title:

HowtoInsureYourIncome:AStepByStepGuidetoBuyingtheCoverageYouNeedAtPricesYouCanAffordIncludingDisabilityIncomeInsurance,SocialSecurity,Workers'Compensation,AcceleratedBenefits

author:publisher: SilverLakePublishing

isbn10|asin: 1563431483printisbn13: 9781563431487ebookisbn13: 9780585044224

language: English

subject Insurance,Disability--UnitedStates,Workers'compensation--UnitedStates.

publicationdate: 1997

lcc: HD7105.25.U6H691997ebddc: 368.973

subject: Insurance,Disability--UnitedStates,Workers'compensation--UnitedStates.

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HowtoInsureYourIncomeAStepbyStepGuidetoBuyingtheCoverage

YouNeedatPricesYouCanAffordIncluding:

DisabilityIncomeInsuranceSocialSecurity

Workers'CompensationAcceleratedBenefits

TheMerrittEditors

MERRITTPUBLISHINGADIVISIONOFTHEMERRITCOMPANY

SANTAMONICA,CALIFORNIA

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HowtoInsureYourIncome

Firstedition,1997Copyright©1997byMerrittPublishing

MerrittPublishing1661NinthStreetSantaMonica,California90406

ForalistofotherpublicationsorformoreinformationfromMerrittPublishing,pleasecall(800)638-7597.OutsidetheUnitedStatesandinAlaskaandHawaii,pleasecall(310)450-7234.

Allrightsreserved.Nopartofthisbookmaybereproduced,storedinaretrievalsystemortranscribedinanyformorbyanymeans(electronic,mechanical,photocopy,recordingorotherwise)withoutthepriorwrittenpermissionofMerrittPublishing.

LibraryofCongressCatalogNumber:97-075913

TheMerrittEditorsHowtoInsureYourIncomeAStepbyStepGuidetoBuyingtheCoverageYouNeedatPricesYouCanAfford.Includesindex.Pages:274

ISBN:1-56343-148-3PrintedintheUnitedStatesofAmerica.

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AcknowledgmentsTheMerrittEditorswhocontributedtothisbookincludeSanderAlvarez,DeboraChan,CynthiaDavidson,SueSink,MimiTennant,MeganThorpeandJamesWalsh.ThankstoKathyFranklinandGingerMcKelveyfortheirproductionassistance.ThanksalsotoKimberlyBaerDesignAssociates,CynthiaChaillieandChrissyJessee.

SomeofthematerialthatappearsinthisbookisbasedoninformationtakenfromMerrittProfessionalPublishing's1996Life&HealthSourcebook,atextbookforinsuranceagents.

HowtoInsureYourIncomeisthefourthbookinMerrittPublishing'sHowtoInsure...series.

Theothertitlesintheseriesare:

HowtoInsureYourCar,

HowtoInsureYourLife,and

HowtoInsureYourHome.

UpcomingtitleswillincludeHowtoInsureYourPossessionsandHowtoInsureYourHealth.

Becausethesebooksaredesignedtomaketheconceptsandtheoriesofinsuranceunderstandabletoordinaryconsumers,theMerrittEditorswelcomeanyfeedback.Pleasefaxusat(310)396-4563orcall(800)638-7597duringregular

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businesshours,Pacifictime.MoreinformationisavailablefromMerrittPublishingontheInternetathttp://www.merrittpub.com/.

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TableofContentsChapter1WhyYouNeedtoInsureYourIncome 1

Chapter2FiguringOutHowMuchIncomeInsuranceYouNeed

17

Chapter3KeyConceptsandDefinitions 45

Chapter4TheMechanicsofDisabilityIncomeInsurance 67

Chapter5HowInsuranceCompaniesPriceDisabilityCoverage

85

Chapter6SocialSecurityasIncomeInsurance 111

Chapter7Workers'CompensationasIncomeInsurance 139

Chapter8Long-TermCareandLifeInsuranceasIncomeProtection

159

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Chapter9DeferredCompensationasanIncomeInsuranceTool

179

Chapter10PersonalUmbrellaLiabilityInsurance 197

Chapter11OptionalDisabilityBenefitsandRiders 209

Chapter12HowtoMakeanIncomeInsuranceClaim 223

Chapter13BusinessUsesofDisabilityInsurance 241

Chapter14CurrentTrendsintheDisabilityIncomeField 257

Index 269

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Chapter1WhyYouNeedtoInsureYourIncomeTheconceptofdisabilityinsurancegotitsstartcenturiesagoinancientChina.Chineselaborerspaidtheirdoctorsaslongastheyremainedwellandwereabletowork.Theystoppedpayingthedoctorswhenevertheybecameill.

Bymosthistoricalaccounts,itwasaneffectivewaytoaddressthefinancialhardshipsincurredwhenapersonbecamedisabledandwasunabletowork.

Unfortunately,thisconceptdoesn'tappeartobeworkableintoday'ssociety.

Peoplewillinsuretheirhome,theircars,theirthings.Butthey'lloftenforgettoinsuretheassetthatpaysforallofthesetheirabilitytoearnmoney.Thefinancialproblemscreatedbywhatinsuranceexpertscalleconomicdeathduetoadisabilityareveryrealanddistressingtomostpeople.

Considerthefollowingexample:

Bill,age42,istheownerandpresidentofAcmeInc.,a20-year-old,smallbutsuccess-

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fulmanufacturingbusinessthatservestheautomobileindustry.Acmeemploys30workersand,forthepastfiveyears,ithasaveraged$18millioningrosssales.Billhasworkedhardtoachievehissuccessandthecomfortablelifestyleheandhisfamilyenjoy.

Unfortunately,thedayfinallycomeswhenBillhastopayforthelonghours,theskippedmeals,theheavysmokingandthestressofoperatinghisownbusiness.Hesuffersastroke,whichleaveshimpartiallyparalyzedandunabletospeakclearly.

Bill'swifecallstheirinsuranceagenttotellhimwhathashappenedandtofindoutwhichofthemanypoliciesBillhaspurchasedovertheyearswilltakecareofthissituation.

Muchtohershock,noneofthemdo.Billhasthreelifeinsurancepolicieswithatotaldeathbenefitof$800,000.Buthe'snotdead.Hehasseveralbusinessinsurancepolicies,grouphospitalizationinsuranceandotherpoliciescoveringhisfamily'shome,automobilesandposessions.Buthehasnodisabilitycoverage.

Billwasdiligentaboutprotectinghisassetsexceptthemostimportantone...theabilitytoearnanincome.

TheverythingthatenabledBilltoestablishasuccessfulbusinessandacquirehisbusinessandpersonalassetshasbeenleftunprotected.WithintwoyearsofBill'sstroke,hissavingsandmostofthecashvalueinhislifeinsurancehavebeenexhausted.He'sfinallyforcedtosellhisbusinesstoacompetitoratasubstantialloss.

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Ahardirony:Hisfamily'slifestyleandfinancesprobablywouldnothavebeenaffectedsodramaticallybyBill'sdeath.Ifhehaddiedfromthestroke,hisfamilywouldhavereceivedhislifeinsuranceproceeds,SocialSecuritysurvivor'sbenefitsandothercashassets.

Thefinancialimpactoftotaldisabilitymaybegreaterthanthefinancialimpactofdeath.Youmayliveformanyyearstotallydisabled,andthereforeunabletogenerateanincometopayforthehighermedicalandlivingexpensescausedbythedisability.

Disabilityincomeinsuranceisdesignedtoprotectyourmostimportantassettheabilitytoearnanincome.It'saformofhealthinsurancethatprovidesperiodicpaymentswhenyouareunabletoworkbecauseofaninjuryorillness.Thesepoliciespayaweeklyormonthlyincomebenefittoreplaceaportionofthesalaryorwageslostduetoyourinabilitytowork.

Togetafeelforthevalueofaperson'sabilitytoearnanincome,lookatthefollowingchart:

PotentialEarningstoAge65MonthlyIncome

Age $2,000 $6,000 $8,000 $4,00025 $960,000 $1,920,000 $2,880,000 $3,840,00030 840,000 1,680,000 2,520,000 3,360,00035 720,000 1,440,000 2,160,000 2,880,00040 600,000 1,200,000 1,800,000 2,400,00045 480,000 960,000 1,440,000 1,920,00050 360,000 720,000 1,080,000 1,440,000

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Thischartillustratesthatmostofusaredestinedtobemillionaires,inthesensethatourabilitytoearnanincomewillgeneratemorethan$1millioninanaveragelifetime.Andthischartdoesn'tincludethingslikepayraisesorcostoflivingincreases.

TheRiskofDisability

MarkTwainsaidthatthereareonlytwocertaintiesinlifedeathandtaxes.Althoughit'snotquitesocertain,theprobabilityofadisabilityoccurringbeforeyoureachthenormalretirementageof65issubstantial.Thefollowingchartdepictsthisprobability:

TheProbabilityofatLeastOneDisabilityLasting90DaysorMorePriortoAge65

CurrentAge Probability25 4outof5 80percent30 7outof10 70percent35 2outof3 67percent40 2outof3 67percent45 1outof2 50percent50 1outof2 50percent55 1outof3 33percent60 1outof5 20percent

Source:CommissionersDisabilityTable

Clearly,yourpossibilityofbecomingdisabledduringpeakearningyearsissubstantialespeciallyforpeopleage50andyounger.Butthatdoesn'tmeanthingsgetbetterwithage.Althoughtheoverallriskdecreasesasyougetolder,thedurationoftheaveragedisabilityincreases.

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Theolderapersonisattheonsetofadisability,thelongertheaveragedurationofthedisability.Also,theolderthepersonis,thelesslikelyheorsheistototallyrecover.Theprobabilityofadisabilitybecomingpermanentatolderagesismuchgreaterthantheprobabilityofapermanentdisabilitystrikingamuchyoungerperson.

Thefollowingchartillustratestherelationshipbetweenageandtheaveragedurationofadisability.TheAverageDurationofaDisabilitythat

LastsforMoreThan90DaysAgeatOnset Duration

25 4.3years30 4.7years35 5.1years40 5.5years45 5.8years50 6.2years55 6.6years

Source:JournaloftheAmericanSocietyofCertifiedLifeUnderwriters

Thenumbersareallprettydisturbing.Butthetrendclearlygetsmoredisturbingaspeoplegetolder.

Onereasonfortheincreaseddurationoftheaveragedisabilityasyougetolderisthefactthatyourbodydoesnotrespondtotraumainthesamewayitdidwhenyouwereyoung.Forexample,smallchildrencanexperiencemajoraccidentsorsicknessesand

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''bounceback"muchmorequicklythananolderperson.

Anotherfactorthatalsomightcauseincreaseddurationofdisabilitiesamongolderpeopleismotivation.Insurancecompaniesthatdoalotofbusinessindisabilitycoverageclaimthatolderpeoplesometimes"subconsciously"decidetoeasetheirwayintoretirementasaresultofadisability.

Accordingtothisscenario,whichfewinsurancecompaniesdiscusspublicly,a55-or60-year-oldsimplymaynotbeasmotivatedtoreturntoworkfollowingaseriousdisability.

Butthereissomethingofasilverlining:Apersonismorelikelytobecomedisabledthantodieatmostgivenages.Aswe'veseen,thereisa70percentchancethata30-year-oldmalewillincuradisabilitybeforeage65.Thelikelihoodofthissameindividualdyingatage30islessthan1percent.

Astandardmortalitytablewillshowthistendencyistrueatmostpointsbetweenages30and65.Forjustaboutanypersonintheworkforceevenanolderworkerthechancesofbecomingdisabledaregreaterthanthechancesofdying.

RealDeathvs.EconomicDeath

Along-termdisabilitymaynotcausephysicaldeathbutitveryoftencauseseconomicdeath.

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Economicdeathcausedbyadisabilityisfarmorecommonthananaturaldeathduringanindividual'sworkingyears.Thisfacthasrealeffectsonjustabouteveryone.Anexample:IntheUnitedStates,themostcommoncauseofmortgageforeclosuresisthedisabilityoftheborrower.

It'snotjustordinarypeoplewhoconfusetheimportanceofrealdeathandeconomicdeath.Eventheinsuranceindustrydoesit.Insuranceagentsfrequentlyselllifeinsurancebasedonthecapitalizedearningsduringyourlifetime(toage65).So,yourearningpotentialisdiscussed,analyzedandusedasasellingfactorfordeterminingtheamountoflifeinsuranceyoushouldpurchase.

Oncetheagentsellsyouthelifeinsurance,heorsheoftenleaveswithoutdiscussingtheneedforinsurancecoveringtheabilitytoearntheincomeuponwhichthelifeinsuranceamountwascalculated.

Whenadisabilityoccurs,lifeinsuranceisn'tmuchhelp.Thelifeinsurancebenefits(otherthanusuallysmallpolicycashvalues)aren'tavailable.Pensionbenefitsusuallyaren'tavailable.AndevenifthepersoncanqualifyforSocialSecuritydisabilitybenefits,actualreceiptofthemoneyisatleastayearaway.

Ofcourse,earnedincomeusuallyceases.Butexpensesincludingtheaddedmedicalandrelatedexpensescausedbythedisabilitycontinue.

Withoutadequatedisabilityincomeinsurance,whatresourcesareavailabletooffsettheeffectsofadisability?

