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Elimination Period The elimination period is a key element in DI policies, serving to exclude coverage for minor, short-term disabilities - two weeks' lost work because of the "flu" is a good example. This period, during which no DI benefits are paid, begins with the first day of disability and extends for a stipulated length of time. During the elimination period, the insured absorbs the costs of living without income. The elimination period is sometimes compared to the deductible of other types of insurance. Insurers offer various elimination periods from which the insured may choose, typically 30, 60, 90 or 180 days or one year. A few insurers offer a two-week period. Back to top Selecting the Right Elimination Period The elimination period is one feature that can be adjusted to alter the cost of a DI insurance policy. The shorter the elimination period, the higher the cost; the longer the elimination period, the lower the cost. Agents always need to be aware, though, that most people have limited means to endure a lengthy period without income, so a long elimination period may be a mistake if no income is available from sources other than work-related earnings. Another point to remember is that DI benefits are paid in arrears, so yet another month passes after the elimination period before the insured actually receives the first monthly benefit. For example, suppose an insured has monthly expenses of $3,000 that will continue to be incurred whether or not he is working. He has $10,000 in liquid savings, with insignificant income from other sources. A 90-day elimination period would essentially deplete this person's reserves, so a 60-day elimination period is probably the maximum this person should consider. On the other hand, suppose another insured, also with $3,000 of monthly expenses, has $2,000 in monthly income from investments to supplement his liquid savings. Even if this insured, just like the previous person, has only $10,000 in savings available, the elimination period could be extended considerably since this individual can use the $2,000 investment income toward ongoing expenses, and the needs to replace only $1,000 each month from savings. As you can see, the individual's unique financial circumstances are an important factor in selecting the best elimination period. Back to top Benefit Period When the elimination period expires, the benefit period start and the disabled insured becomes eligible for monthly benefits. Remember, benefits are paid at the end of the month - after the insured has, indeed, been disabled during that month - not at the beginning of the month, so still another month passes after the elimination period before a check is actually sent to the insured. The length of the benefit period is another option the insured may choose, within the boundaries established by a specific insurer. The most common options offered are: • One year • Two years • Five years • To the insured's age 65 • Lifetime Know the options your companies offer since not all options are available from all companies and some insurers offer other benefit periods. Figure 2-1 illustrates how the elimination and benefit periods work together. This illustration assumes a 60-day elimination period and a two-year benefit period. Note when the insured actually receives the first monthly DI payment. If the insured becomes disabled according to the provisions of the policy, benefits are paid as long as the insured is disabled or until payments have been made for the duration of the benefit period selected. For example, an insured named Martin has a policy with a two-year benefit period. Martin is able to return to work after receiving benefits for six months, so the insurer stops paying the monthly benefits. However, 18 months of the benefit period remain intact in the event Martin suffers another disability. On the other hand, if Martin's disability had continued after he received two years' of monthly benefits, all benefits would cease when the benefit period expired. Back to top Selecting the Right Benefit Period Insureds naturally want the longest possible benefit period, but longer periods require higher premiums. Normally, agents attempt to sell the DI policy with the longest period for which the individual is eligible and that is a good starting point. However, since premium savings can be achieved by shortening the benefit period, this option offers a means to reduce the premium if necessary. A valuable service agents can offer clients is the ability to illustrate premium differences based on different benefit periods and to explain the consequences. For example, although the odds of suffering some period of disability are relatively high, most disabilities last one year or less, so a shorter benefit period can be quite adequate for the average person. A potential client might object that he or she could be one of the few who suffer longer disabilities, which is correct, but the chances are relatively small. If a shorter benefit period allows the individual to purchase the policy, agents can stress that receiving disability income payments for a short period is more beneficial than receiving no income at all if disability does occur. Contemporary DI policies usually offer identical benefit period options for disability associated with both injuries and sickness, but some policies might have different periods. For example, all individuals disabled by accidental injury might be offered benefit periods for a lifetime, whereas if the disability results from sickness, a benefit period might extend no later than the insured's age 65. Most insurers offer the longest benefit periods only to the very best classes of risks. For example, an insurer might offer its best classes a lifetime benefit period for both sickness accidents. While you'll learn more later about how insurers classify risks, for now, you just need to know that "white collar" professionals such as physicians and attorneys are in the best classification. These, then, would be eligible for a lifetime benefit period, assuming the insurer offered such a period. On the other hand, certain occupations that are no considered "white collar," such as professional hair stylists and non-professionals, might be eligible for benefit periods extending no more than five or ten years, depending on the particular insurer involved. Back to top Renewability Provisions In the following paragraphs, we will again review provisions you should already be somewhat familiar with - whose dealing with guarantees about a policy's renewability. DI insurance policies may be written with any of the provisions discussed here as permitted by law. You will want to be completely knowledgeable about the circumstances under which the policies you sell are and are not renewable. Renewability is extremely important from the insured's point of view since people are more likely to become uninsurable as they grow older. Back to top Guaranteed Renewable A policy that is guaranteed renewable allows renewals up to a specified age, usually 60 or 65. In some states, these policies must guarantee renewal for at least five years if the policy is issued after the insured reaches age 54. The insurance company may cancel a guaranteed renewable policy only if the insured does not pay the premium. The premium may not be increased for any individual insured, but rates for an entire class of insureds, such as everyone working in a certain occupation, may be raised. Many disability income policies are guaranteed renewable. Back to top Guaranteed Renewable by Class Other policies are guaranteed renewable by class, which means the insurer will renew an individual policy as long it renews all policies in that particular class. Likewise, the insurer may choose not to renew a policy only if it refuses to renew all such policies. Other features are the same as a guaranteed renewable policy. Back to top Noncancelable The most liberal type of renewability provision is a policy that is non-cancelable and guaranteed renewable to a certain age. Failure of the insured to pay premiums is the only reason an insurer may cancel a non-cancelable policy. Furthermore, the premium may never be raised for any reason. Non-cancelable disability income policies are generally reserved for the very best occupational risks, such as professionals and highly-compensated executives. Back to top Optionally Renewable Policies that are optionally renewable give the insurer the right to refuse renewal at a specified time, typically only at the end of a period for which the premium has already been paid. The insurer must give the insured advance notice that it will not renew the policy. The insurer may increase premiums only for classes of insureds, not for any one individual. Back to top Conditionally Renewable Under a conditionally renewable provision, the insured may continue to renew the policy as long as certain conditions exist. In a disability income policy these conditions generally relate to the insured's continuing to work in a gainful occupation. The insured's health may not be one of the conditions. If the conditions are not met, the insurer may not cancel the policy but may opt not to renew only at a policy anniversary date. Premiums may be raised only for classes of insureds. Back to top Cancelable Many states currently prohibit cancelable policies. Where they are permitted, the insurer may cancel coverage by notifying the insured in advance and returning any unearned premium. Some cancelable policies may be canceled at any time, others only at an anniversary date. Premiums for cancelable policies usually may be increased. This concludes your review of policy renewability. If you need additional information, please consult our basic health insurance text. The table that follows provides a summary of the features just discussed. Back to top
Back to top Workers Compensation Another source of disability benefits is the workers compensation system, which is administered separately by the individual states. While workers comp laws provide other benefits in addition to disability, we're concerned here only with the latter. Workers compensation benefits are available only to individuals who suffer occupational injury or illness. Disabilities resulting from causes that do not arise from and in the course of employment are not covered by workers comp. For example, a person who is injured in and disabled from an auto accident while not working could not receive workers comp disability benefits, but could receive benefits from an individual DI policy. Back to top | ||||||||||||||||||||||||