regardless of other benefits received during the disability period.

BENEFIT PERIOD

The benefit period is the length of time during which benefits will be paid. Disability income policies are described as either short-term or longterm depending on the length of the benefit period. Short term policies generally provide benefits from six months to two years, while long term policies may provide benefits for five to 10 years and may even provide benefits to age 65 or for life.

TERMS OF RENEWAL

The terms of renewal stated in the policy contract outline the rights of the policyholder and the insurer to renew the policy, cancel the policy and/or adjust or modify premiums or benefits. It is important to keep in mind that under employer group plans and association group plans, the employer and/or association is generally the group policyholder and therefore policyholder renewal rights rests with the employer and association, and not with covered employees or members.