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Cashsavingsprobablywouldbethefirstresourcethatyouwoulddrawuponifyouweredisabled.Buthowmanypeoplesystematicallysavecashfordirecontingencies?Howmanytimeshaveyouintendedtodepositmoneyintoasavingsaccountandfailedtodoso?Andevenifyoudosystematicallysave,theamountsprobablywon'tbeadequatetoseeyouthroughaprolongeddisability.

Anefficientsavermayhaveasavingsaccountequaltotwoorthreemonthsofincome.Ifadisabilitylastsforashortperiod,suchasamonthorso,thenthesavingsaccountcantakecareofthefinancialproblemsofthedisabledperson.However,theaveragedisabilitylastsconsiderablylongerthanamonthortwo.

Statistically,ifa30-year-oldmaleisdisabledforatleast90days,theaveragelengthofthedisabilitywillbe4.7years.Thesecondplacemostpeoplewouldturnformoneywhentheyaredisabledisinvestmentsandotherpersonalassets.

Youmighthaveinvestments,suchasautomobiles,realestate,cashvaluelifeinsurance,stocksorbonds.Havingthesethingscanhelpyougetthroughadifficulttimebutitbetternottakelong.Convertingassetsintocashwillprovidemoneyforonlyalimitedperiodoftime.Anditusuallydrainsapersonorfamilyoflong-termearningpower.

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Anotherconcern:Howliquidarethesepersonalassets?Ifyouhaveavintagecarthatyouthinkisworth$50,000,youmaynotbeabletofindabuyeratleastnotquicklywhowillpaythatamount.Forthisreason,youmaybereluctanttosellaprizedcoincollectionorworksofartinordertoraisemoney.

Evenifaninvestmentisliquid,itmaybevolatile.Youmightown1,000sharesofstockthatyouboughtfor$50per.Butifthatstock'stradingat$30asharewhenyou'redisabled,ifyousell,youonlyget$30,000.

Thethirdplacemostpeoplewouldlookformoneyisanybusinessassetstheyown.Theproblemhereisthatfewpeoplehavetheseinasubstantialway.

Ifyouownabusiness,itmaytakecareofyourdisabilitybygeneratingincomeinyourabsence.Unfortunately,turningtobusinessassetsmoreoftenmeanssellingthebusinessorliquidatinginventoryorotherpartsoftheoperation.Eithercaseusuallyresultsinaforcedsalewhichmaybringaslittleas10or20centsonthedollar.

Ifyou'reanemployee,theremaybesomework-relatedbenefitsavailablefromaqualifiedplan,asalarycontinuationplan,employeestockplans,workers'compensation,etc.

Butgroupdisabilitybenefitsareofshortdurationayearorlessandcoveronlyapercentageoflostincome.Andtheseso-calledfixedandcappedbenefitplanstendtodiscriminateagainsthigher-paidemployees.

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Forexample,agroupplanmightprovidebenefitsequalto60percentofpayuptoamaximumbenefitof$2,000permonth($24,000annually).Thismayprovetobeanadequatebenefitforallemployeeswhoearn$40,000orlessperyear.

Formanagers,executivesorowners,thedisabilitybenefitisstilllimitedto$24,000peryear.So,ifamanagerisearning$60,000annually,herdisabilitybenefitcoversonly40percentofherordinarypay.Anotherfactorrelatedtogroupbenefitsorwork-relatedplansisthefactthatyoumerely"rent"thiscoverage.Benefitsareavailableontheconditionthatyoucontinuetobeanemployee.Ifyouterminateemployment,yourdisabilitybenefitsalsoareterminated.Ifadisabilitystrikesbetweenjobs,therearenowork-relatedbenefitsprovided.

Anotherpotentialfinancialresourceisthefederaland/orstategovernment.Primarily,theseprogramsconsistofSocialSecuritydisabilityincomebenefitsandworkers'compensation.

EligibilityfordisabilitybenefitsunderSocialSecurityrequiresthatyoubebothfullyinsuredanddisabilityinsured.FullyinsuredstatusmeansthatyouhavepaidSocialSecuritytaxesfor40calendarquarters(10years).DisabilityinsuredrequiresthatyouhavepaidSocialSecuritytaxesinatleast20outof40calendarquarters(fiveoutof10years)priortofilingadisabilityclaim.

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Inaddition,youmustbeunderage65,thedisabilitymustbeexpectedtolastforatleast12monthsorendindeath,andthedisabilitymustsatisfythedefinitionoftotaldisabilityinaccordancewiththeSocialSecuritylaw.

Basically,totaldisabilityisdefinedas:

theinabilitytoengageinanysubstantialgainfulactivitybyreasonofamedicallydeterminedphysicalormentaldisabilityrelativetoaperson'seducationandpriorworkexperience.

Thismeansthatyoumustbeunabletoperformyourpreviousjoboranyothersubstantialworkthatexistsinthenationaleconomyrelativetoyourage,educationandpriorworkexperience.

Inaddition,thereisafive-monthwaitingperiodbeforeanybenefitscanbepaid.Inreality,duetothewaitingperiod,plusthetimeittakestoprocessaninitialclaim,thefirstSocialSecurityclaimcheckislikelynottobereceiveduntilabouttheendofthefirstyearofdisability.

(We'lllookatSocialSecuritydisabilitybenefitsinmuchgreaterdetailinChapter6.)

Workers'compensationprovidesanothersourceofdisabilityincomebenefits.Workers'compoffersbenefitstoworkerswhohavejob-relateddisabilitiesduetoanaccidentorsickness.Workers'complawsandthebenefitsprovidedvarysomewhatfromstatetostate.

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Theintentoftheworkers'compsystemistomaketheemployerliableforoccupationaldisabilitieswithoutfaulthavingtobeprovedbytheinjuredworker.Therefore,theemployermaycoversuchclaimsoutofcompanyfundsorelect(asalmostalldo)tocoverthisriskbymeansofworkers'compinsurance.

Thebasicrequirementtobeeligibleforthesebenefitsisthatthedisabilitymustbework-related.Fallingoutofbedinthemorningandbreakingyourarmdoesnotconstituteaworkers'compclaim.Slippingonawetflooratyourplaceofemploymentandbreakingyourarmisaworkers'compclaim.

Thefinalsourceofmoneythatdisabledpeopleusuallyturntoisborrowing.Theproblemwiththissource:Whowilllendyoumoneyifyouareunabletoworkduetoadisability?Banksandotherlendinginstitutionsusuallywon't.Mostpeopleinneedturntofriendsandfamily.Butevenarelativemaybereluctanttolendmoneyunderthesecircumstances.

And,intheend,evenifyoucanborrowmoney,theamountpeoplewilllendisoftennotenoughtoseeyouthroughalengthyperiodofdisability.

InsuranceastheSolution

Therearemanydifferentkindsofinsurancecoverageavailablethatcoverdisability.We'llconsiderthecriticalonesthroughoutthisbook.But,forthesakeofquickcomparison,whatfollowsisabasicreviewofthetypesoflossesandbenefits.

Aswe'vealreadyseen,themostcommonformofcoverageisdisabilityincomeinsurance(alsoreferredto

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aslossoftimeinsurance).Thispaysyouaweeklyormonthlybenefitfordisabilitiesduetoaccidentorsickness.Theprimarypurposeofdisabilityincomecoverageistoreplacepersonalincomelostduetoadisability.

Disabilityincomeinsuranceisdesignedtoreplacelostincomefollowingtheonsetofadisability.Itguaranteesthedeliveryofdollarsinanexact,predeterminedamount,exactlywhenneeded.

Disabilityincomepoliciesareissuedonanindividualbasisoronagroupbasisthroughanemployer-sponsoredplan,laborunionorassociation.Benefitspaidareinaccordancewiththepolicy'sprovisionsand,toadegree,yourlossofincome.

Somestates(California,Hawaii,NewJersey,NewYorkandRhodeIslandarethebestknown)providestatebenefitsfornon-occupationaldisabilities.Theamountofthebenefitswillvarydependingonthestate.Generally,thestateplanwillprovide50percentto60percentofyourwagesforalimitedperiodoftimesuchassixto12months.

Althoughtechnicallyahealthinsuranceproduct,accidentaldeathanddismemberment(AD&D)coverageisfrequentlyprovidedaspartofanindividualorgrouplifeinsurancecontract.Itmayhelpoutintheeventofadisability.AD&Dcoveragepaysaprincipalsumforaccidentaldeath,inaccordancewiththepolicy'sprovisionsanddefinitionofaccidentaldeath.

Theprincipalsumissimilarinmeaningtoapolicy'sfaceamount.Thissameamountispaidifyouloseuseoftwoarms,twolegsortwoeyesduetoanacci-

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dent.Thisamountusuallyisidentifiedasthecapitalsumifthepolicyispayinganaccidentaldismembermentbenefit.

Long-termcare(LTC)insurancepaysforthecareofpersonswithchronicdiseasesordisabilities,andmayincludeawiderangeofhealthandsocialservicesprovidedunderthesupervisionofmedicalprofessionals.LTCoftencoversnursinghomecare,home-basedcareandrespitecare.

Limitedhealthinsurancecontractsapplytoavarietyofspecialcircumstances.Toensurethatyouhavesufficientnoticethatthecoverageislimited,everypolicythatprovideslimitedcoveragemust,bylaw,stateplainlyonthefirstpageofthepolicy:"THISISALIMITEDPOLICY."

Accidentonlyinsuranceprovidescoverageforinjuryfromaccident,andexcludessickness.Benefitsmaybepaidforalloranyofthefollowing:death,disability,dismemberment,orhospitalandmedicalexpenses.

Creditinsuranceislistedherebecauseofthelimitednatureofitscoverage.Thispolicyisissuedonlyifyouareindebttoacreditor.Thecoverageislimitedtothetotalamountofyourindebtednessbutsomeinsurancecompanieswillevenbalkatpayingthat.

Conclusion

Yourabilitytoearnanincomeisafargreaterassetthananyoftheothermaterialpossessionsorassetsyoumayhave.

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Theriskoflosingthisabilityissubstantial.Theprobabilityofadisabilityoccurringismanytimesgreaterthantheprobabilityofprematuredeathduringthesameperiodoftime.

TheProbabilityofDisabilityComparedtoDeathatSpecificAges

Age No.per1,000

Disabled

No.per1,000Dying

ProbabilityofDisabilityCompared

toDeath32 6.87 1.74 4to137 7.75 2.27 3.5to142 9.46 3.39 2.8to147 12.00 5.00 2.4to152 15.78 7.36 2to1Source:CommissionersIndividualDisabilityTableandCommissionersStandardOrdinaryMortalityTable

Andgettingolderdoesn'tdiminishtheproblem.Althoughtheriskofadisabilitydecreaseswithage,thelengthofadisabilityincreases.

Logically,thereshouldbemoredisabilityincomesoldtocoverthishigherrisk.Thisdoesn'tmeanthatlifeinsuranceisawasteit'sanimportantthingtohave.Itjustmeansthatmorepeopleshouldbethinkingabouttheeconomicdeaththatadisabilitycancause.

Theinsuranceindustryencouragesconfusiononthisissue.Thecommissionspaidtoagentsforsellingdisabilityinsuranceareusuallysmallerthanthecommissionsforsellinglifeinsurance.Forthisbasicreason,agentsoftenstresstheneedforlifeinsurancebasedontheprobabilityofprematuredeathwhile

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overlookingtheriskofaneconomicdeathcreatedbyadisability.

Themosteffectivesolutiontoeconomicdeathcausedbyadisabilityistoownadequateamountsofdisabilityincomeinsurance.Relyingonsavings,theemployer,orthefederalorstategovernmentdoesnotguaranteethatadequatefinancialresourceswillbeavailable.

Thereareanumberofalternativestostandarddisabilityincomeinsurancethatpeoplecanuseeffectivelytocovertherisk.Insomecases,thesealternativesareanecessity,becauseapersondoesn'tqualifyforstandarddisabilitycoverage.Inothercases,theyaresimplymorecost-effectivemeanstothesameend.

Duringworkingyears,theriskofadisabilityoccurringismuchgreaterthantheriskofprematuredeath,andtheimpactofadisabilitycanresultinanenormousfinancialburden.Theeconomicdeathcausedbyadisabilitycanleadtoliquidationofpersonalandbusinessassets,aswellasincurreddebt.

Deathisacertainty.Butdisabilityisanearcertaintyatsomepointinyourworkinglife.

Thischapterhasdiscussedsomeofthemostbasicwaysthattotaldisabilitycanimpactpersonalfinances,andhowdisabilityincomeinsurancecanhelpreplaceaportionofthewageslost.Inthenextchapter,we'lllookatafewofthewaysyoucancalculateexactlyhowmuchandwhatkindofinsuranceyoushouldpurchase.

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Chapter2FiguringOutHowMuchIncomeInsuranceYouNeedDisabilityincomeinsurancecanenableyoutopayamortgageandothernecessaryfamilyexpenseswhenatotaldisabilityduetoanaccidentorsicknesscutsoffyourincome.Butexactlyhowmuchofthisinsurancedoyouneed?

Basically,theprocessofdeterminingyourdisabilityinsuranceneedsissimilartoidentifyingyourlifeorhealthinsuranceneeds.Themaindifferenceisthatdisabilityinsuranceconsidersyourannualincomeaspartoftheequationtheotherkindsofinsurancedon't.

