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Disability Insurance
Chapter 3
This chapter will cover the mechanics of a disability insurance policy. There are laws that govern DI coverage as well as those that govern health insurance. It will cover common riders that can be added to a policy to tailor it to the needs of a client.
Mandatory Provisions
The Uniform Individual Accident and Sickness Policy Provision Law drafted by the National Association of Insurance Commissioners (NAIC) in 1950 and passed by all states except Louisiana, mandates that certain provisions are included in every individual disability income policy as well as in every health insurance policy. In addition to the mandated provisions, most insurers provide the option of additional riders that may be unique to that insurance company, (insurer). The Uniform Individual Accident and Sickness Policy Provision Law (also called uniform or standard policy provisions) include 12 mandatory provisions. The 12 mandatory provisions are:
1. Change of Beneficiary
2. Notice of Claim
3. Claim Forms
4. Entire contract and changes
5. Premium grace period
6. Legal Actions
7. Payment of Claims
8. Physical Exam & autopsy
9. Proof of Loss
10. Policy Reinstatement
11. Time limit for Paying Claims
12. Time limit on Certain Defenses
Changing of beneficiaries is a provision included in any type of policy. The provision allows the policyowner to change beneficiaries in writing as long as an irrevocable beneficiary designation has not been made. An irrevocable designation would be one where the beneficiary cannot be changed by the insured. A policy that allows the insured to change the beneficiary is called revocable. The irrevocable beneficiary has a vested right in the contract. The revocable beneficiary has no right to the proceeds until the death of the insured.
Insurance policies provide that if the irrevocable beneficiary dies before the insured, the insured may proceed to name a new beneficiary.
Notice of claims sets the time parameters during which the claim must be filed. For instance, the policy may state that a claim must be filed within 20 days of the occurrence or commencement of any loss covered by the policy. If the state where the policyholder resides requires more than the insurance company normally allots, the insurance company must comply with that state's requirements.
Claim forms must be sent by the insurer to the insured within 15 days after receiving a notice of claim. If the insurance company does not comply with this 15 day requirement, the insurance company must allow the insured to submit the claim in any manner as long as all the information required is attached.
The Entire Contract and Changes provision dictates that the insurance contract between the insured and the insurer (insurance company), is contained in the insurance policy, the application, endorsements, and any or all riders attached to the policy. Only these documents outline the enforceable parts of the contract. No changes can be made to the contract unless it is agreed upon in writing by both the insured and the insurer. The written agreement is then attached to the existing policy.
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No contract changes may be made unless agreed upon in writing by both the insurance company and the policyowner. |
All insurance policies must specify a grace period. A grace period is a specified amount of days following the premium due date during which the policyholder may pay unpaid premium without losing their insurance. Depending on the type of insurance in question, the length of grace period can be anywhere from seven to 31 days. The grace period is also determined by how often the premiums are collected. For instance, if a policyholder pays annually for their insurance policy, they may have a grace period of 31 days. If the policyholder pays monthly, the grace period might only be ten days.
It should be mentioned that some states require the grace period to be 31 days, regardless of what the insurance company normally enforces. During this grace period, the policy stays in force.
Legal actions taken by the insured must be 60 days after written proof of loss has been furnished to the insurer in accordance with the policy guidelines. No more than three years can pass for an insured to take legal action against the insurer. Some states may allow for only two years, while some states may even go all the way up to six years.
Payment claims state any of the covered losses under the insurance policy that the insured would be entitled to. If the policy has accrued benefits unpaid, it will state where the funds will go, normally to the estate.
The insurer has the right to order a physical examination of the prospective insured, at their expense, as often as it may be reasonable to "require during the pendency of a claim here under."
Proof of loss must be submitted to the insured within 30 days as dictated by the policy and contingent on the state's laws. If the insured was not able to submit a claim within a 90-day period, and if it was not reasonable to furnish such proof, the insured then has one year to submit their claim. The only exception to this is an absence of legal capacity.
Reinstatement of the policy states the guidelines for which the insurer will reactivate a policy that has "lapsed" or where premiums were not sent in. The insurer has the right to ask the insured to fill out an application for reinstatement before the policy can be activated again. If the insured has submitted all required documentation to the insurer and they do not notify the insured within 45 days, the policy is reinstated. The insurer may require ten days to pass before they will cover a loss due to sickness, but the insurer will cover an accident immediately upon reinstatement of the policy.
