Life & Health Chapter 16 | Health Chapter 7: Disability Income Insurance

Accidental Bodily Injury

See “accidental results.”

Accidental Means

This describes an unforeseen, unexpected, or unintended event that results from an action that was not deliberately undertaken. This applies to an accident policy by requiring a mishap’s cause and result to be accidental for any claim to be payable.

Accidental Results (Accidental Bodily Injury)

This is an unintended consequence of an action that the insured takes, even if undertaken voluntarily. Policies that use the accidental bodily injury provision are referred to as “accidental results” policies because they only require for the result of the injury to be unexpected and unintended. This definition is far less restrictive than the accidental means definition.

Additional Monthly Benefit (AMB)

The AMB rider can supplement employer-provided disability benefits, cover gaps in Social Security Disability Insurance (SSDI), or help pay for extra initial expenses if a person becomes disabled.

Additional Purchase Option (APO)

See “Guaranteed Insurability Rider.”

Any Substantial Gainful Work

This phrase is an essential part of the Social Security definition of disability. The law defines disability as the inability to do any substantial gainful work due to any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Any Occupation

For a policy to provide disability income benefits, the definition of total disability requires the insured to be unable to perform any job for which that insured is “reasonably suited by reason of education, training, or experience.” See “Any Occupation for Which the Insured is Reasonably Suited.”

Any Occupation for Which the Insured is Reasonably Suited

For purposes of determining a person’s disability, in the states that use this phrase, it’s the same as the more generally used industry term, “any occupation.” In the states that don’t use this extended phrase, the phrase “any occupation” is taken more literally and is, therefore, more strict.

Benefit Period

This is the maximum length of time during which a benefit can be paid. The longer the benefit period, the higher the cost (premium) of the policy. Rather than charging additional premiums or excluding coverage when issuing a disability income policy to a substandard risk, an insurer may shorten the benefit period.

Business Overhead Expense (BOE) Insurance

This form of insurance reimburses the insured company for business expenses and payroll costs if the business owner/operator becomes disabled.

Capital Sum

This is the accidental death and dismemberment policy benefit that’s paid if the insured suffers a dismemberment.

Cash Surrender Value Rider

This rider returns all premiums to the policy owner at age 65 if no claims have been made.

Change of Occupation Provision

This provision allows the insurer to reduce the maximum benefit that’s payable under the policy if the insured switches to a more hazardous occupation without informing the insurer. It also allows the insurance carrier to reduce the premium rate being charged if the insured changes to a less hazardous occupation. If the insured does change to a less hazardous job, the insurer will return any excess unearned premium.

Concurrent Disability

This applies when multiple events are involved in causing the same disability. A person may also experience a loss that fits more than one definition of disability. In either case, the insured may only claim one benefit.

Confined Disability

Some disability policies may differentiate benefits based on whether the insured is confined at home or in a hospital. A confined disability requires the insured to stay indoors.

Coordination of Benefits

This is the process that’s used to determine the order in which insurance companies pay a claim. It’s used both among group insurance companies and in conjunction with social insurance. The primary insurer pays all claims as if it were the only carrier. The coverage that’s designated as “contingent” will cover the remaining balance.

Cost of Living Adjustment (COLA) Rider

This rider provides an automatic increase in benefits (typically tied to the Consumer Price Index, or CPI) in order to offset the effects of inflation. The COLA rider applies once the insured has filed a claim and has received benefits for more than one year. The rider eases the impact of inflation on a fixed income.

Credit Disability Insurance

This type of policy makes payments on a loan when an insured borrower becomes disabled. The policy pays the creditor, not the borrower. See “Decreasing Term Disability Policy.”

Decreasing Term Disability Policy

These contracts cover a fixed period that starts on the date they’re issued. As the time elapses, the remaining number of potential monthly benefit payments also decreases until it reaches zero. Credit disability policies are a form of decreasing term disability policy.

Delayed Disability Provision

This provision applies to a disability income policy which allows a certain amount of time after an accident for a disability to result, during which the insured remains eligible for benefits. Most disability policies offer this benefit, which allows some extension of the time between an occurrence and resulting disability, during which the policy will still cover a resulting total disability.

Disability Buyout Plan

This is a form of a buy-sell agreement that’s funded by insurance policies. This contractual agreement uses disability policy funds to purchase an owner’s share of a business if that owner becomes disabled.

Disability Buyout Policy

This is a disability policy that’s designed and used to fund a disability buyout plan.

