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