You'llhearinsuranceagentsandotherindustrytypestalkintechnicaltermsaboutneedsanalysis.Butyoushouldn'tbeintimidatedbytechnicalities.Thecriticalquestionthatneedsanalysisanswersis:Isthepremiumyou'llpayforcoverageworthitsprice?

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DeterminingYourDisabilityInsuranceNeeds

Determiningtherelevanceandaffordabilityofthepremiumrequiresyoutohaveagoodunderstandingofyourcircumstancesbothfromafinancialstandpointandapersonalperspective.Athoroughjoboffactfindingcanhelpyouattainthislevelofunderstanding.

Aneedsanalysisprocesswilldevelopdataandinformationregardingthefollowingissues:

Personalinformation,suchaswhereyoulive,whatyoudoforwork,thesizeandshapeofyourfamily,andgoalsorobjectives;

Otherinsuranceyouown,suchasindividuallyownedlifeandhealthinsurance,includingnamesofinsurers,amountsofcoverage,beneficiarydesignations,etc.;

Statutorybenefits,suchaseligibilityforworkers'compensationbenefits,SocialSecurity,stateprogramsandsimilarbenefits;

Businessdata,suchasbusinesslocation,jobtitleandduties,salaryandwork-relatedbenefits,suchasgrouplifeandhealthinsurance,pensionbenefits,sickpay,sickdays,etc.;

Assets,whichmeansvariousliquidandnon-liquidassets,includingcash,securities,realestate,etc.;and

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Liabilities,whichmeansfixedmonthlyexpenses,suchasrent,foodandshelter,aswellasvariablemonthlyexpenses(medical,dental,homeandautorepair,etc.).

Organizeddifferently,theseissuescanbethoughtofastwocategoriesofconcern:whatyoumakeandwhatyouhavetoprotect.

CalculatingHowMuchYouMake

Whatyoumakeisfairlysimpletocalculate.It'stheamountofearnedincomeyouexpecttohaveduringaspecificperiodoftime.Inmostcases,insurancecompaniescalculatethisnumberbyaskingwhatyoumakeinsalaryandotherearnedincome.

AgoodinsurancecompanywillaskforsomekindofproofofincomelikeanIRSW-2formorothertaxdocument.However,somecompaniesdon'trequirethissortofduediligenceresearch.Whenaninsurancecompanydoesn'tdoitshomework,troubleoftenfollows.

The1996federalappealscourtdecisionMassachusettsMutualLifeInsurancev.MassoudHeidarydealtwithapolicyholdertryingtowringalotoutofadisabilitypolicy.

InApril1990,MarylandresidentHeidaryappliedfordisabilityinsurancefromMassMutual.ThecompanyissuedadisabilitypolicytoHeidarylaterthatmonth.

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Threemonthslater,Heidarywasinvolvedinanautomobileaccidentandsubsequentlyfiledaclaimforbenefits.

Investigatingtheclaim,MassMutualdiscoveredthatHeidaryhadmadematerialmisrepresentationsinhisinitialapplicationforinsurance.Contrarytohisclaimthathewasacompanypresidentwithmanagerialresponsibilities,hespentatleasthalfhistimeworkingasanelectrician.Contrarytohisclaimtohavenoknowndisorderofthejointsandbones,hehadsufferedsincechildhoodfromadeformitycausedbyabrokenarm.Contrarytohisclaimtohaveanannualincomeof$65,000,hehadearnedjust$24,000in1990.

MassMutualofficialsmetwithHeidaryinOctober1991.Atthattime,Heidaryacceptedacheckrepresentingreimbursementforallofthepremiumshehadpaid,plusinterest,andsignedareleaseformdischargingthecompanyfromallliabilityunderthedisabilitypolicy.

Twoyearslater,HeidarycontactedMassMutualandsoughtbenefitsunderthesamedisabilitypolicy.MassMutualrefusedtopay.Instead,inOctober1994,MassMutualsuedHeidaryandaskedforacourtdeclarationthat:

Heidaryhadmadematerialmisrepresentationstothecompanywhenheappliedfordisabilityinsurance;

hehadreleasedthecompanyfromallobligationsunderthedisabilitypolicyinOctober1991;and

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hewasaccordinglynotentitledtobenefitsunderthepolicy.

Heidarydeniedmakingmaterialmisrepresentationsinhisapplication.

ThetrialcourtobservedthatMarylandlawstated:

absentfraud,duressormutualmistake,...onehavingthecapacitytounderstandawrittendocumentwhoreadsandsignsit,or,withoutreadingitorhavingitreadtohim,signsit,isboundbyhissignature.

Findingnoevidencethatcouldleadarationaljurortoconcludethatfraud,duressoramutualmistakehadoccurred,thecourtruledthatHeidarywasboundbythetermsofthereleaseformhehadsigned.Heidaryappealedthedecision,arguingthatthetrialcourterredwhenitruledforMassMutual.

Hebasedhisappealonfourassertions:

1)hedidnotreadorspeakEnglishwell,becausehisnativelanguagewasFarsi;

2)usingasingleinsuranceapplicationform,hebelievedhehadappliedforbothlifeinsuranceanddisabilityinsurance;

3)aMassMutualagentwhospokeFarsiwaspresentattheOctober1991meetingandtoldhim,inFarsi,thatthecheckbeingofferedrepresentedthefirstinstallmentofdisabilitybenefits,andthereleaseformconcernedonlyalifeinsurancecontract;

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4)giventhereleaseform'suseofthephrase''onthelifeofMassoudHeidary"andtheabsenceofanyuseoftheword"disability"intherelease,hebelievedthatthereleasewaseffectivewithrespectonlytoalifeinsurancepolicy.

TheFarsi-speakingMassMutualagentdeniedmakingthestatementsattributedtohimbyHeidary.

TheappealscourtconcludedthatnoreasonablepersoncouldfindthatHeidarythoughthewasbuyingalifeinsurancepolicy:

...AppearingatthetopofthefirstpageoftheinsuranceapplicationsubmittedbyHeidarywereseveralboxes,bywhichtheapplicantwastoindicate,withacheckmark,thetypeofinsurancehewishedtoobtain....OnHeidary'sapplication,onlyoneboxwascheckedtheboxnexttothephrase"NewDisabilityInsurance."

...Theone-and-one-half-pagesectionoftheapplicationtitled"LifeInsuranceData,"beginningonthefirstpageoftheapplication,wasleftblank.Theone-and-one-half-pagesectiontitled"DisabilityInsuranceData"wasfullycompleted.

...theinsurancepolicyissuedinresponsetoHeidary'sapplicationbearsthetitle,onthefirstpageofthepolicy,"DisabilityIncomePolicy:BenefitsPayableForLossOfEarnedIncome."

Heidary'sbestchanceatsalvagingsomepartofhisclaimswastoshowthatthereleasehesignedduring

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theOctober1991meetingwasambiguousandconfusing.Buteventhisargumentdidn'tworkwiththeappealscourt:

...ThereleaseformHeidarysignedclearlyreferredtothedisabilityinsurancepolicybyusingthepolicynumber.Theformstated,inpertinentpart:

Inconsiderationofthepaymentof$4,185.43,representingarefundofpremiumplusinterestunderPolicyNo.9391944issuedbyMassachusettsMutualLifeInsuranceCompanyofSpringfield,Massachusetts,onthelifeofMassoudHeidary,theundersignedherebydeliverssaidpolicytosaidcompanyforcancellationandherebyreleasesandforeverdischargessaidcompanyofandfromallmannerofclaims...whichshe/heeverhad...byreasonoftheissuanceofsaidpolicyofinsurance.

Theappealscourtaffirmedthelowercourt'sdecisioninfavorofMassMutual.

CalculatingHowMuchYouNeedtoProtect

Inadditiontofactualinformation,yourgoals,objectivesorspecialneedsshouldbeconsidered.Amongthemostcommonoftheseissuesareeducationalobjectivesfordependentchildren,otherfamilyneeds,businessobjectivesandretirementgoals.

Ingreaterdetail,thesearethefactorsthatwillimpactyourdisabilityneedsmostdirectly:

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Fixedobligations.Suchexpensesasmortgageorrentpayments,carpayments,utilities,food,installmentpurchases,insurancepremiums,etc.,mustbeitemized.Thetotalfixedexpensesmustbepaidfromsomesource.

Variableexpenses.Thesearetheunexpected,non-fixedexpensesthatoccurfrommonthtomonth,suchasautomobilerepairs,medicalexpenses,prescriptions,homerepairs,theever-menacingmiscellaneousexpenses,etc.Someestimationoftheseunexpectedmonthlyobligationsmustbedeterminedandthesourcefromwhichtheywillbepaid.

Inaddition,thereistheaddedexpenseduetoaperson'sdisability.Generally,incomestopsandthereareexpensesincurredrelativetothedisablinginjuryorsickness:additionalmedication,doctor'sbills,theneedforprostheticappliances,suchasbraces,andpossiblehospitalbillsthatarenotfullycoveredbyhospitalizationinsurance.

Personalassets.Thenextquestiontobeansweredis:Whereisthemoneygoingtocomefromtopaythesevariousobligations?Howliquidareyourpersonalassets?

Thefirstsourceofliquiditywillbepersonalsavings.Thequestionstoberaisedhereinclude:

Doyouhaveanysavings?Ifso,howmuchandhowadequateisitforpurposesofpayingexpenses?

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Willyoubewillingtousepersonalsavingstopayexpensesassociatedwithadisability?

Work-relatedbenefits.Whattypeofdisabilitybenefitsmightyouhavefromyouremployer?Isthereaformalsickpayorsalarycontinuationplan?Doyouhaveanyaccumulatedsickdays?

Governmentbenefits.Afewstatesprovidestatutorydisabilitybenefits.Onanationalscale,SocialSecurityoffersadisabilityincomebenefitifthedisabledindividualcanqualifyforit.(ItmaybeadvisablenottoincludeSocialSecuritydisabilitybenefitsinatotalplan,sincesomanyclaimantsaredeniedbenefits.Inaddition,evenifaclientqualifiesforbenefits,ittakesnearlyayeartoreceivethefirstcheck.)

Mostinsurancecompaniesusefairlystandardworksheetstodetermineamonthlyexpenseestimatethatrelatestodisabilitycoverageneeds.Theworksheetsusuallyincludemortgageorrent,utilities,food,autoortranportationexpenses,tuitionoreducationexpenses,clothing,outstandingconsumerloansorinstallmentpurchases,insurancepremiums,medicalordentalcarecosts,taxesandmiscellaneousexpenses.

Againsttheseexpenses,you'llneedtoweighanynon-earnedincomethatyouwouldexpecttohaveduringaperiodofdisability.Thisincludesgroupdisabilityincomeinsurance,interestincome,dividends,rentalincome,deferredcompensationandresidualcommissions,royaltiesandothermiscellaneousincome.

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DisabilityIncomeNeedsAssessmentWorksheet

Part1

EnteryourmonthlyexpensesrelatedtoeachoftheseitemsandaddthemforSubtotal1.Ifpossible,averagewhatyouspentduringthelastsixthmonths.Mortgageorrent

Utilities

Food

Autoexpenses/transportation

Tuition/educationexpenses

Clothing

Loansandinstallmentpurchases

Insurancepremiums

Medical/dentalcarecosts

Miscellaneousexpenses

Taxes

Subtotal1Part2

Enteryourmonthlyincomeprovidedbyeachofthefollowingsourcesofnon-earnedincomeandaddthemforSubtotal2.Fortheinsuranceitems,checkeachpolicy'smaximumbenefit.Fortheotheritems,useasix-monthhistoricalaverage,ifavailable.

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GroupdisabilitycoveragebenefitsOtherinsurancebenefitsInterestincomeDividendsRentalincomeResiduals,royalties,etc.Subtotal2Part3

SubtractSubtotal2fromSubtotal1.Thiswillprovideyouwiththemonthlyincomefigurethatyouneedtoinsureagainstdisability.Subtotal1Subtotal2 -Totalmonthlyincometobeinsured

Ifthefinalincomefigureisnegative,checkyournumberswithaneyetowardmakingsureyourexpensesareallcoveredandthenon-earnedincomeisabsolutelyreliable.Ifyourfinalnumberisstillnegative,youdon'tneedtoworryaboutdisabilityinsuranceandshouldbethinkingaboutretiring.

Formostpeople,thefinalincomefigurewillbepositiveandprobablydisturbinglylarge.Andremember,thisisonlyamonthlynumber.

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Inordertoestimatethelikelytotallossfromadisability,referbacktothedisabilitydurationchartonpage5ofChapter1.

ComputinganAverageLong-TermDisabilityLossTotalmonthlyincometobeinsuredAveragedurationofadisabilitythatlastsatleast90days xAveragelong-termdisabilityloss

Asyoucansee,along-termdisabilitycancreateasix-figureloss.Thekeytostayingingoodfinancialshapeiscoveringthatmonthlyfigure.Aswe'venotedalready,groupdisabilityusuallywillcoverjustafractionofyourbasesalary.

Thedisabilityneedsassessmentworksheetgivesyouoneofthenumbersyouneedtotellyourinsurancecompanyoragent:yourmonthlycostoflivingthebasisofyourincomeinsuranceneeds.Yourcurrentmonthlyearnedincomegivesyouthesecond.Theaveragelong-termdisabilitylossfromthesecondchartinthissectiongivesyouthethird.Thesenumbersprovidearangewithinwhichyourincomecoverage(whetherit'sdisabilityinsurance,SocialSecurityorsimplecashsavings)shouldfall.