The time of payment of claims provision outlines when the insurer will pay the insured for a submitted claim. This is subject to the insured sending in the required documentation, or proof of loss. DI benefits are paid monthly.
The time limit on certain defenses is when the insurance company limits the ability to cancel or void an insurance policy because of representations made by the insured on their application. This is sometimes called the contestability provision and in each insurance contract a time limit is given. Normally it is two years. There is no time limit if the insured has engaged in fraud.
Unlike the old standard provisions law of 1908, the uniform law does not require verbatim use by the insurers, nor must the provisions appear in a set order. The provisions must be followed in substance only. In fact, most insurers use provisions more favorable to the policyholder than the law demands. The 1908 standard provisions law was drafted by committees. The provisions were then recommended to and adopted by the individual states. The original recommendation included 15 provisions that had to be included verbatim in all health policies. In addition, five optional provisions were available for use if the items covered by them were in the policy.
Amendments by the various states to the standard provisions law diminished the degree of uniformity among them. To solve this dilemma, the NAIC recommended adoption by the states of the Uniform Individual Accident and Sickness Policy Provisions Law in 1950. The new law contained 12 mandatory and 11 optional provisions. We have already discussed the 12 mandatory provisions. The 11 optional provisions are:
1. occupation change
2. age misstatement
3. other insurance with the same insurer
4. expense insurance with other insurers
5. income insurance with other insurers
6. relation of earnings to insurance
7. unpaid premiums
8. cancellation
9. conformity with state statutes
10. illegal occupation
11. intoxicants and narcotics
The Uniform Individual Accident and Sickness Policy Provision Law include other health insurance requirements, in addition to the mandatory and optional provisions. Some of the other requirements are that the entire monetary and other considerations must be expressed in the policy; the type used in the policy must be at least ten point and must not give undue prominence to any portion of the text; general exceptions and reductions shall be grouped under a descriptive head; a policy in violation of the act shall be construed to conform to the act; no policy provision can restrict or modify the provisions of the act; supplying claims forms, acknowledgment of notice of claim, or the investigation of a claim are not waiver of defense against the claim; the policy remains in force for any part of a policy term that exceeds the age limit, and acceptance of a premium after that term keeps the policy in force, subject to any cancellation provisions in the policy; if misstatement of age leads the insurer to accept premiums beyond the age limit, liability is limited to a premium refund; and the act does not apply to workman's' compensation, reinsurance, blanket or group coverage or life insurance or annuity riders covering total disability.
Description of the Optional Provisions:
The change in occupation provision allows the insurer to raise or lower premiums or benefits accordingly to change in the insured's occupation that may be more or less hazardous. In DI policies a change in occupation can mean a more hazardous occupation, and this trickles down to the insured in the form of increased premium. Age is also a factor in DI policies when determining the premium cost. The younger an insured starts coverage, the lower the premium will be.
Since the annual premium on an insurance policy written with a level premium is based on the attained age of the insured at the inception of the policy, applicants sometimes deliberately misstate their age. If the insurance company realizes that the insured has misstated their age, the amounts payable under the policy will be adjusted to pay for premiums of the correct age at the time of purchase. This is referred to as a misstatement of age provision.
The misstatement of age is frequently discovered when proofs of death are filed. Such age misrepresentations do not fall in the incontestability provision. Regardless of the time of the discovery, the amount due under the policy is adjusted to match with the amount that the premium would have purchased had the age been correctly stated.
Insurance companies have developed this next provision to alleviate the possibility of paying a claim twice, even if the insured has another policy with the same insurer. This provision is called the other insurance with this insurer provision, also called the duplicate coverage provision. The insurer has two methods of assuring this: (1) the insurer specifies a maximum dollar amount for which the insurer is liable under all combined policies. Under this method the insurer agrees to return any excess premiums paid by the insured. (2) The insurer may request the insured to choose which policy will pay benefits and the insurer then returns the premiums paid for the other unused policy.
The next provision may or may not be exercised by the insurance company. It is called the expense insurance with other insurers provision. This provision does not normally apply to a DI policy. Expense insurance deals with benefits paid for expense related services. This type of coverage includes medical plans.
There is also the provision called income insurance with other insurers. This provision deals with DI policies as well as other types of insurance. Under both provisions, it states that each insurance company will share in the benefit payments in proportion to the benefit amounts each insurance company provides under their own policy. When each insurance company pays in proportion to the claim, the insured may have paid premiums in excess, which means those premiums will typically be refunded.
