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Disability Income Insurance

Author: Dick Hartzen
People purchase life insurance to protect families against the income problems faced when a family member dies. Among the problems are:
  • Burial expense costs*
  • Unpaid medical bills
  • Loss of income
* According to Money Magazine, the average funeral expenses in 2012 were $10,000 to $12,000.
What is overlooked is that a more common problem may cause a larger loss. That problem is disability.
According to the 2007 Social Security Mortality Table:
  • The odds in a 35 year old male’s death this year are 0.001651 per thousand…female’s death 0.000896.
  • 40 year old male 0.002323…female 0.001377.
A look at disability occurrences is alarming:
  • 1 in 4 of today’s 20 year olds will become disabled prior to retirement.
  • More than 50% of those disabled are between ages 18-64.
  • A typical female healthy non-smoker age 35 has a 24% chance of becoming disabled for 3 months or more during her working career. There is a 38% chance that it will last 5 years or longer. If she smoked, the odds increase to 41%.
  •  A typical healthy non-smoker male has a 21% chance of a 3 month or longer disability with 38% those lasting 5 years or longer.
A disability income policy is mandatory to prepare for this contingency. Items to pay special attention to include:

Definition of disability
ANY OCCUPATION is the least favorable. The insured must be unable to perform any occupation. There is nothing considered regarding the previous occupation. If the insured executive can deliver newspapers, he may not be considered “disabled.”
OCCUPATION BY TRAINING AND EXPERIENCE is a better  definition than the previous one. It may be the only definition that can be used for the average worker. A surgeon who can teach or assist in surgery may face a problem with this definition.
OWN OCCUPATION is the definition that should be used by those that qualify. What occupation was being performed at the time of the disability? If it cannot be performed, the insured is disabled. Most policies have a shorter time length for this definition which reverts to “training and experience” after a few years (5-10).

What renewal privileges are allowed? Is the policy “owned” or “rented”?
CANCELLABLE POLICIES are not used very often. The insurer retains the right to cancel at its discretion and on an individual basis.
RENEWABLE AT COMPANY OPTION allows the insurer to renew/non-renew individual coverage at their discretion. The policy is not cancellable, but the renewable privilege is taken away.
CONDITIONALLY RENEWABLE allows the insurer to non-renew on a class basis. Individual non-renewals are not allowed.
GUARANTEED RENEWABLE does not allow any type of non-renewability, but does allow rates to be adjusted on a class basis.
NON-CANCELLABLE AND GUARANTEED RENEWABLE policies do not allow the insurer to cancel, non-renew or raise premiums. These are the best (and most expensive) of the policies.
Other items that are important and easy to understand include the elimination period and length of time that payments continue. A problem may arise in a short elimination period due to payments usually beginning 30 days after the elimination period is served. This may mean that a 30 day elimination period may not start benefits until 60 days has elapsed.
The qualifications for “partial disability” (if any) can differ from companies and should be reviewed. “Residual disability” definitions face the same problem.
Every property and casualty agent should learn about IRC- Revenue 55-264, 1965-1BC11 which allows certain business owners to purchase a tax deductible disability policy. Benefits will be taxable to the business when received, but deductible when paid.
Last Updated:  May 24, 2013


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