AnalyzingCoverage

Onceyourneedsanalysisiscompleted,yourfocusshouldchangetocomparingdisabilityincomepolicies.Onceagain,thisprocessusuallyrunsbetterifyouuseaformalmethodofreview.

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Therearesomerecurringconsiderationsthatformaframeworkforcoveragecomparison.Thisframeworkcanhelpyoudeterminehoweachkindofinsurancerelatestoyourneeds,goalsandabilitytopayfortheinsurance.

Theconsiderationsthatbuildthisframeworkare:

Thelengthoftheeliminationperiod(EP).Thisisthewaitingperiodbetweenwhenyoumakeanincomeinsuranceclaimandwhenthecoveragebegins.EPsworkmuchlikedeductiblesinautoorhomeownersinsurancethelargertheyare,thecheaperthecoverage.

Thelengthofthebenefitperiod(BP).Thisistheamountoftimethattheincomeinsurancewillpaybenefits.Itrelatesdirectlytothetotallossfigurethatweconsideredearlierinthischapter.

Theamountofthemonthlybenefit.Differentformsofincomeinsurancewilltreatthisitemdifferently.Aswe'veseenbefore,itmaybethesinglemostimportantfactorformostpeople.

Theoccupationalclassificationofthepersoninsured.Thisrelatesmostdirectlytoworkers'compandotherjob-relatedcoverage.Butitalsoimpactsthecostofmostindividualcoverages.

Theinclusionofoptionalbenefits.Theseusuallyarebasedonyourindividualneedsandfinancialgoalsthesubjectivefactorsthataredifficulttoquantify.

Mostofthesespecificconsiderationscanbeadjustedtoprovideforanincreaseordecreaseinthepremium,whichshouldbeconsideredifthepriceofthepolicyisacriticalfactor.

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Aswe'venoted,theeliminationperiodissimilartoadeductiblebutitiswhatinsuranceprofessionalscallatimedeductible,insteadofadollardeductible.Thelongertheperiodoftimethatyoucangowithoutcollectingdisabilitybenefits,thesmallerthepremiumforanyinsurancewillbe.Thus,aplanwitha30-dayEPwillhaveaconsiderablyhigherpremiumthanaplanwitha90-or180-dayEP.

Usually,aplanwitha60-dayEPwillcostapproximately20percentlessthanaplanwitha30-dayEP.Mostinsurancecompanieswilloffereliminationperiodsfrom30daystoaslongastwoyears.

EventhoughasavingsinpremiumcanberealizedwiththelongerEP,itmaynotbeinyourbestinterest.

Forexample,ifyouchoosea90-dayeliminationperiod,youwillnotbegintoaccrueabenefituntilthe91stdayofadisability.Theinsurancecompanywon'tissueaclaimcheckuntiltheendofthemonth.Therefore,you'llwaitroughly120daysfourmonthsfromtheonsetofthedisabilityuntilyoureceiveanybenefit.

SelectingEliminationandBenefitPeriods

Whendeterminingwhicheliminationperiodtoelect,youmustanswerthequestion,"HowlongcanIgowithoutanyincomefrommydisabilityincomeplan?"

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Theanswertothisquestionwilldependonthesizeofyourmonthlyincomeinsuranceneedandtheamountofcashsavingsorliquidassetsyouhaveinreserve.

Acaveat:Don'tcountonSocialSecuritytocoveryourincomeinsuranceneeds.Itcanbeasecondarylevelofcoveragebutnotmuchmorethanthat.Everysituationisdifferent,butyouprobablywillendupchoosingamong30-,60-or90-dayeliminationperiods.ApolicywithnoEPisusuallyveryexpensive.Apolicywithmorethana90-dayEPusuallydoesn'tbeginprovidingbenefitssoonenough.

Remember:AftertheEPissatisfied,youbegintoaccruebenefitswiththeinitialcheckarrivingaboutonemonthlater.So,a30-dayEPwouldresultinthefirstcheckbeingissuedabout60daysaftertheonsetofthedisability.

It'susuallyamistaketoassumesomeonewhohasahigherincomecanlivewithalongerEP.Ifyoumakemoremoney,youoftenhavebiggerexpenseswhichputsyouinthesameplaceassomeonemakinglessmoney.Acorporateexecutiveearning$250,000peryearmaynothaveanymoreliquiditythanaworkerearning$25,000.

ThebestwaytobesureyoucanlivewithalongerEP(90-dayperiodsarecommon,butsix-monthEPsex-

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ist)istomakesureyouhaveshort-termdisabilityinsurancetocoveryouduringthewait.Thisshort-termcoverageiswhat'sprovidedbymostwork-relatedplans.

Onceyou'vefiguredoutwhatkindofeliminationperiodyoucantolerate,youneedtochoosethelengthoftimethatbenefitswillbepaid.Themostcommonbenefitperiodsareoneyear,twoyears,fiveyearsandtoage65.Insomecases,alifetimeaccidentand/orsicknessoptionmaybeincludedinthepolicy,whichextendsthebenefitperiodforyourlifetime.

Liketheeliminationperiod,thebenefitperiodisareflectionofthepremiumyoupay.Thelongerthebenefitperiod,thehigherthecostofthepolicy.Shortbenefitperiodsresultinlowerpremiums,especiallywhentheyarecoupledwithlongeliminationperiods.Thefollowingchartillustratesthisconcept.

ThePremiumandtheBenefitPeriodMale,age45,$1,000monthlybenefitpayabletoage65BenefitPeriod AnnualPremium

1Year $2552Years $3305Years $510

ToAge65 $690Lifetime $830

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Ifyoudeterminethata30-dayeliminationperiodisadequate,thenitwouldbereasonabletoconsideratwo-orfive-yearbenefitperiod.Ontheotherhand,whenevaluatingtheriskofapermanentdisabilityandthepotentiallifetimelossofincome,quitepossiblyatoage65benefitperiodshouldbeconsidered.

Followingananalysisofallofthefactsandyourneeds,thedecidingfactormaywellbethecostofthepolicy.Inthiscase,askyourself:Shouldyouuseyourresourcestopayforashortereliminationperiod,orusethepremiumstocoveralongerbenefitperiod?

Althoughinsuranceexpertsnormallydiscussdisabilityincomebenefitsintermsofmonthlyamounts,theylookatthebiggerpicturewhendeterminingthebenefitperiod.Thepotentiallossofincomeduetoapermanentandtotaldisabilitycanliterallybeinthemillionsofdollars.

Forexample,a40-year-oldearning$50,000peryearwhobecomestotallydisabledstandstolosemorethan$1.2millionbeforeage65ifthedisabilitybecomespermanent.And,aswe'veseen,theolderyouareattheonsetofadisability,themorelikelyitisthatyouwillnotrecoverorwillnotrecoverfully.Thisobservationsuggeststhatyoushouldgetthelongestbenefitperiodpossible.However,thishastobeweighedalongwiththelargerpremiumrequiredforthelongerbenefitperiod.

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Ifcostisanissue,thenyoumayhavetoconsiderashorterbenefitperiod,orlongerEP,orboth.Afive-yearbenefitperiodwouldresultinasubstantiallylowerpremiumthanato-age-65benefitperiod.Ofcourse,thehopeisthatifadisabilitystrikes,itwillnotbepermanent.Ifitisnot,thenashorterbenefitperiodwillnotharmyou.

SelectingtheBenefitAmount

Thenextfactortoconsideristheamountofthemonthlybenefit.Theinsurancecompany'sissueandparticipationlimits,aswellasanyapplicablestatelaws,willdeterminethemaximumamountofmonthlybenefitsthatmaybeissued.Typically,thiswillbeapredeterminedpercentagesuchas70percentor75percentofgrossearnedincome.

Forthisreason,whenyou'reapplyingfordisabilityinsurance,thecompanywillwanttoknowhowmuchearnedincomeyoumakeeachyear.Inasense,thisprocessservestolimitthetotalbenefityoucanpurchase.Anotherfactorthatdeterminestheamountofthebenefitistheexistenceofanyotherdisabilityincomecoverageinforce.Oneofthequestionsontheapplicationforinsurancerequiresthatyouindicatethenameoftheinsurerandparticularsregardingtheadditionalcoverage.Anyothercoveragewillcausetheamountrequestedtobelimitedtotheinsurer'sunderwritinglimits.Thesearereferredtoastheissueandparticipationlimits.

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AssumethatCompanyAwillissuedisabilitycoverageupto70percentofaperson'sgrossearnedincome.Inaddition,itwillparticipatewithotherinsurers'coverageuptothis70percentmaximum.Diane,apharmacist,earns$3,000permonth.Shemaypurchasedisabilityincomeupto70percentofherearnedincomeor$2,100permonth.However,sheindicatesonherapplicationthatshehasothercoveragewithCompanyXintheamountof$1,000permonth.ThemaximumcoveragethatCompanyAwillissueisanadditional$1,100permonth.CompanyAisparticipatingwithCompanyX,andtotalbenefitsarelimitedtoCompanyA'sissueandparticipationlimitsof70percentofearnedincome.It'ssurprisinghowoftenpeopletrytoincludefalseinformationondisabilityinsuranceapplications.The1993federalcourtcaseJeromeBreaultv.BerkshireLifeInsuranceconsideredafairlyblatantexampleofthis.

VirginiaresidentBreaultwasshoppingforanindividuallong-termdisabilityinsurancepolicyin1989.Althoughhealreadyhaddisabilitycoveragethroughagroupinsurancepolicyprovidedbyhisemployer,Breaultdoubtedthereliabilityandadequacyofthiscoverage.HecontactedafriendwhoworkedforBerkshire,aMassachusetts-basedinsurancecompanythatspecializesinlong-termdisabilitypolicies.

BreaultexpressedhisuneasinesswithhiscurrentcoverageandhisfriendsaidthataBerkshireagentwould

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contacthim.Ashorttimelater,anagenttelephonedBreaulttodiscussthevariousdisabilitycoverageoptionsavailablethroughBerkshire.

Inthecourseoftheirinitialtelephoneconversation,Breaultinformedtheagentthathehadobtainedashort-termdisabilitypolicyfromMutualofOmahaandthathealsohaddisabilitycoveragethroughhisemployer'sgroupinsuranceplan.TheagenttoldBreaultthatgroupdisabilitypoliciesusuallyprovidedinferiorcoverageandthatheshouldnotrelyonthegrouppolicy.

InJanuary1990,theagentcalledBreaulttocompletetheinsuranceapplication.Inthistelephoneconversation,theywentthroughtheapplicationquestionsonebyone.InadditiontobackgroundquestionsconcerningBreault'sage,socialsecuritynumber,address,occupationandincome,theapplicationalsorequestedinformationconcerningotherinsurancecoverage.

Specifically,question12askedforadescriptionof''allcoverageinforceincludingindividual,franchise,association,grouporgovernmentplans."Onthecompletedapplication,"none"waswrittendownastheanswertothisquestion.

TheapplicationwassenttoBreault,whoreviewedit,signeditandreturnedittoBerkshire.Whenhereturnedtheapplication,Breaultknewtheinformationrelatingtohisexistingdisabilitycoveragewasfalse.

Followingthecompletionofamedicalexamination,BerkshireapprovedBreault'sapplicationfordisabilityinsuranceandissuedhimapolicy.

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BreaultunderwentsurgeryinJanuary1991,whichlefthimtotallydisabledandunabletowork.Consequently,hemadeclaimsandreceivedbenefitsunderhisshort-termMutualofOmahapolicyandhisemployer'sgroupinsurancepolicy.

HealsomadeaclaimforbenefitsunderhisBerkshirepolicy.

Inthecourseofinvestigatingtheclaim,BerkshirediscoveredthatBreault'soriginalapplicationhadnotlistedtheadditionalpolicies.Giventhis,BerkshiredeterminedthatBreault'sfailuretodisclosematerialfactsontheapplicationvoidedthepolicy.

Berkshire'schiefunderwriterdeterminedthathadthecompanyknownaboutthesepolicies,itwouldnothaveissueddisabilityinsurancetoBreaultinthefirstplacebecausetheamountofcombinedcoverageexceededBerkshire'sissuelimitationsguidelines.

BerkshirenotifiedBreaultthatitwasrescindingthepolicybecauseofmaterialmisrepresentationsintheoriginalapplicationandrefundedhispremiumchecks.

BreaultsuedBerkshireforbreachingitscontractwithhim.HeclaimedthathewasnevertoldthathisotherdisabilitycoveragewouldaffecttheissuanceortermsofaBerkshirepolicy.

Berkshirerespondedbyclaimingithadvalidlycanceledthepolicy.ItaskedthecourttodismissBreault'scharges.

Whilethelawsuitcontainedanumberofarguments,thekeyissuewaswhetherBreaulthadmisledBerk-

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shireonthedisabilityapplication.Ifso,Berkshirewasrightinrescindingcoverage.

Thecourtruledthatinformationconcerninganapplicant'sexistingdisabilitycoverageisclearlymaterialtoaninsurancecompany'sdecisiontoissueadisabilitypolicy:

...Itbearsonthepossibilitythattheapplicant,ifoverinsured,mightfeignadisablingillnessorseektoavoidreturningtoworkafteralegitimateinjury.Suchmisconductbytheinsuredisanadditionalriskaninsurerisfreetodeclinewhere,ashere,anapplicant'spotentialcombinedmonthlydisabilitybenefitswouldexceedhisregularmonthlyincomeifheisprovidedadditionaldisabilitycoverage.