The relation of earnings to insurance provision prevents the insured from actually profiting financially from a disability. The relation of earnings to insurance provision affects DI policies. This provision restricts total benefits paid from all policies to no more than either the insured's monthly earnings at the time of the disability occurring or the insured's average monthly earnings for the two years prior to the disability. Like the previous provision mentioned, the insurer pays only their proportionate amount of benefits with any excess premiums being refunded to the insured. When this situation happens it is called over-insurance. That is why the preplanning of collectable benefits is so important.
If the insured made a claim, and there are unpaid premiums, this provision allows the insurer to deduct such premiums from the benefit amount.
The cancellation provision requires the insurer to notify the insured at least five days in advance of canceling the policy. This provision is not allowed in some states, and it is obvious why. The insurer would be able to cancel whenever they wished without regard to the length of time the insured expected to be covered. Upon cancellation, the insured would receive any unused premium. Some policies may be written so that an insured can only cancel on the policy's renewal date. Under this circumstance, there would be no premium to refund.
The conformity with state statutes dictates that an insurance policy will be amended on the renewal date to conform with the minimum state laws and regulations. This provision prevents policies from becoming outdated when state laws and regulations change. This provision also allows the insurance company to use the same applications in all the states, conforming to each one as needed.
The Illegal Occupation provision allows the insurer to deny coverage for an injury or sickness that occurs from the result of or while the insured was engaged in an illegal occupation or action. This also applies if the insured was under the influence of an intoxicant or an illegal narcotic. The exception to this provision is a prescribed drug or a drug administered by a physician. In such a case, the drug-affected reaction that caused the accident would be covered by the insurance policy.
There are also other provisions that can be included in disability policies. Not all provisions are offered by all insurers, thus there is a need for an agent to be familiar with the policies they are selling.
Waiver-of-Premium Provision
Normally all DI policies have a waiver-of-premium provision. This means that the insured does not have to pay premiums after a disability continues for a specific length of time. This length of time is normally 90 days. Some insurers use the elimination period instead. If premiums are paid up to that time, the policy cannot thereafter lapse during the total disability period. If the waiver-of-premium is 90 days, and the insured has the disability for that length of time, normally the insurer refunds any premiums paid during that period. This provision is invaluable to the family of the disabled person who likely needs every dollar available.
Non-occupational Provision
A nonoccupational provision states that the DI policy will not pay any benefits if workers' compensation or similar compulsory benefits for employed people are payable for a condition otherwise covered by the DI policy.
Transplant Provision
This provision is found in few DI policies. It states that if the insured is temporarily disabled due to donating an organ to be transplanted to another person, the insurer will then recognize this as a disability covered by the policy. The amount received by the insured will be as much as it would be for a total disability benefit.
Rehabilitation Provision
This provision is aimed at helping a disabled insured return to work. Insurers often pay this provision because it is hoped it will save them money in the long run. The insurer may offer this type of benefit whether or not the policy actually has the provision. Again, the bottom line is that the insurer is trying to save money.
Some insurers have taken it a step further and offered benefit for vocational rehabilitation. In such cases where the insured has lost a limb, they may even pay for prosthesis.
Non-disabling Injury Provision
The non-disabling injury provision pays for medical expenses for an injury that does not cause a total disability. As you may know, most DI policies do not cover the insured's medical expenses.
Preexisting Conditions Provision
A DI policy excludes, as does most medical policies, coverage for preexisting conditions. The exclusion normally disappears after a certain amount of time has passed. If the insured experiences a disability relating to the preexisting condition after the required time has passed, the disability will be covered by the policy. This period of time can be anywhere from 12 to 24 months following the effective date.
State law allows policyholders at least ten days to review a new policy. This may be referred to as a Free Look Provision. If the policyholder decides they do not want the policy, they can send it back to the agent or company within those ten days and request that it be annulled. The insurer will then refund all premiums paid. The request must be submitted in writing.
There are other optional provisions that DI policies may have. The important thing to remember is that each DI policy may be different. It is vital to read and understand each individual policy being sold.
Common Riders
The following are riders or options available to the insured. There may be substantial differences among companies, however, so the selling agent must investigate each one.
Return of Premium Rider
This option appeals to people who feel they will never be disabled. The Return of Premium rider promises to return a portion of the premium, fewer claims paid, at some set future date, such as five years. This rider is not cheap. Some professionals actually do not even recommend it because of the cost. Remember that the policy has to be in force for the full term (five years, for instance). The full percentage of return will only be received if no claims have been made. These types of "ifs" may hinder the insured from making a claim. The insured may pass up benefits that were actually due them.
