Introduction to Disability Income Insurance A Continuing Education Course for Life

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Introduction to Disability Income
InsuranceA Continuing Education Course for
Life Health Insurance Producers

• For internal use only. For educational and
  training purposes only. Not for use with the
  general public.

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Agenda

• ? The risk of disability
• ? The Individual disability income policy -
  basic definitions - policy benefits
• ? Optional benefits
• ? Premiums discounts

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Why Disability Insurance?
? Provides an income to an individual who is sick
or hurt and cannot work. ? Critical
protection for - professionals - owners
of small businesses - executives
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The Risk of Disability

• ? The chances of being disabled for 90 days or
  more vs death

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
AGE 30 AGE 40 AGE 50
Death
Disability
Source 1985 Society of Actuaries CIDA Table and
1980 CSO Table
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The Risk of Disability

• ? Disability is 16 times more likely than death
  to cause foreclosure on a home

Source U. S. Housing Home Finance Agency, 1998
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Disability the Small Business

• ? 48 of small businesses fail due to a
  disability in the business
• ? 70 of small businesses DO NOT provide
  disability protection for employees
• Source LIMRA International

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The Risk of Disability

• ? The Odds of a Long-Term Disability striking one
  or more business partners

100
80
60
40
20
AGE 30
AGE 40
AGE 50
AGE 60
One
Two
Three
Four
Five
Six
GROUP SIZE
Groups consist of equally weighted average of
males and females in all occupation classes.
Based on 1985 CIDA Table disability lasts 90
days or more.
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The Risk of Disability

• ? When a disability strikes, it can take a long
  time to recover

(YEARS)
AGE
AGE
AGE
AGE
30
50
55
40
Source 1980 CSO Table
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Individual DI Policies
The Basic Policy Features

• Renewability
• ? Guaranteed Renewable
• ? Non-cancellable

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Guaranteed Renewable

• The insurance company cannot . . .
• ? Cancel the policy
• ? Change policy provisions
• . . . as long as premium payments are made on a
  timely basis.
• Butit CAN increase premiums with prior notice

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Non-cancellable

• The insurance company cannot . . .
• ? Cancel the policy
• ? Change policy provisions
• ? Increase the policy premium after issue
• . . . as long as premium payments are made on a
  timely basis.
• Individual DI policies are both non-cancellable
  and guaranteed renewable provide the greatest
  degree of protection.

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Definition of Disability

• ? Own Occupation...insures ability to perform
  duties
• ? Income Replacement (or loss of
  earnings)focuses on income

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Own Occupation

• Total disability
• ? The inability to perform the material and
  substantial duties of ones own occupation...
• ? The occupation engaged in at the time
  disability begins.
• ? Insured can work in another occupation and
  still collect benefits
• ? The most liberal definition

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Own Occupation

• ? Own occ definition part of basic policy
• ? Pure own occ benefits payable for a specified
  period... (e.g. 2 years, 5 years, to age 65,
  lifetime)
• ? After own occ period, the insured is disabled
  if unable to perform the duties of any
  occupation for which he or she is reasonably
  suited
• ? Residual benefits available by rider

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Modified Own Occupation

• ? Variation of the Pure Own Occ definition
• ? The insured is disabled if unable to perform
  the duties of his own occupation and is not
  working in any other occupation
• Periods of Pure Own Occ and Modified Own Occ
  can be combined in the same contract
• ? Residual benefits typically available by rider

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Income Replacement

• ? Definitions of total and residual disability
  are part of the basic policy
• ? Total disabilityinsured is unable to perform
  the duties of his or her occupation and not
  working in another reasonable occupation
  (modified own occ)
• ? Pure own occ may be available by rider
• ? Residual benefits generally payable
  proportionate to actual income loss.

