General Nature of Disability Income Insurance

1. General Nature of Disability Income Insurance • 1. Provides periodic payments to person insured when he or she is unable to work because of injury or illness. • 2. Coverage may be provided for accidents only or for accidents and sickness. Coverage for sickness only is rare. • 3. Benefit eligibility presumes loss of income, but this is usually defined as the inability to pursue an occupation.

2. Need for Disability Income Insurance • 1. Probability of disability at most ages before retirement is greater than the probability of death • 2. Because disability can be both total and permanent, severity ranks with death of the wage earner in severity • 3. When persons other than the disabled person were supported by the lost income, the problem is compounded

3. Protection from Other Sources • 1. Workers Compensation for work-related disabilities • 2. Compulsory Temporary Disability programs in California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico • 3. OASDI for total and permanent disability • 4. Employer-provided sick leave or cash benefits

4. Short-Term Versus Long-Term Disability • 1. Short-Term disability provides coverage for disabilities up to 2 years. • 2. Long-Term disability provides coverage for disabilities longer than 2 years, often until age 65. • 3. The distinction between short-term disability and long-term disability is reflected in pricing, underwriting, and the breadth of coverage.

5. Disability Income Contracts • OCCUPATIONAL AND NON-OCCUPATIONAL • 1. Most short-term disability is written on a non-occupational basis. • 2. Some contracts provide “wrap-around” coverage. • 3. Long-term policies may be written on a non-occupational basis or may provide coverage for both occupational and non-occupational disabilities.

6. Definitions of Disability • 1. Own occupation • 2. Own occupation and not working in any other occupation (referred to as “modified own occupation”) • 2. An occupation for which insured is or might easily become qualified • 3. Any occupation

7. Loss of Income Approach • Abandons the effort to define the disability in terms of the cause of loss and focuses instead on the result—which is the loss of income. • pays benefits based on income loss after disability event, (accident or sickness), measured by % reduction in income. • coverage for partial disabilities, measured by percentage reduction in income. • only form that pays for progressive disease such as Multiple Sclerosis or Muscular Dystrophy, prior to total disability.

8. Disability Income Policy Exclusions • 1. War • 2. Self-inflicted injuries • 3. Aviation • 4. Alcohol or narcotics • 5. Pre-existing conditions

9. Income Needs in the Event of Disability • 1. Unlike the case in life insurance, disability income need is not limited to those with dependents. • 2. Income need may even be greater for the person without a spouse (no second income, need to hire a care provider). • 3. If breadwinner dies, income stops but expenses also decline. • 4. In event of disability, income stops and expenses will likely increase.

10. Disability and the Retirement Risk • 1. Insurers do not offer lifetime disability coverage for illness. • 2. The need for income after age 65 will exist whether or not the individual is disabled. • 3. Sufficient income should be provided in the disability income protection program to allow completion of the retirement accumulation.

11. Evaluating Existing Sources of Protection • 5. Most important disability income need is long-term disability for both occupational and nonoccupational disability to supplement Social Security benefit • 6. Some people will also need short-term coverage for disabilities that are not covered under Social Security

12. Taxation of Disability Income Benefits • 1. Benefits from individually-owned disability income policies are not subject to federal income tax. • 2. Premiums paid by individuals for disability income insurance are not deductible for federal tax purposes. • 3. Sick pay and other disability income payments that have been paid for by the employer are treated essentially as wages and taxable to the employee.

13. Cost of Disability Income Insurance • 1. Premium for disability income depends on • occupation, age, and sex of the insured • period for which benefits are payable • amount of the weekly or monthly benefit • length of the waiting period • 2. Most disabilities are short-term; coverage for longer periods of disability costs less proportionately than for shorter periods. • 3. The waiting period under disability policies has a significant influence on cost.