Berkshire'schiefunderwriterhadstatedthatthecompanywouldnothaveissuedapolicytoBreaulthaditknownofhisotherdisabilitypoliciesforexactlythesereasons.

Breaulthadreviewedtheentireapplication,signeditandthenreturnedittoBerkshire,knowingthatitcontainedfalseinformation.Hehadactualknowledgethattheinsurancecompanyhadreceivedfalseinformation.

ThecourtgrantedBerkshire'smotionanddismissedBreault'sclaims.

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UnearnedIncomeandNetWorth

Athirdfactorthatcanlimitapolicy'sbenefitamountisunearnedincome.Unearnedincomereferstorents,royalties,interest,dividends,etc.Thisincomeispaidregardlessofyourdisabilityorworkstatus.

Ifyouhavesubstantialamountsofunearnedincome,yourinsurancecompanymayreducethebenefitamountitwillsellyou.Themeaningofsubstantialamountsofunearnedincomewillvaryfromcompanytocompany.Apersonwithafewthousanddollarsofunearnedincomewillnotbeaffected.Typically,ifapersonhasannualunearnedincomeamountingto$15,000ormore,theinsurerwillwanttoreducethebenefitamount.

Despitewhatwe'venotedabouthighincome,highnetworthcanreduceaperson'sneedfordisabilityinsurance.Apersonwithsizablenetworth,suchasamultimillionaire,isbasicallyself-insuredandprobablydoesn'tneeddisabilityincomeinsurance.Thisindividual'spersonaland/orbusinessassetswillprovideprotection.

Infact,apersonwithahighnetworthmaywellbedeclinedbyaninsurancecompanyorofferedsomesmalltokenbenefit.

Yourneedsdocomeintoplay,butregardlessofyourneedstheamountofcoveragewillbelimitedbyyourearnedincome,unearnedincome,andtheinsurancecompany's(Continuedonnextpage)

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(Continuedfrompreviouspage)issueandparticipationlimits.Thesefactorsaredesignedtopreventoverinsurance,whichmightgiveapolicyholderincentivetofakeadisability.Thepurposeofinsuranceistomakealosswholeagain.Thus,whenaninsurer'sissueandparticipationlimitsare70percentofgrossearnedincome,thisamountprobablywillbeveryclosetoyournetincomeortakehomepay.Therefore,thelossismaderelativelywholeagain.

Unfortunately,theproblemfacedbymanypeopleisoverspendingtheirincomes.Withinstallmentpurchases,creditcards,etc.,manypeoplelivebeyondtheircurrentincomes.Theamountofadisabilityincomebenefitisdesignedtodiscourageoverspendingtendencies.

OptionalPolicyBenefits

Whenyou'reconsideringanincomeinsurancepackage,thefinalingredientistheinclusionofanyoptionalpolicybenefitsbeyondthebasicdisabilitybenefits.

Theirinclusionmostoftenwillbedependentonyourneedsandyourabilitytopaytheextrapremiumfortheseoptions.Theadditionalpremiumchargedfortheoptionalbenefitsdescribedhereisrelativelylow.Dependingontheoption,theadditionalcostwouldrangefrom$30topossibly$100annually.

Theoptionsthatappealtomostpeopleinclude:

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FutureIncreaseOptions

CostofLivingRider

LifetimeAccidentandSicknessBenefit

TheFutureIncreaseOption(FIO)generallyisimportanttoanyapplicantwhoisunder40yearsofage.Itprotectsfutureinsurabilitybyprovidingtheguaranteedrighttopurchaseadditionalamountsofdisabilityincomeinfutureyears.Normally,theriderisnotavailablepastage40,althoughsomeinsurersmayofferituptoage50.

Ofcourse,manypeopleareconcernedaboutchangesinthecostofliving.Toprotectthepurchasingpowerofdisabilityincomebenefits,manyapplicantsaddtheCostofLivingRidertotheirbasepolicy.Thissimplystatesthat,asapredeterminedcostoflivingstandardincreases,thebenefitsprovidedbythepolicywillincreaseacorrespondingamount.

Althoughitisarelativelyexpensiveoption,LifetimeAccidentandSicknesshasparticularappealtoapersonwhoislikelytoexperiencedramaticincreasesinearningsovertheyears.

ASocialSecurityRidermayserveyourneedsbyprovidingadditionaldisabilitybenefits(usuallyforthefirstyear),whileadeterminationismadeastoyoureligibilityforSocialSecuritybenefits.

PlanningfortherightpackageofbenefitsalsocanbeachievedthroughtheuseoftheAdditionalMonthlyBenefitrider,inmuchthesamewaytheSocialSecurityRiderisused.

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Otheroptions,suchtheastheHospitalConfinementorNon-DisablingInjuryriderswillappealtocertainpeople,dependingontheirneedsandobjectives.Theseareparticularlyusefulforpeoplewhosejobsarephysicallydemandingenoughthatreturningtoworkwouldbeespeciallydifficult.

ReducingthePremium

Thepolicy'spremiumcanbereducedbychangingthelengthoftheeliminationand/orbenefitperiodsandbenefitamounts.

Thefollowingchartillustratesthesepoints.

PremiumConsiderationsObjective ActionLowerthepremium

Reducethebenefitperiod

Increasetheeliminationperiod

Reducethebenefitamount

EliminateoptionalbenefitsRaisethepremium

Increasethebenefitperiod

Decreasetheeliminationperiod

Increasethebenefitamount

Addoptionalbenefits

TaxConsiderations

Premiumspaidforanindividuallyowneddisabilityincomeplanarenottax-deductible.However,benefitsreceivedfromthepolicyare

tax-free.

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Thisconceptalsoappliestoasoleproprietorshiporapartnership.Asoleproprietorshipisanon-incorporatedformofbusinessownedbyoneindividual.Asoleproprietorisnotconsideredanemployee.Therefore,anycoverageprovidedthroughthebusinessisconsideredindividuallyowned.

Likewise,partnersarenotconsideredemployees.Thereforedisabilitybenefitswillbeconsideredindividuallyowned.Thus,thepremiumsarenotdeductible,butthebenefitsaretax-free.

Note:Asoleproprietorshiporapartnershipthatprovidesaformalsickpayplanforemployeeswillreceiveataxdeductionforthepremiumspaidonbehalfoftheemployees.Intheseinstances,benefitsreceivedbytheemployeesaretaxable.

Conclusion

Thischapterhasgivenyousomeguidelinesforcalculatingyourneedforincomeinsurance.Mostpeopleuseindividualdisabilityincomeinsurancetoaccomplishthisbutthereareotherwaystoinsureincome.Whatevermechanismyouchoose,youcanusetheneedsanalysistoolsdescribedinthischaptertofigureouthowmuchcoverageyoushouldhave.

Throughoutthisbook,we'llconsidervariousmechanismsforinsuringyourincome.Ifyouaren'tcertainabouthowmuchofthesekindsofinsuranceyouneed,referbacktothischapterespeciallytheearlysectionsfortipsonhowtodotherightcalculations.

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Chapter3KeyConceptsandDefinitionsTofullyunderstandincomeinsurance,youneedtounderstandthelanguageoftheproduct.Insuranceis,ingeneral,anindustrythatreliesheavilyonjargonandtechnicallanguagetoexpressrelevantconcepts.Thischapterexploressomebasicdefinitionsandconceptsregardingtraditionalformsofincomeinsurance.

Anunderstandingofeachofthesetermsisimportantbecause,asaconsumer,youmustbeabletounderstandhowthepolicywillworkifyoubecomedisabled.Benefitswillbepaidinaccordancewiththepolicy'stermsandconditions.

Accident

Thetermaccidentusuallyisdefinedasanunintendedandunforeseeneventthatresultsinbodilyinjury.Thisisreferredtoasanaccidentalbodilyinjurydefinitionandisconsideredveryliberal,sinceitrelatesthedefinitionofanaccidenttoaresultthatiscausedbyanunintentionalevent.

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Ontheotherhand,accidentalsocanbedefinedasanyinjurycausedbyaccidentalmeans.Thisdefinitionattemptstodeterminethecauseofthelossandwhetherthatcausewasaccidentalorintentional.Ifthecausewasaccidental,thenbenefitswouldbepayable.Ifitcanbedeterminedthatthecauseoftheaccidentwasintentional,thentheclaimwouldbedenied.

AccidentalDeathBenefits

Somedisabilityincomecontractsincludeanaccidentaldeathbenefit,shouldtheinsuredpersondieduetoanaccident.Inanaccidentaldeathsituation,ifthecauseofdeathcannotbedeterminedaccurately,thentheinsurermayrequestanautopsybeperformed,aslongassucharequestdoesnotconflictwithstatelaw.

BenefitLimits

Thepurposeofbenefitlimitsistoprotecttheinsurancecompany(andthepolicyholder)fromoverin-surance.Generally,apersonmayinsureamaximumof60percentto70percentofearnedincome.Thisbenefitmaximumiscontainedintheinsurancecompany'sissueandparticipationlimits.

Thepurposeofinsuranceistomakealosswholeagainnottomakemoneyasaresultofaloss.Alimitationof70percentofpayasamaximumdisabilityincomebenefitprobablycomesclosetoyournetpayaftertaxes.

BenefitsPeriod

Aftertheeliminationperiodhasbeensatisfiedandmonthlydisabilitybenefitsbegin,theywillbepaid

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foraspecificperiodoftime,providedtheinsuredpersonremainstotallydisabled.Thisperiodoftimeisknownasthebenefitperiod.Typicalbenefitperiodsareoneyear,twoyears,fiveyearsandtoage65.

Example:Ifyouhaveadisabilityincomepolicywithamonthlybenefitof$1,000,payableaftera30-dayeliminationperiod,withabenefitperiodoffiveyears,thenyouwouldbeentitledtofivefullyearsofbenefitsfollowingtheeliminationperiodforeachtotaldisability(assumingthatyoucontinuetobetotallydisabledthroughoutthebenefitperiod).Inmostcases,thelongerthebenefitperiod,thehigherthepolicy'spremiumwillbe.

ChangeofBeneficiary

Thismandatoryprovisionsaysthatthepolicyholder(usuallytheinsured)hastherighttonameorchangeabeneficiary.Sinceadisabilityincomepolicymayincludeanaccidentaldeathbenefit,thisprovisionisrelevantwhetherthepolicycomesfromahealthinsurancecompanyoralifeinsurancecompany.

Theonlytimethepolicyholdermaynotchangeabeneficiaryisifthebeneficiarywasdesignatedasanirrevocablebeneficiary.Anirrevocabledesignationcannotbechanged,butthepolicyholderdoeshavetherighttochangerevocablebeneficiaries.

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ChangeofOccupation

Thechangeofoccupationprovisionestablishesamethodforprocessingdisabilityincomeclaimsifyouchangejobs.Underthisprovision,ifyoumovetoamoreorlesshazardousoccupation,theinsurancecompanyshouldbenotified.Itthenwilladjustyourpremiumtoreflectthehigherorloweroccupationalrisk.

Failuretonotifyusuallywillresultintheinsurancecompanyadjustingbenefitsdownwardifyoudoeventuallyfileaclaim.

ClaimForms

Onceyou'venotifiedtheinsurancecompanythatyou'remakingaclaim,ithas15daystoprovideyouwiththenecessaryclaimforms.Thisisn'tusuallyaproblem,though,becauseyou'lloftenhaveclaimformsinadvanceofanyclaim.Manyinsurancecompaniesmakeapracticeofgivingyouclaimformsalongwiththepolicy.

Consideration

Theconsiderationprovisionappliestobothyouandtheinsurancecompany.Bydefinition,theconsiderationisthevalueexchangedbythepartiestotheinsurancecontract.Theconsiderationyouprovideistheinformationonyourapplicationandthepaymentoftheinitial(andsubsequent)premiums.Theconsiderationthattheinsurancecompanyprovidesisthepromisetopaythebenefitsasstatedinthepolicy.

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ContestablePeriod

Theinsurancecompanymaynotcontestorchallengeanystatementontheapplicationordenyaclaimafterthepolicyhasbeeninforcefortwoyearsfromtheeffectivedateofcoverage.Twoyearsisthestandardcontestableperiod,afterwhichthepolicybecomesincontestable.However,aparticularstatemayelectatimelimitmorefavorabletotheinsurer,suchasthreeorfouryears.

Therearetwoexceptionstothisconcept.Anymisstatementofageorsexcanbecorrectedatanytimethatitisdiscovered.Thiserrornormallyisnotintentionalorfraudulent.Usually,thismistakeisdiscoveredatthetimeaclaimismade.Atthispoint,evenafterthetwo-yearcontestableperiod,thepolicycanbechangedtoreflectthecorrectageorsexoftheinsuredand,accordingly,thecorrectpremiumorpolicybenefitcanbedetermined.

Thesecondexceptionisfraud.Fraudmayvoidthehealthinsurancecontractwheneveritcanbeprovenbythecompany.However,itshouldbenotedthatifthepolicydoesnotstipulatethatfraudwillvoidthepolicyatanytime,thenanyfraudulentapplicationorclaimmustbediscoveredandprovenbytheinsurerwithinthecontestableperiod.

