The Basic Building Blocks of the Individual Disability Policy

1. The Basic Building Blocks of the Individual Disability Policy

2. Policy Provisions • Definition of disability • Own occ or any occ • Insuring Clause • Partial vs Residual • Definition of earnings • Benefit offsets (income offsets) • Benefit duration • Elimination period • Exclusions and limitations • Optional benefits • Issue Options • Claims

3. Definition of Disability (Own/Any Occupation) • Own occupation typically 2,3,5 years or own occ to age 65 • Unable to perform all the material duties of own occupation on a full-time basis for selected # of years • Any occupation begins after own occupation period ends • Unable to perform the duties of own or any other occupation for which person is fitted by training, education, experience, age and physical and mental capacity

4. Insuring Clause • Non-cancelable (non-can) • Insurer guarantees that the policy cannot be cancelled for the duration of the coverage, other then for nonpayment of premium • Insurer promises that the rates will not change • Insurer promises that the other policy provisions cannot be changed • Guaranteed Renewable • Policy cannot be canceled • Other provisions of the contract cannot be changed • Rates can be adjusted for the entire class of insureds with DOI approval • Cancelable – rare, due to the lack of guarantees needed by customers

5. Partial • Partial – Typically, loss of income is not a factor. Instead, the policy provides a benefit equal to 50% of the total disability benefit. Usually, partial must follow total disability and the benefit period is of a limited duration (usually 3 to 12 months)

6. Residual • Residual – Encourages return to work, at least part-time, following disability. Residual disability results in the inability of the insured to perform some of his/her duties and has a loss of income. The benefit payable is calculated by comparing pre and post-disability income. This percent is then multiplied times the total disability benefit, resulting in the residual disability benefit

7. Calculation of Incomes Variations • Cash Method of Accounting – it is the actual cash received during the period of disability that is counted, even if the income was earned through the performance of services rendered prior to the disability • Accrual – the cash received during disability, but earned prior to the disability is excluded from the the determination of post-disability income

8. Loss of Earnings Contracts • Relatively new product • Works similar to Own Occupation with Residual Benefit policies with one exception . . . The insured’s post-disability earnings from any occupation reduce the benefit payable under the policy • Considerably less expensive then ‘own occ’ contracts

9. Financial Underwriting Issues • Insurable Earned Income – limited to salary, wages, bonuses, net earnings from a business enterprise, and certain executive benefits • W-2 - Employees • Schedule C –self-employed • Replacement Ratio – the ratio of coverage provided to to earned income • Discretionary income • Issue and Participation Tables • Unearned Income and Net Worth

10. Defining Insurable Income • Insurable income is earned income; income generated from an individual’s efforts in his/her profession. • Income test. Will the income stop if the individual becomes disabled? If it does, it is insurable.

11. Insurable Income Options • Basic Monthly Earnings • With or without commissions and/or bonuses • 12 or 24 month average • W-2 Earnings • S-Corporation Earnings • Partnership Earnings • Teacher’s Earnings

12. Insurable Income Options • S-Corporation Earnings • Defined as shareholder earnings reported on Sub S Corporation’s Federal tax form 1120S or similar form • Partnership Earnings • Defined as earnings reported by the partnership on Internal Revenue Service Form 1065 schedule K-1 • Earnings are normally reported on Net Earnings (Loss) from Self Employment line of tax forms

13. Other Income Benefits • Workers’ Compensation • Social Security • Other Compulsory Group Disability • Government Retirement Disability • Employer’s Retirement Disability • Unemployment

14. Social Security Offset • Common rider, especially in lower-paid marketplace • Under this rider, part of the benefit amount purchased is subject to offset if Social Security is paid • If Social Security is not paid, the full benefit amount is paid • Contract typically requires the insured to file for Social Security benefits and provide evidence showing that Social Security has denied the claim • The insured pays less for each $100 of benefits subject to offset

15. Income Not Typically Offset • 401k plans and 403B plans • VA benefits • Profit sharing not funded by employer • Thrift plans • IRAs • Tax sheltered annuities • SOPs – stock ownership plans • Retirement benefits • No-fault auto insurance

16. Benefit Durations • Most common are plans payable for 2,3, 5 or to age 65 • The most common is 65/65 (accident/sickness or illness) • Lifetime is available, however, more limited and often restricted to disability form an accident (not sickness) • Many contracts will limit benefit duration if disability does not occur prior to a specific age, ie., age 55

17. Elimination Period • Also called the ‘waiting or qualification’ period • 30, 60, 90, and 180 day or normal • Remember to coordinate the short and long-term group plans • Longer E.P.s are less costly

18. Optional Benefits • Automatic Benefit Increase Option (AIB) • Annual increase in benefits • Non-medical or financial underwriting • Accept or decline option • Limited number of years • Cost of Living Adjustment (COLA) • Usually a flat percent or matches CPI-U • Usually increases until capped (usually 2 x) • Simple or Compounded

19. Optional Benefits (cont.) • Guaranteed Purchase Option (GPO) • Option, at additional premium, which allows purchase of additional amounts of coverage at specific intervals or ages • While no medical underwriting is necessary, the insured must meet financial underwriting guidelines • New premium charged is based on higher benefit amount • Increases typically only allowed prior to disability

20. Optional Benefits (cont.) • Return of Premium • Concept is that the insured pays premium for a period of time and does not become disabled or receives benefits that are less than the aggregate premiums paid, the return of premium options refunds the insured a portion or all the premium paid – less benefits received • Rational is that a skeptical buyer might purchase if they cannot lose the monies paid • Two options • Cash value and premium refund • Both options significantly increase the cost to the buyer

21. Issue Options • Issued as applied for – standard issue • Exclusion Rider – policy issued as applied for except for that specific medical issue or activities • Rated Premium – the coverage is issued, however, there is an ‘additional’ rating • Can be done in conjunction with extending the E.P. or shortening the benefit period • Change occupational class to one less favorable • Reduce the benefit applied for • Decline the risk

22. Claims • Filing the claim • Usually two parts to the form; Part 1 is completed by the insured and Part 2 is completed by the attending physician • Evaluation of the Claim • Contestability period • APS • Financial review • Denial or payment • Application vs Claims Fraud

23. Questions?