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Occupation Class

• ? Determines pricing and benefits available.
• ? Executive policies - executives,
  professionals, white-collar business owners
  
  e.g, - 6, 5, 4, 3
• ? Gray/Blue Collar policies
  
  - gray- and blue-collar business owners
  or employees e.g. - Class 2, 1

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Occupation Class

• ? Executive/Professional policies
  
  6 - architects, CPAs, many executives 5 -
  engineers, veterinarians 4 - family
  physicians, manufacturers reps 3 -
  psychologists, surgeons, dentists
• ? Some companies have created special occ
  classes for physicians or certain medical
  specialties (e.g. 4P)
• ? Gray- and Blue -Collar policies
  
  Class 2 - electricians, plumbers,
  machinists Class 1 - repairmen, painters,
  delivery people

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Occupation Class Own Occ Coverage

• ? Executive/Professional own occ periods...
  
  6, 5, 4 - for entire benefit period
  
• Class 3 - may have a shorter own occ period
• (e.g. 5 years)
• ? Gray- and Blue Collar own occ periods...
  
  - Class 2 1 - 2 years at
  most - typically own occ not offered
• ? Note many companies offer only modified own -
  occ regardless of occupation class

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Monthly benefit

• ? The monthly dollar amount stated in the
  contract that are payable for total
  disability
• ? Amount issued depends on
• - earned income
• - occupation class
• ? Other disability coverage in force

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Sample Maximum Issue Participation Limits

• Class Max. Individual Limits
• Classes 6, 5, 4 15,000
• Class 3 10,000 - 15,000
• Class 2, 1 7,500
• will participate up to 20,000/25,000 with
  group LTD in CA FL, issue participation
  limits may be lower.

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Waiting Period

• ? The number of days from the onset of disability
  for which no benefits are payable
• ? Waiting periods available 30, 60, 90, 180,
  360/365 days or in months 1, 2, 3, 12, 24
  months
• ? Benefits payments made at end of each month
  for which they are payable - for 90-day
  wait, first benefit check issued on 121st day

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Benefit Period

• ? The length of time for which a disability
  income benefit will be payable under the policy
  
• ? Normally 2 years, 5 years, to age 65, 67 or
  70, and lifetime
• ? Benefit periods available depend on the
  occupation class
• Not offered by many companies. Often limited in
  CA FL

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Benefit Periods Available

• ? 6, 5, 4, 3 - 2 yrs, 5 yrs, to 65, to 67, to 70,
  lifetime (except for some medical professions)
• ? Class 2 1 - 1 yr, 2 yrs or 5 yrs
• There may be state variations for these
  occupations.

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Residual Benefit

• ? Pays the insured a portion of the total
  disability benefit
• ? Benefit is based on the percentage of income
  loss suffered due to the disability
• ? Usually payable for the policy benefit
  period (up to age 65)

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Residual Benefit

• Residual benefits available as . . .
• ? A rider to an own occupation policy or
• ? Built in to an income replacement policy

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Residual Benefit

• What to look for in the best policies
• ? Residual disability loss of income due to
  disability (usually 20) loss of time or duties
  may be required
• ? Waiting period can be satisfied by total or
  residual disability
• ? Residual benefits are paid in proportion to
  income loss

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Residual Benefit

• What to look for in the best policies
• ? First 6 monthsminimum benefit of 50 is
  paid thereafter...
• ? With 75 or more loss of income, 100 of
  the benefit is payable
• ? Recovery benefit After full-time return to
  work, residual benefits still payable for a
  certain period, as long as continuing income
  loss (20 or more) is due to the previous
  disability. May be payable
• for entire benefit period
• for certain time period, e.g.. 12, 24, 36
  months
• as lump sum (e.g.. Up to 4 times monthly
  benefit paid)
• Many companies have an 80 threshold.

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Recurrent Disability

• ? A disability (for which benefits have been
  paid) recurring within 6 or 12 months is
  considered a continuation of the prior period
  of disability
• ? Benefits payable without a new waiting period
• ? Disabilities must be due to the same or related
  cause
• ? For interrupted waiting period periods of
  disability must be separated by no more than 6
  months, and be due to the same cause
• ? Another approach accumulation period, e.g.
  30 days of disability within a 60 day period.