Disability Income Rider

On a life insurance policy, this rider converts 1% of the policy face amount into a disability benefit, which is payable if the insured becomes totally disabled.

Elective Indemnity Option

The option allows the insured to receive an optional lump-sum payment for specific injuries. It can also be used in a disability buy-out policy. When applying for a disability policy, an insured may choose to add the elective indemnity option.

Elimination Period

This is a duration of time between the beginning of an insured’s disability and the commencement of the period for which benefits are payable. The elimination period is often considered a disability policy “deductible,” which correlates directly with the cost of a policy. If an insured wants a lower premium, she will need to settle for a longer elimination period. If an insured wants a shorter elimination period, the policy premiums will be higher.

Federal Insurance Contributions Act (FICA) Taxes

These are payroll taxes that are paid by both employees and their employers and are used to fund Social Security.

Flat Amount Approach

With this approach, even if the insured’s earnings change, the policy benefit remains the same unless the insured purchases a rider that can be used to change the benefit. This is most commonly used in individual insurance contracts. In fact, policies utilizing this approach define the policy benefit as a fixed dollar amount per month.

Fully Insured

This term is used by the Social Security Administration to describe individuals who are eligible for Social Security retirement and disability benefits. Eligibility is based on paying a sufficient amount in payroll taxes for the minimum number of calendar quarters. Individuals who have paid enough taxes for at least 40 quarters (10 years) attain permanent, fully insured status.

Future Increase Option

See” guaranteed insurability rider.”

Guaranteed Insurability Option

See “guaranteed insurability rider.”

Guaranteed Insurability Rider

This rider guarantees an insured’s insurability and gives the insured the right to buy additional amounts of disability income coverage at predetermined times in the future without proof of good health.

Guaranteed Purchase Option (GPO)

See “guaranteed insurability rider.”

Guaranteed Renewable

This provision states that the insurer must renew an insurance policy up to the established termination age unless the insured fails to pay the premium. The insurance carrier cannot change the policy terms but can change the premium rate on a class basis (if necessary).

Hospital Confinement Rider

This rider pays an additional benefit for each day that an insured is in the hospital over and above the basic policy benefit.

Impairment Waiver

This rider is also referred to as a waiver for impairments. In order to cover an applicant, insurers use this rider to permanently exclude certain losses, in some cases for a standard premium.

Income Replacement Contract

This contract defines disability as a loss of income and uses that method to determine disability.

Key Employee Insurance Policy

This type of policy indemnifies an employer if it loses a key employee’s services.

Lifetime Extension Rider

This rider extends the benefit period beyond the age of 65.

Long-Term Disability Insurance Policy

This is a disability income insurance policy that’s characterized by monthly benefit payments and a benefit period of two or more years.

Loss of Earnings Test

This test requires a loss of income for there to be a compensable claim. If the insured can earn as much as his pre-disability income, despite the inability to perform the duties of his former profession, then there’s no loss and no claim to pay.

Material Duties

This refers to the actual tasks or activities that a person must complete in the course of doing her job.

Morbidity

This measures the risk of becoming disabled and can factor in personal as well as occupational circumstances.

Medical Reimbursement Benefit

See “Non-Disabling Injuries.”

Natural Group

This is a group that’s formed for a legitimate purpose other than to purchase group insurance.

Non-Cancelable

This provision states that the insurer must renew an insurance policy up to the established termination age unless the insured fails to pay the premium. Also, the insurance carrier can neither change the policy terms nor the premium rate.

Non-Cancelable and Guaranteed Renewable

See “Non-Cancelable.”

Non-Disabling Injuries

This benefit applies to injuries, which may have been the result of an accident, but are not necessarily disabling. Many disability policies include a limited medical expense benefit that pays the actual cost of medical treatment for non-disabling injuries that are the result of an accident.

Non-Occupational Coverage

This is coverage that is provided by a disability income policy that doesn’t provide benefits for losses occurring due to the insured’s employment.

Occupational Coverage – A disability income insurance policy that provides occupational coverage will pay a monthly benefit for job-related disabilities as well as non-occupational losses. In other words, it covers the insured seven days a week and 24 hours a day.

Own Occupation

This term applies when determining a person’s disability. Total disability requires the insured to be unable to work at the insured’s own occupation in order to receive disability income benefits.

Partial Disability

This occurs when an illness or injury prevents an insured from performing one or more (but not all) of the key duties of the insured’s own occupation. Alternatively, partial disability can also be defined as the insured’s inability to work at his job on a full-time basis. In either case, a covered loss occurs if the result is a decrease in the insured’s income.