DisabilityIncomeInsurance

Disabilityincomeinsurancecanbedefinedasacontractthatnormallypaysamonthlybenefit,followingtheeliminationperiodfortotaldisabilityduetoaccidentorsickness.Disabilitybenefitsalsomaybepaidforpartialorresidualdisability.

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EarnedIncome

Moststatesandinsurancecompaniesspecifytheamountofdisabilityincomethatyoumaypurchase.Typically,thislimitationisexpressedasapercentageofyourearnedincome.

Earnedincomeisdefinedascompensationreceivedforpersonalservicesrendered.Thistypeofincomeisdifferentiatedfromunearnedincome.Youmayinsureearnedincome,butnotunearned.

Unearnedincome,suchasdividendsandinterest,ispaidtoyouregardlessofhealthandtheabilitytoworkornotwork.Thereisnocompensatorypersonalserviceinvolvedwhenanindividualreceivesinterestpayments,dividendchecksfromstockinvestments,royaltiesfromhavingwrittenbooks,incomefromrentalproperties,etc.

EliminationPeriod

Eliminationperiod(EP)istheperiodoftimethatyoumustbetotallydisabledbeforebenefitsarepayable.Theeliminationperiodisalsoknownasthewaitingperiod(WP).Theeliminationperiodisusuallymeasuredindaysormonths,suchas30,60or90days;oronemonth,threemonths,sixmonths,etc.

Theeliminationperiodcanbethoughtofasadeductiblebasedontime,inmuchthesamewayanautomobilepolicyoramajormedicalpolicyissubjecttoadollarormonetarydeductible.Forexample,ifyouareinvolvedinanautoaccident,youmustfirstsatisfythepolicy'sdeductible,andthentheinsurancecompany

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willpayyourclaim.Withadisabilityincomepolicy,youmustfirstsatisfythedeductibleintermsoftime(theeliminationperiod),andthentheinsurancecompanybeginstopayyouamonthlybenefit.

EntireContract

Theentirecontractconsistsoftheinsurancepolicy,riders,anyamendments,andasignedandwitnessedcopyoftheinsuranceapplication.Allattachedpapersconstitutetheentirecontractofinsurancebetweenyouandtheinsurer.Therearenoverbalagreementsorotherdocumentsthattheinsurercouldusetochangeoralterthecontract.Theagentcannotchangeoralteranypolicyprovisionorbenefit.

Exclusions

Although,strictlyspeaking,exclusionsandpolicylimitationsarenotconsideredpolicyprovisions,theyarecertainlyimportantelementsofthecontract.

Toadegree,thenumberortypesofexclusionswillbedeterminedbythemarketplace.Forexample,ifthemajorityofinsurersweretoexcludealldisabilitiesassociatedwithautomobileaccidents,anautoaccidentexclusionlikelywouldbecommoninallpolicies.

Themorecommonpolicyexclusionsincludethefollowing:

Warandactofwar.Lossesduetowar,declaredorundeclared,areexcluded.

Self-inflictedinjury.Aself-inflictedinjury,

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suchasanattemptedsuicide,wouldbecontrarytothepolicy'sdefinitionofaccident(unintentionalorunforeseen).

Aviation.Thisexclusionnormallypertainstocommercialairlinepilotsandthosewhoflyprivateaircraft.Thisexclusionmayapplytopassengersinaprivateaircraft,aswell.

Mostinsurerswillnotcovercommercialpilotsfordisabilityincomeduetothefactthatarelativelyminorchangeinhealthaslightchangeinvision,ahearingproblem,etc.couldleavethepilottotallydisabled.Theseminorimpairmentswouldnotdisablemostotherpeople.

FreeLook

Thefreelookprovisiongivesyoutheopportunitytoreviewthepolicyuponreceiptandreturnittotheinsurerwithin10daysforarefundofallpremiumspaidifyouarenotsatisfiedforanyreason.

GracePeriod

Thegraceperiodistheperiodoftimethatthepolicyholderhastopaythepremiumbeforethepolicylapsesfornonpayment.Generally,thegraceperiodisonemonth.However,italsomaybeexpressedas30or31days.

Thegraceperiodsimplyallowsthepolicyholderadditionaltimetopayapremiumaftertheduedate.Duringthegraceperiod,thecoverageremainsinforce.

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IllegalOccupation

Thepurposeoftheillegaloccupationprovisionistoprotecttheinsurancecompanyfromlosses,suchasinjury,thataretheresultofyourinvolvementincriminalactivities.

IntoxicantsandNarcotics

Theintoxicantsprovisionissimilarinpurposetotheillegaloccupationprovision.Itpermitstheinsurertodenyaclaimifthecauseofthesicknessorinjuryisduetotheconsumptionofalcoholortheuseofnarcotics.Thus,adrunkdriverinjuredinanautoaccidentwouldnotbecovered.

InsuringClause

Theinsuringclauseisabriefstatementthatgenerallydefinesthescopeorextentofthepolicy'sbenefits.Specificinformationregardingpolicycoverageswillbefoundinothersectionsofthepolicy.Atypicalinsuringclausemightreadasfollows:

XYZMutualInsuranceCo.willprovidedisabilitybenefitsfortheinsuredagainstlossbeginningwhilethepolicyisinforce,duetoaccidentorsickness.Benefitswillbepaidinaccordancewiththeprovisionsofthispolicyandinconsiderationoftheinsured'sstatementsintheapplicationandpaymentoftheinitialpremium.

Asyoucansee,theprincipalpartsoftheinsuringclausearethetypeofpolicy,thepartiestothecontractandtheresponsibilitiesoftheparties.

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MisstatementofAgeorSex

Thisoptionalprovisionpermitstheinsurancecompanytoadjustbenefitsorpremiumsifthepolicyholder'sageorsexhasbeenmisstated.Ageandsexarealsofactorsthatcontributetothecalculationofthepremium.Ifageorsexhavebeenmisstated,thenthepremiumand/orthepolicybenefitswillbeadjustedaccordinglytoreflectthecorrectpremiumorbenefitrelativetotheageorsexofthepersoninsured.

NetWorth

Networthreferstoyourtotaleconomicorfinancialvalueafterdeductingallliabilitiesfromyourtotalassetsorestate.

Anindividualwithanetworthofseveralmilliondollars,consistingofbusinesses,realestate,stockinvestments,etc.,probablydoesn'tneeddisabilityincomeinsurance.Inessence,thispersonisself-insured.Ifadisabilitystrikes,thisindividualcantakecareofhimself.

Thus,extremelyhighamountsofnetworth(usuallyinthemillionsofdollars)willreducetheamountofdisabilitybenefitthataninsurancecompanywilloffer.

NoticeofClaim

Youhave20days(oranother,reasonableamountoftime)tonotifytheinsurancecompanyofaclaim.Notificationofaclaimmaytaketheformofawrittencommunicationoratelephonecalltotheinsurancecompanyoragent.Notifyingtheagentisconsiderednotificationtothecompany.

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Ifyouwereseriouslyinjuredandunabletonotifytheinsurancecompanywithin20days(duetobeinginacoma,forexample),thennotificationoftheclaimmayoccurlaterthanthe20-dayperiod.

OccupationalCoverage

Occupationalcoveragerefersto24-hour-a-daydisabilityincomeprotection.Theinsuredpersoniscoveredunderthetermsofthepolicywhetherthesicknessorinjuryoccursonthejoboroffthejob.Somepoliciesmaybeidentifiedasnon-occupational.Anon-occupationalcontractprovidesbenefitsonlyfordisabilitiesthatarenotwork-related.

Policiesmakethesedistinctionsbecauseoccupationaldisabilitiesnormallyarecoveredthroughworkers'compensationorsimilarstatutoryplans.Mostoften,groupdisabilityincomecontractswillspecifyoccupationalornon-occupationalcoverage.

Usually,individualpoliciesprovideoccupationalcoverageincombinationwithworkers'compbenefits.

PartialDisability

Contractssometimesprovidepartialdisabilitybenefits.Partialdisabilityisoftendefinedastheinabilitytoperformoneormoreoftheregulardutiesofyouroccupation.Thepartialdisabilitybenefitusuallypaysupto50percentofthepaymentfortotaldisabilityforaperiodofthreetosixmonths.

PaymentofClaims

Theclaimspaymentprovisionidentifiestowhom

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benefitswillbepaid.This,ofcourse,istheinsuredpersonwhoalsomaybeidentifiedasthelosspayee.Itispossiblethatpolicybenefitsmaybepaidtoathirdpartyiftheinsuredpersonexecutesaproperassignmentform,whichauthorizestheinsurancetopaybenefitsdirectlytoanotherparty,suchasadoctororhospital.

Increditincomeinsurance,thecreditoristhethird-partypayee.

Typically,however,adisabilityincomeclaimwillbepaiddirectlytotheinsuredperson.

PermanentDisability

Adisabilityusuallyisclassifiedaspermanentortemporary,inadditiontototalorpartial.Apermanentdisabilityisonethatreducesoreliminatesyourabilitytoworkfortherestofyourlife.Permanentdisabilityresultsfrominjurytoalimbororganthatisnotexpectedtorecover,suchaslossoforlossofuseofaneye,handorfoot.

PhysicalExam

Thisprovisionpermitstheinsurertorequestaphysicalexamofaclaimantascontinuedproofofadisability.Theexamisconductedbyaninsurancecompany'sdoctoratthecompany'sexpense.Thisprovisionmaybeinvokedifthecompanyhasreasontobelievethattheclaimantisnotdisabledorismalingering.

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Example:Youareinvolvedinanautomobileaccidentandsufferawhiplashneckinjury.Afteryouhavebeenreceivingdisabilitybenefitsforseveralmonths,yourinsurancecompanyfeelsthattheaverageclaimantwiththisinjuryshouldbesufficientlyrecoveredandabletoreturntowork.Atthispoint,itmayrequestthatyoubeexaminedbyitsdoctortodetermineeligibilityforcontinueddisabilitypayments.

PolicyChanges

Theonlychangesthatcantakeplaceinaninsurancepolicymustbeinitiatedbytheinsurancecompanyorthepolicyholder.Anysuchchangesmustbeinwriting,signedbyacompanyofficial(andusuallythepolicyholder),andtheymustbeattachedtothepolicy.Addingpolicybenefitstoanexistingcontractisusuallyaccomplishedbymeansofanamendmentorrider,whichbecomespartofthepolicy.

Anyattempttochangeapolicyprovisionmustbeapprovedbyyourstate'sinsurancecommissioner.Anychangestocontractprovisionsusuallymustbebeneficialtotheinsuredorpolicyholderinordertoobtainapprovalfromtheinsurancecommissioner.

PresumptiveDisability

Disabilityispresumedtobetotalandpermanentincasesinvolvingthelossofsight,hearing,speechorthelossofanytwolimbs.Underthesecircumstances,theinsurancecompanydoesnotrequireyoutosub-

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mittoperiodicexaminationstoprovecontinuingdisability.

ProbationaryPeriod

Aprobationaryperiodisawaitingperiodthatfrequentlyappliestogroupinsurancecoverage.Itisthenumberofdaysormonthsthatanindividualjoiningagrouphastowaitbeforebecomingeligibleforcoverage.

Example:Anewemployeemayhavetoworkcontinuouslyforatleast30daysbeforebecomingeligibleforcoverageundertheemployer'sgroupdisabilityinsuranceplan.

ProofofLoss

Uponreceiptoftheclaimforms,youhave90daystofileproofofloss.Proofoflossconsistsofcompletingtheclaimforms,whichwillincludethefollowingtypesofinformation:thetime,dateandnatureoftheaccidentorsickness;andthenamesandaddressesofdoctorsorhospitalsprovidingtreatment.Inaddition,astatementfromtheattendingphysicianusuallyisrequired,whichwillindicatetheanticipateddurationofthedisability.

Fordisabilityincomeclaims,subsequentclaimformsmayhavetobesubmittedtotheinsurancecompanyatregularintervals(everytwoorthreemonths).Thisrequirementisnecessarysothattheinsurercande

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terminethatyouarecontinuouslytotallydisabledandstilleligibleforbenefits.

QualificationPeriod

ThequalificationperiodoftenabbreviatedQPisgenerallydefinedastheperiodoftimethatyoumustbetotallydisabledbeforebecomingeligibleforresidualbenefits.Inaddition,youalsomustsatisfythepolicy'seliminationperiod.

RecurrentDisability

Arecurrentdisabilityprovisioninadisabilityincomepolicyissimilartoarelapseprovision.Ifyousufferarelapse(adisabilitythatisrelatedtoapriordisability)andifthisrelapseoccurswithinsixmonthsofyourreturntowork,thentheseconddisabilitywillbeconsideredacontinuationoftheinitialdisability.Thisworkstoyouradvantage,becausetheeliminationperioddoesnothavetobesatisfiedasecondtime.

Reinstatement

Shouldadisabilitypolicylapsefornon-paymentofthepremium,thereusuallywillbeaprovisionthatstateshowthepolicyholdermayrequestreinstatementofthepolicy.Typically,thereinstatementprocessconsistsofsubmittinganapplicationforreinstatement,provinginsurabilityandpayingallbackpremiumsplusinterest.

Someinsurersmaypermitreinstatementwithoutaformalapplication,dependingonthelengthoftimethathaselapsedsincethepolicylapsed.Inthissituation,usuallyasignedstatementofcontinuedgood

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healthandthepremiumsinarrearsplusinterestaretheonlyrequirements.