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Presumptive Total Disability

• ? Total disability presumed for total and
  irrevocable loss of sight, hearing, speech, use
  of both hands or feet, or use of one hand and
  one foot
• ? Waiting period waived
• ? Benefit continues for the maximum benefit
  period

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DI
Other Policy Provisions

• ? Waiver of Premium
• - premiums are waived while disability benefits
  are payable
• - insured must remain disabled for the waiting
  period
• (premiums paid during this period are
  refunded)
• ? Automatic Increase Benefit
• - automatic annual increases to the benefit to
  keep up with inflation - set increases
  (e.g. 4) or tied to CPI
• - increases become permanent part of monthly
  benefit

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DI
Other Policy Provisions

• ? Rehabilitation Benefit
• - reimbursement for a program of vocational
  rehabilitation
• In California Florida only or nationwide
  
• ? Mental and nervous disorder limitation
• - aggregate lifetime benefit period for these
  conditions limited to 24 months

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DI
Optional Benefits

• Cost of Living Adjustments
• ? During disability, increases the monthly
  benefit
• ? Annual increases begin after a claim has been
  paid for one year
• ? Monthly benefits increased by... - fixed
  3 or 4 simple or compounded - based on
  Consumer Price Index (3 min - 6 max) - based on
  Consumer Price Index (max of 3 or 6)
• ? Upon recovery, insured typically may purchase
  the indexing increases without evidence of
  insurability

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DI
Optional Benefits

• Future Increase Option
• ? Allows the insured to purchase future increases
  to the monthly benefit
• ? No medical insurability required, but insured
  must still qualify financially for the increased
  benefit amount
• ? Options every year to age 55
• ? Some policies allow an option during a
  disability amount varies and may be payable
  for that disability
• Note Availability of options can differ by
  class and/or state.

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DI
Optional Benefits

• Social Insurance Riders
• ? Coordinates with social insurance (e.g. Social
  Security, Workers Compensation)
• ? Pays if Social Security does not pay a benefit
• ? Dollar-For Dollar offset with with social
  insurance plans - workers compensation, social
  security, railroad retirement, state
  disability, no fault

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DI
Optional Benefits

• Partial Disability
• ? Pays a benefit if the insured is unable to
  perform one or more of the duties of his or her
  own occupation
• ? Benefit 50 of the total disability benefit
• ? Payable for 6 or 12 months
• ? For sickness, partial disability may require
  that the partial disability be preceded by
  total disability

37
DI
Other Optional Benefits

• Group Disability Replacement rider
• ? Allows the purchase of additional individual
  coverage if group insurance terminates and is
  not replaced.
• Unemployment Premium Waiver rider
• ? Premiums waived after 60 days of unemployment
  compensation.
• Return of Premium / Cash Value riders
• ? Percentage of premiums paid returned at the end
  of a specified term minus claims.

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DI
Premiums

• ? Level Premiums.
• ? Modified Premiums increase in year 4/6 then
  remain level. Dividend may be payable
  beginning in year 4/6 to reduce premium.
• ? Step-Rate Plan initial lower rate during first
  5 years (or to age 30/35, if later) increased
  premium is level thereafter.
• ? ARDI or graded premiums annual increases.

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DI
Premiums

• ? Gender-specific, except for MT. Unisex rates
  are also used in multi-life cases.
• ? Based on insureds age nearest birthday or age
  last birthday.

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DI
Premium Discounts

• ? No-tobacco-use discount20 to 25
• ? Volume discount2 to 8 (a few companies)
• ? Group billing discount10 to 15
• ? Association discounts...10 to 15
• ? Large case discounts 20 to 35 with commission
  reductions

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Questions?
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Introduction to Disability Income
InsuranceA Continuing Education Course for
Life Health Insurance Producers