Percentage of Earnings Approach

This approach is most commonly used in group insurance contracts. Benefit plans using this approach define the policy benefit as a fixed percentage of the insured’s income. If the insured’s earnings change, the policy benefit automatically adjusts to maintain the policy benefit at the same percentage of income, as defined by the group benefits plan.

Permanent Disability

This term is used in Workers’ Compensation to describe a condition that’s considered to be permanent in nature. It may include cases of dismemberment or a chronic disabling condition. The benefit may be a lump-sum payment or weekly income.

Presumptive Disability

This is a disability that provides for the payment of disability benefits if an insured experiences the level of direct physical harm that’s specified in the policy. The term “presumptive disability” generally applies when an insured suffers a double dismemberment (loss of two or more limbs), or the permanent loss of sight, hearing, or the power of speech.

Primary Insurance Amount (PIA)

This is the basic monthly benefit that’s available to covered individuals. Social Security bases the PIA on a person’s income and the amount of taxes on that income.

Principal Sum

This is the accidental death and dismemberment policy benefit that’s paid if the insured dies due to a covered accident. It equals the face amount of the policy.

Probationary Period

This is a specified number of days (typically from seven to 30) beginning on the effective date of an insurance policy. During this period, the policy only covers accidents. It excludes any losses or claims resulting from sickness during this time. The exclusion of claims due to sickness is important because a person can be ill (infected with a disease) before the illness becomes manifest. This provision is designed to prohibit a person from buying insurance only when he needs it and then immediately filing a claim, which results in adverse selection.

Pro-Rata

This refers to the ways that multiple insurers share responsibility for a claim they both cover. Each carrier covers a proportional amount of the claim based on its percentage of the available insurance.

Recurrent Disability Provision

This is a disability income policy provision that specifies a period during which the reoccurrence of a disability is considered a continuation of a prior disability claim. During that period, the insurer will then pay benefits without a new elimination period. If the recurrence takes place after that period, it’s considered a new disability. Being considered a new disability means that the claim will be subject to a new elimination period. Recurrent disabilities also count against the benefit period that’s initiated by the original claim rather than starting a new one.

Rehabilitation Benefit

This benefit facilitates vocational training to prepare an insured for a new occupation. With some disabilities, insureds may not be able to return to their previous employment but can still work at some kind of job. Under the rehabilitation benefit, the insurer will pay the approved cost of a rehabilitation program to help the disabled insured return to work.

Relation of Earnings to Insurance

This clause applies when a person has more than one policy that covers the same disability claim. It states that the total benefit cannot be more than the income lost. Each insurer pays a pro-rata share of the total amount paid.

Residual Disability

This is related to the proportional disability benefit that a person collects while working less than full time and suffering an income loss of at least 20%. Insurance companies base residual disability income payments on the proportion of income that the insured has lost.

Return of Premium Rider

This rider refunds the insured’s premiums (dollar for dollar without interest) if the insured doesn’t file a claim. The rider may extend for the life of the policy or for a stipulated period.

Short-Term Disability Insurance

This is a disability income insurance policy that’s characterized by weekly benefit payments and a benefit period of no more than two years. Group short-term disability policies tend to have benefit periods of no more than 26 weeks and are integrated with corporate sick time and long-term disability benefits.

Social Security Disability Income (SSDI)

This is available to individuals who meet the definition of being fully insured and qualify for Social Security Disability Income benefits. A worker’s Social Security Disability Income (SSDI) benefit equals 100% of the worker’s Primary Insurance Amount (PIA).

Social Security Rider (Social Insurance Supplement or Social Insurance Substitute)

This supplement pays a monthly disability benefit when the insured applies for social insurance, and the social insurance benefit is either delayed, denied, or less than the amount of the rider.

Substantial Duties

This refers to a person’s essential capabilities which make it possible to do her job.

Temporary Disability

This is used in Workers’ Compensation to describe a condition that’s considered to be potentially temporary in nature unless re-evaluated at the end of the prescribed temporary benefit period under state law.

Waiver for Impairments

See “Impairment Waiver.”

Waiver of Premium

This is activated when an insured is disabled and begins receiving benefits. The insurance company waives premium payments during a disability and keeps the policy in force. The disability must meet the definition that’s stipulated in the policy and must continue through the waiting period. The waiver is NOT a loan; instead, the insurance company is “waiving” the premiums.” It’s just as if the premiums were being paid each month.

Workers’ Compensation

This is a form of liability insurance that provides benefits to workers who are harmed by work-related occurrences.