COLA Rider
The Cost-of-Living Adjustment (COLA), also referred to as the inflation rider, provides for an annual upward increase in the benefit based on a certain percentage. This increase is determined in some proportion to the increase in the annual Consumer Price Index (CPI). The insured must be disabled for one full year for the increase in benefits to take effect. This option is available on long term plans only. This rider can vary from insurer to insurer. Check to see how the increases are calculated. Is it on an interest basis or compounded? Another thing to check is the limits on how high the increases can go. This rider can be very expensive, but if the insured were disabled for an extended period of time, say ten years, this rider will have paid for itself.
Social Security Rider
Social Security does not pay disability benefits until the person has been disabled for five months (Chapter five covers social security disability benefits). A social security rider can be added to the policy to pay the insured a certain amount (above the regular benefit) each and every month for each month that the insured does not collect Social Security benefits. The Social Security rider also requires a 90 day waiting period, so the insured will only collect benefits for months four and five (assuming a six month waiting period). Keep in mind, though, there is no guarantee that a person will ever receive Social Security, which means this rider might be a good one to have. This rider may only be available on long-term plans and may be payable to age 65.
Purchase Option Rider
The purchase option, also known as the guaranteed insurability rider, allows an insured to buy more coverage as they get older, or at the onset of some event, such as a birth of a child or a marriage. When marriage or children come, it is especially important to protect one's income. The insured's income must have increased significantly in order to be eligible for this rider. The insurer will require proof of the increased income. If the insured's income increased to $1000 a month, the insurer is not going to allow the increase benefit amount to be $1300. The relation to earnings and insurance must match up so the over-insurance threat can be avoided. This rider is also an expensive one.
For younger couples the purchase option rider may be very important. Statistically the odds are greater for a person to be disabled at some point as they grow older. A couple is likely to have their yearly income increased as they grow older and as they grow older their odds of becoming uninsurable increase. If the couple decides to purchase a higher benefit amount, the rider allows them to do so without proving insurability. The first option period available to the couple to increase their benefits differs from insurer to insurer. Typically it is one or two years. After that, additional options are made available every two to three years up to a specified age dictated by the policy.
If the option period happens to be when the insured is currently disabled, the insurer may allow the increase in the policy. The increase would take effect on the current disability with most DI policies. This does differ between companies.
Residual Disability Income
If the insured works while residually disabled, the insurer will pay a monthly benefit amount in proportion to the percentage of the insured's loss of income.
Family Income Rider
The insured could receive a stipulated amount of additional monthly income from the end of the elimination period to the end of a stipulated period of time, which begins on the date of issue. This rider can be used for specific limited term financial obligation such as mortgage or college funding.
Accidental Death and Dismemberment Rider
This rider contains a provision for the payment of lump sums for the loss of sight or limbs instead of the weekly or monthly income benefits, but only if the disability is caused by an accident.
Blindness and dismemberment benefits are often given prominence in the DI policy and could be mistakenly regarded as an added and attractive rider. The policy may give the insurer the ability to substitute a lump sum payment for continued income payments. It may not be as broad as a policy providing long-term income payments for sickness as well as accident. Some insurers will allow the insured to choose how they are paid - one lump sum or installments.
The accidental death benefit is usually payable in the policy if death occurs:
1. Before the insured's 70th birthday,
2. Directly & independently of all other causes,
3. As a result of accidental bodily injuries, or
4. Within 90 days from the date of the accident.
Excluded risks in most policies are for suicides while sane or insane, death resulting from war, death resulting from disease, or if the death occurs while outside the Earth's atmosphere (yes, this is an actual exclusion).
The Accidental Death & Dismemberment Rider may appeal to people who feel their insurance program is inadequate or want high limit accident protection. This rider may fit well in a family's budget if they cannot yet afford life insurance for the breadwinner since a relatively small premium provides extra coverage for accidental death. Under the age of 40 accidents is the cause of death in more than 50 percent of the cases.
This rider affords a family extra insurance protection only on a limited basis. When considering this rider, one should remember that cause of death usually has nothing to do with the needs of the dependents and the accidental death rider may give the family a false sense of security.
The insurance industry is always trying to meet the needs of the policyholders, offering new riders and options to them. Reading the policies will keep the active agent abreast of the changes of the DI field.
End of Chapter 3
United Insurance Educators, Inc.
2012