Uponreceiptoftherequestforreinstatement,theinsurerwilleitherapproveordisapprovetheapplicationwithin45days.Whennodecisionisrenderedwithin45days,thepolicyisconsideredautomaticallyreinstatedafterthe45thday.

RelationofEarningtoInsurance

Thepurposeoftherelationofearningtoinsuranceprovisionalsoknownastheaverageearningsclauseistopreventoverinsurance.Theprovisionstatesthat,ifyouareoverinsured,thecompanycanreducedisabilitybenefitsbasedonyouraveragemonthlyincome.Theaveragemonthlyincomewillbebasedonyouraverageearningsforaperiodoftimepriortotheonsetofthedisability,suchasoneortwoyears(orlonger).

RenewabilityProvisions

Renewabilityreferstoyourrighttorenewthepolicy.Manydisabilityincomepoliciesareissuedforperiodsofoneyear.Attheendofoneyear,assumingyoupaythenewpremium,thepolicyisrenewedforsubsequentperiodsofoneyear.However,therearedifferenttypesofrenewability.

Adisabilityincomepolicymaybeissuedascancelable.Acancelablepolicyisonethatmaybecanceledorhavethepremiumsincreased,atanytime,bytheinsurer,aslongasyouaregivenproperwrittennotice

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(usuallyfiveor10days).Thistypeofrenewabilityisnotusuallyfoundindisabilityincomepolicies.

Aguaranteedrenewablepolicyisoneinwhichtheinsurerguaranteestorenewthecontract,butitdoesnotguaranteethepremium.Thepremiummaybeincreasedonthepolicyanniversary,butthepolicycannotbecanceled.Manydisabilityincomepoliciesareissuedasguaranteedrenewable.

Anon-cancelablecontractisoneinwhichtheinsurerguaranteesboththepremiumandtherenewabilityofthepolicy.Thistypeofrenewabilityassuresthepolicyholderthatthepremiumcannotbeincreased,norcanthepolicybecanceledbytheinsurer.Thisisacommontypeofrenewabilityfoundindisabilitypoliciesissuedtothelower-riskoccupationalclassessuchasdoctors,lawyersanddentists.

Sickness

Sicknessisusuallydefinedasadiseaseorillnessthatfirstmanifestsitselfwhilethepolicyisinforce.Thedefinitionofsicknessinthepolicyalsomayincludeareferencetopre-existingconditions.

Generally,apre-existingconditionisanysicknessthatexistspriortotheeffectivedateofthepolicy.Sicknessmaythenbedefinedas:

anyillnessthatfirstmanifestsitselfwhilethepolicyisinforceorasicknessthatbeganpriortotheeffectivedateofcoverageifitwasstatedontheapplicationforinsurance.

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Theexpressionfirstmanifestsitselfdoesnotnecessarilyimplythataconditionhasbeendiagnosedortreatmenthasbeengivenbyadoctor.Basically,firstmanifestsitselfreferstotheappearanceofsymptomsofasicknessordisease.

TemporaryDisability

Atemporarydisabilityoccurswhenyouareunabletoworkwhilerecoveringfromanillnessorinjury,butareexpectedtofullyrecoverfromthatillnessorinjury.Exampleswouldbeabrokenlegorasprainedback.

TimelyPaymentofClaims

Onceaninsurerreceivestheproofofloss,itisitsresponsibilitytopaytheclaimpromptly.Promptlymeansimmediately.Manystateswillalsodefinepromptlyaswithin60daysofreceiptoftheproofofloss.

TotalDisability

Totaldisabilitycanbedefinedinanumberofdifferentways,dependingonhowliberalorrestrictivetheinsurancecompanywantstobe.Afairlyliberaldefinitionoftotaldisabilitymightreadasfollows:

theinabilitytoperformthedutiesofyouroccupation.

Bychangingyouroccupationtoanyoccupation,theentirecontractischanged.

Therecanbeanynumberofvariationsbetweenthesetwodefinitionsoftotaldisability.Forexample,totaldisabilitycouldbedefinedas:

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theinabilitytoperformthedutiesofyouroccupationforthefirsttwoyearsofadisabilityand,thereafter,theinabilitytoperformthedutiesofanyoccupationrelativetoyoureducation,experienceandprioreconomicstatus.

Example:Dr.Smithisaneurosurgeonwhoownsadisabilityincomepolicythatpaysa$5,000monthlybenefitfortotaldisability,payabletoage65followinga30-dayEP.Dr.Smithwakesuponemorningandisunabletoshavebecauseofhandtremors.Needlesstosay,heisalsounabletoperformsurgery.

Dr.Smith'spolicycontainsthe''youroccupation"definitionoftotaldisabilitymentionedabove.FollowingtheEP,Dr.Smithbeginstocollect$5,000monthly,becauseheisunabletoperformthedutiesofhisoccupationneurosurgeon.

Twoyearslater,Dr.Smithdecidestoteachmedicineatalocaluniversity.Hestillhasthehandtremors,butthisdoesnotpreventhimfromteaching.Dr.Smithispaid$5,000permonthforteaching.

Hecancontinuetoreceivehisdisabilityincomebenefitsinadditiontohisearningsfromteaching.Heisstilltotallydisabledasaneurosurgeon,andthus,inaccordancewiththepolicydefinition,isstilleligibletoreceivebenefits.

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However,ifDr.Smith'spolicydefinedtotaldisabilityas"theinabilitytoperformthedutiesofanyoccupation,"hewouldnolongermeetthedefinitionoftotaldisability.Heisnowabletoperformthedutiesofanotheroccupation,andthusisnolongerconsideredtotallydisabled.

UnpaidPremium

Simply,thisprovisionallowstheinsurertodeductanyunpaidpremiumfromanydisabilityincomeclaimpayment.

WaiverofPremium

Waiverofpremiumprovidesforthepaymentoftheinsured'spremiumwhenheorsheisdisabledinaccordancewiththepolicy'sdefinitionoftotaldisability.Usually,thereisawaitingperiodofthreeorsixmonthsbeforetheinsurerbeginstopaythepolicy'spremium.Forexample,oncethethree-monthwaitingperiodissatisfied,theinsurercommencespayingthepolicypremiumsolongastheinsuredremainstotallydisabled.Theinsureralsowillrefundanypremiumpaidduringthewaitingperiod.

Conclusion

Definitionswilloccurthroughoutthebookprovidingyouwithmoreinformationondisabilityincomeinsurance.Thischapterexaminedafewoftheimportantdefinitionsrelatingtothetraditionalformsofincomeinsurance.Thenextseveralchapterswillex-

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plainthetechnicaldetailsofdisabilityinsurancepoliciesandvariousalternatives.

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Chapter4TheMechanicsofDisabilityIncomeInsuranceTherearetwobasictypesofindividualdisabilityincomeinsurancetraditionalyouroccupationtypecoverageandresidualpolicies.

Traditionalcoveragerelatespolicybenefitstotheinabilitytoperformfunctionsordutiesofanoccupation.Residualdisabilityincome,whichcameintobeinginthe1970s,relatesbenefitstolossofincomeduetoadisability.

We'llfirstexplorethetraditionalpolicy,thenwe'llconsidertheresidualpolicy.

Traditional"YourOccupation"Coverage

Harvey,asalesrepresentativeforatoolcompany,hasadisabilityincomepolicythatprovides$2,500permonthfortotaldisabilityduetoaccidentorsickness,followinga30-dayEP.Benefitsarepayabletoage65.(Continuedonnextpage)

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(Continuedfrompreviouspage)Harvey'spolicydefinestotaldisabilityastheinabilitytoperformthedutiesofhisjobforthefirst24monthsofadisability;thereafter,theinabilitytoperformthedutiesofanyjobrelativetohiseducation,trainingandprioreconomicstatus.Harveycurrentlyaveragesabout$5,000inmonthlycommissions.

Harveysuffersamajorheartattackandishospitalizedfor30days,duringwhichheundergoesbypasssurgery.Followinghisreleasefromthehospital,heisunabletoreturntoworkandneedssomephysicalrehabilitation.Thisprocesscauseshimtobeoutofworkforanadditional60days.

Aftertheinitial30daysofHarvey'sdisability,theEPissatisfiedandhebeginstoaccruehis$2,500monthlybenefit.Forthenexttwomonthsofhisdisability,hewillcollect$2,500permonth.

After90days,Harvey'sphysicianadviseshimthathehasimprovedenoughthathecanbegintoresumehisnormalsalesactivities.However,thedoctorrequiresthatheonlyworkonehouradayforaweek,followedbytwohoursadayforanotherfullweek,thenahalfdayforaweek,untilheisabletoresumehisnormalworkactivities.

Harveybeginshisone-hour-per-dayroutineonMonday,June1.Atthispoint,heisperformingsomeofthedutiesofhisoccupation,butnot(Continuedonnextpage)

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(Continuedfrompreviouspage)allofthedutiesofhisoccupation.However,heisnolongertotallydisabledandisnowoffclaim.

Harveywascollecting$2,500permonthduetohistotaldisability.Now,onehourperdayresultsinnodisabilityincomebenefits.Howmuchcommissionisheearningbyworkingonehourperday?Certainlynot$2,500.

Thisscenarioistypicalofthemechanicsoftheyouroccupationdisabilitypolicies.Whenbenefitsaretriggeredbytheinabilitytoperformfunctionsofajob,thentheclaimantmustbetotallyunabletowork.Thereappearstobelittleincentiveforapersontoreturntoworkonapart-timebasis,unlessthepolicycontainsapartialdisabilityincomebenefit.

Frequently,thetraditionaldisabilityincomepolicywillcontainalimitedpartialdisabilitybenefit,whichwillpaytheclaimant50percentofhistotaldisabilitybenefitforuptosixmonths.Generally,thedefinitionofpartialdisabilitywillbetheabilitytoperformsome,butnotall,ofthedutiesofyouroccupation.

Withoutapartialbenefit,aworkersimplymaybeunabletoreturntoworkfinanciallyuntilhecandosoonafull-timebasis.Thiswilltendtoprolongtheclaim,whichisnotgoodforeithertheinsurerortheinsured.Yet,formanydecades,thiswastheonlytypeofdisabilityincomeinsurancesold.

Today,thistypeofpolicyisstillsold,mostoftentothosewhoareemployedinhigher-riskoccupations.

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Applicantsfordisabilityincomeinsuranceareclassifiedaccordingtotherisksinherentintheiroccupations.Forexample,adentistoradoctorworksinasaferenvironmentthanatruckdriverorafactoryworker.Generally,mostinsurerswillofferalloccupationalclassestheyouroccupationtypeofcoverage.

ResidualDisabilityIncome

Residualdisabilityincomebenefitsaretriggeredbysimplelossofincome.Inthetechnicallanguageofthepolicy:lossofpre-disabilityincomeduetoadisabilitycausedbyaccidentorsickness.

Thebasicquestionbecomes:Hastheinsuredpersonsufferedalossofincome?asopposedtoIstheinsuredpersonunabletoperformthedutiesofhisorherjob?

Iftheanswerisyes,thenthepersonisentitledtoabenefitinproportiontothelossofpre-disabilityincome.Inessence,theresidualbenefitisalong-termpartialdisabilitybenefit.Itcanbedefinedas:

theabilitytoperformsome,butnotall,thedutiesofone'soccupationand,asaresultofdisability,theinsured'searnedincomeisreducedbyatleast20percentofpre-disabilityincome.

Underthiskindofpolicy,aslongasyouarepartiallydisabled,youreceiveabenefitinproportiontolostincome.Andthispartialpaymentlaststhroughoutthepolicy'sbenefitperiodevenifthatbenefitperiodistoage65.Thisproportionatebenefitisapercentageofyourtotaldisabilityincomebenefit.

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Inotherwords,ifyousuffera30percentlossofpre-disabilitycompensation,youareentitledto30percentofyourtotaldisabilitybenefit.

Example:Maryhasaresidualpolicywitha30-dayeliminationperiodfortotalbenefitsanda90-dayqualificationperiodforresidualbenefits.After30daysoftotaldisability,Marywouldbegintoreceivetotaldisabilitybenefits.Assumingshewasstilltotallydisabledafter90days,shewouldthenbeeligibleforresidualbenefits.Atthispoint,ifMarywassufferingatotallossofherpre-disabilityincome,shewouldcontinuetoreceive100percentofhertotaldisabilitybenefit.However,sinceshehasnowsatisfiedthequalificationperiod,shewouldbeeligibleforproportionateresidualbenefitsinsubsequentmonths.IfMary'spolicyhadcontaineda30-dayEPand30-dayQP,then30daysoftotaldisabilitywouldsatisfybothperiods.Manycompaniesofferresidualpolicieswithoutqualificationperiods.Theeliminationperioddoublesforthequalificationperiod.Thus,whenaresidualpolicyhasazero-dayqualificationperiod,satisfyingtheeliminationperiodmakestheinsuredeligiblefortotalorresidualbenefits.

Whenapolicyhasnoqualificationperiod,daysoftotaldisabilityand/orresidualdisabilitywillsatisfytheeliminationperiod.

