Standard Provisions of Individual Disability Income Insurance

1. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • 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

2. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk 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

3. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • 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

4. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Tax Implications • Policy purchased by an individual with after tax dollars • Premiums are not income tax deductible • Benefit payments are income tax free

5. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • 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

6. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • 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)

7. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Benefit features – Standard provisions (cont’d) • Occupational definitions and applications (cont’d) • 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

8. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Benefit features – Standard provisions (cont’d) • Occupational definitions and applications (cont’d) • 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

9. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Benefit features – Standard provisions (cont’d) • Occupational definitions and applications (cont’d) • 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

10. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Benefit features – Standard provisions (cont’d) • Occupational definitions and applications (cont’d) • 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

11. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Benefit features – Standard provisions (cont’d) • Occupational definitions and applications (cont’d) • 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

12. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Benefit features – Standard provisions (cont’d) • Occupational definitions and applications (cont’d) • 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

13. Standard Provisions of Individual Disability Income Insurance Chapter 22 Risk Management For Financial Planners • Benefit features – Standard provisions (cont’d) • Occupational definitions and applications (cont’d) • 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