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Example:Murphhasaresidualdisabilitypolicywithnoqualificationperiodanda90-dayeliminationperiod.Afterinjuringhimselfwithaball-peenhammerdoingsomehomeimprovements,Murphistotallydisabledfor40days,followedby50daysofpartialdisability.Theeliminationperiodhasbeensatisfiedbythecombinationof40daysoftotaland50daysofpartialdisability.Murphiseligibleforpolicybenefitsbeginningonthe91stdayofhisdisability.Theresidualbenefitswilltaketheformof100percentofthetotaldisabilitybenefit,orsomeotherproportionatebenefitrelativetothelossofpre-disabilityearnings.Ifyouhavearesidualdisabilitypolicy,yourpre-disabilityincomewillbeusedinthecalculationofresidualbenefits.Thisfigurenormallywillbebasedonaverageincomeforaspecifiedperiodoftime,suchasone,twoorthreeyears.So,thepolicymaydefinepre-disabilityincomeas:

theaveragemonthlyincomeearnedbytheinsuredduringthe12monthspriortotheonsetoftotaldisability.

KeyDifferencesBetweenTraditionalandResidualPolicies

Traditionaldisabilityincomepoliciesdefinetotaldisabilityintermsofjobdutiesorfunctions.Theclaimsprocessistriggeredbytheinabilitytoperformduties

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ofajob.Withthesepolicies,benefitsceasewhentheclaimantreturnstowork,evenonapart-timebasis.

Residualdisabilityincomebenefitsaretriggeredbyalossofpredisabilityincome.So,theyofferanincentivefortheinsuredpersontoreturntowork,becausebenefitswillbecontinuedinproportiontohisorherlossofincome.

Thefollowingchartillustratesahypotheticalclaimifithadbeenmadeunderaresidualpolicy:

ResidualDisabilityIncomeBenefitsBasedonpredisabilityincomeof$5,000monthly$2,500totaldisabilitybenefit,30-dayEP,toage65benefitperiod

ResidualMonth LostEarnings %ofLostIncome Benefits1 $5,000 100 $02 5,000 100 2,500

3 5,000 100 2,5004 4,500 90 2,5005 4,000 80 2,0006 3,000 60 1,500

Theresidualalsocalledlossofincomeapproachiscommonlyofferedtodaytoalllower-riskoccupations.Dependingontheinsurancecompany,itmayormaynotbeofferedtohigher-riskoccupationalgroups.

Generally,theprovisionsofaresidualpolicywillbesimilartothoseofthetraditionalcontract.Therewillbeaneliminationperiod,benefitperiod,etc.

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Onekeymechanicaldifference:Totaldisabilityisusuallydefinedastheinabilitytoperformthedutiesofyouroccupation.Thedefinitionalsomaybeexpandedtoincludeeligibilityforresidualdisabilitybenefits,asfollows:

Followingaperiodoftotaldisability,theinsuredmaybeeligibleforresidualbenefitsif,duetodisability,thereisalossofatleast20percentofpre-disabilityincome.

Thisdefinitionprovidestotalorresidualbenefitsifyouaretotallyorresiduallydisabledfromdoingyourjob.Theresidualbenefitrequiresaminimumlossof20percentofpre-disabilityincome.

Ontheotherhand,iftheinsurancecompanyremovestheyouroccupationelementofthetotaldisabilitydefinition(assomedo),itcreatesaso-calledpureresidualdefinition.Thisdefinitionlookssomethinglikethis:

...theabilitytoperformsome,butnotall,thedutiesofyouroccupationand,asaresultofdisability,theinsured'searnedincomeisreducedbyatleast20percentofpre-disabilityincome.

Inaccordancewiththisdefinition,100percentofthetotaldisabilitybenefitispaidfordisabilitiesthatresultin100percentlossofpre-disabilityincome;80percentofthetotaldisabilitybenefitispaidifyousufferan80percentlossofpre-disabilityincome;etc.

Therearemanypossiblevariationsofthesedefinitions.Somepoliciesdefinetotaldisabilityintermsofworkingfulltimeandresidualdisabilityintermsofworkingparttime.

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Mostpoliciesalsowillrequirethatyoubeunderthecareofalicensedphysicianduringtheperiodofdisability.

TaxIssues

Premiumspaidforindividuallyowneddisabilityincomeinsurancearenottax-deductible,sincetheyarenotconsideredpremiumsformedicalcareinsurance.However,thebenefitspaidbyadisabilitypolicyaretax-free.

Anemployercandeductpremiumspaidforgroupdisabilityinsuranceonemployeesasabusinessexpense,providedtheemployerisnotthebeneficiaryofthepolicy(benefitsarepayabletotheemployees,nottheemployer).Thevalueofthecoverageprovidedbytheemployerisnotconsideredtaxableincometotheemployee.However,benefitsaretaxable.

Paymentsforpermanentlossesunderaccidentaldeathanddismembermentcoverage(suchaslossofalimborbodilyfunction,lossofsightorhearing,orpermanentdisfigurement)arenotincludedastaxableincometotheemployee,regardlessofwhopaidthepremium.

Accidentaldeathbenefitsavailableunderadisabilitypolicyareconsideredlifeinsurancebenefitsandarereceivedincometax-freebythebeneficiary,providedthecontractmeetstheIRSstatutorydefinitionoflifeinsurance(thismeansthepolicy'scashsurrendervaluecannotexceedthenetsinglepremiumnecessarytofundfuturebenefits,andthepolicymustmeetotherminimumrequirements).

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Basically,theconceptisthatifonepartyreceivesataxdeductionforthepremium,theotherpartywillbetaxed.Eitherthepremiumorthebenefitwillbetaxed.Ifthebenefitisreceivedtax-free,thepremiumwastaxed.

InjuryandSicknessBenefits

Disabilityincomebenefitsarepaidfordisabilitiescausedbyaccidentalinjuryorsickness.Whilethebenefitamountisusuallythesameforeithercauseofdisability,theprimarydifferencebetweencoverageforaccidentsandsicknessliesintheeliminationperiod.

Eliminationperiodsforsicknessmayrangefromsevendaystooneyear.Frequently,accidentcoveragehasareducedeliminationperiodornoeliminationperiod.

Example:Sergiohastotaldisabilitycoveragewitha30-dayeliminationperiodforsickness.Thesamepolicyprovidesthatbenefitsforadisabilitycausedbyaccidentalinjurybeginimmediately(noeliminationperiod).IfSergiocontractsadisablingcaseofmononucleosis,hehastowait30daystobegincollectingbenefits.Ifhebreakshisbackplayingsoftball,hecancollectbenefitsrightaway.Ofthedifferentdefinitionsgiventothetermaccident,therearetwomajorones:accidentalbodilyinjuryandaccidentalmeans.

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Accidentalbodilyinjuryisdefinedasaninjury(theresultofanaccident)thatisunintentionalandunforeseen.

Accidentalmeansisaninjurywhosecauseisunintentionalandunforeseen.Thatis,theaccidentwasnotcausedbyanyactiontakenbytheinjuredpersonorbyanyactivityperformedbytheinjuredperson.

Example:Sandystrainsherbackcarryingseveralheavybagsofgroceries.Thisaccidentwouldbedefinedasaccidentalbodilyinjury,becauseSandydidnotintentionallystrainherback.However,whiletheinjurywascausedbyaccident,itcouldnotbedefinedasaccidentalmeansbecausethecauseoftheaccidentwasforeseeable.

Inotherwords,usingreasonablejudgment,Sandycouldhaveforeseenthatcarryingtooheavyaloadcouldcauseproblems.

IfthepolicyunderwhichSandywascovereddefinedaccidentintermsofaccidentalmeans,shewouldnotreceivebenefits.

Ontheotherhand,ifadogrunsinSandy'spathwhileshe'scarryingthegroceriescausinghertofallandbreakherarmshewouldbecoveredunderthedefinitionofaccidentalmeans.Thisisbecausetheinjurywascausedbycircumstancesthatcouldnotreasonablybeforeseen.Also,thecauseofthefallwas(Continuedonnextpage)

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(Continuedfrompreviouspage)notbasedonanyactiontakenbySandy,oronanyactivityinwhichshewasengaged.

Anote:Becauseaccidentalmeansissucharestrictivedefinition,itisusedlessoftenthanitoncewas.

Sicknessorillnessmaynotbedefinedinanymannerthatismorerestrictivethansicknessordiseasethatfirstmanifestsitselfaftertheeffectivedateofthepolicy.

However,ifadisabilitypolicyprovidesnon-occupationalcoverageonly,thedefinitionofsicknessmayexcludework-relateddisabilities.

Example:LauraappliesforandisissuedadisabilityincomepolicywithaneffectivedateofMay1.Aboutamonthlater,shebeginstohaveadigestiveproblemthatissubsequentlydiagnosedasagallbladderproblemrequiringsurgery.Medically,hersymptomsfirstappearedaftertheeffectivedateofthepolicyand,thus,thesicknessclaimwouldbehonoredbytheinsurancecompany.

Analternativeexample:LaurabeginstohavethedigestiveproblemonMay1.Shecontactsherdoctorandhesuggeststhatshetakesomeantacidmedicationwhichshepurchasesfromherlocaldrugstore.ByJune1,theproblemappearstobenobetter,butLauradoesnothingaboutit.Shebuysadisabilityincome(Continuedonnextpage)

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(Continuedfrompreviouspage)policywithaneffectivecoveragedateofJuly1.Amonthlater,sheconsultswithherdoctorwhodiagnoseshergallbladderproblem.

Eventhoughthediagnosisoccurredaftertheeffectivedateofthedisabilityincomepolicy,thesymptomsappearedpriortotheeffectivedate.Shouldaclaimariseandallthefactsbecomeknown,theinsurancecompanycoulddeterminethatthegallbladderproblempreexistedtheeffectivedateoftheinsuranceanddenytheclaim.

Exclusions

We'vediscussedbrieflysituationsinwhichaninsurancecompanymightarguethatdisabilityincomecoveragewasexcluded.Aswithanykindofinsurance,thesesituationswhichindustryprofessionalscallexclusionsarecritical.

Commonexclusionsfoundindisabilityincomepoliciesincludelossesarisingfromwar,militaryservice,attemptedsuicide,overseasresidence,aviationundercertaincircumstances(pilotorcrewofanaircraft)andlossesthatresultwhenapersonisinjuredwhilecommittingafelony.

PolicyProvisionsSpecifictoDisabilityIncome

Alldisabilityinsurancepoliciescontainagroupofmandatoryprovisionsrequiredbyallstatesinany

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lifeorhealthinsurancecontract.Inaddition,therearesomeprovisionsthatarecommontomostdisabilityincomepolicies.Theseinclude:

Changeofoccupation.Thisprovidesamethodforhandlingdisabilityincomeclaimsifyouhavechangedoccupationssincetheinitialapplicationspecifically,ifyouhavechangedtoamoreorlesshazardousoccupation.Thisprovisionallowstheinsurancecompanytoadjustbenefitsorpremiumstoreflectthechangeinoccupation.Ifthisprovisionisnotcontainedinthepolicy,thennochangescanbemade.

Example:Sydneybuysadisabilitypolicywhileshe'sworkingasabartenderandgoingtolawschool.Thepolicyisissuedundertheoccupationalclassificationofbartender.Sydneyfinishesschool,passesthebarexamandbecomesapracticinglawyer.Shemovesintoalesshazardousjobclassificationwithahigherhistoricalincomeaverage.Ifachangeofoccupationprovisionisinherpolicy,Sydneyshouldcontactherinsurancecompanyandprovideevidenceofhernewoccupation.Thecompanyshouldadjustherpremiumaccordingly.

Relationofearningstoinsurance.Alsoknownastheaverageearningsclause,thispreventsoverinsurance.Itallowsthecompanytoreducedisabilitybenefitsbasedonyourcurrentaveragemonthlyincome.Thisprovisioncomple

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mentstheinsurer'sissueandparticipationlimits,whichmaystatethatyoucan'thaveadisabilityincomebenefitwhichexceedsacertainpercentofearnedincome.

Example:Jakewasearning$2,000permonthandwasissuedadisabilityincomepolicythatprovideda$1,400monthlybenefit(70percentofhisearnedincome).Twoyearslater,whenJakefilesaclaim,hisearnedincomehasdroppedto$1,500permonthandit'sbeenthatlowfortheprecedingyear.Iftherelationofearningsprovisionispartofthepolicy,Jake'sinsurancecompanycanadjustthetotaldisabilitybenefitto70percentofhiscurrentincome.

Recurring.Somepeoplerefertothisastherelapseprovision.Itstatesthatif,withinsixmonthsofareturntoworkfollowingaperiodoftotaldisability,youaredisabledagainfromthesameorarelatedcause(arelapse),thentheseconddisabilitywillbeconsideredtobeacontinuationoftheinitialdisabilityclaim.

Example:AmandahasaheartattackonJune1.Sheistotallydisabledforthreemonths,butreturnstoworkonSeptember1.Twomonthsafterherreturntowork,shesuffersasecondheartattack.Inaccordancewiththerecurringprovision,thesecondheartattackandsubsequentclaimareconsideredacontinuationof(Continuedonnextpage)

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(Continuedfrompreviouspage)theinitialclaim,eventhoughitwasinterruptedbyatwo-monthreturntowork.

IfAmandasatisfiedtheEPwiththefirstclaim,thentherewouldbenoneedforhertosatisfyanewEP,andbenefitswouldbepaidtoherimmediately.Amandaalsowouldbesubjecttothesamebenefitperiod.Becausethefirstclaimtookthreemonths,thesecondclaimwouldbeginwiththefourthmonthofthesamebenefitperiod.

IfAmanda'ssecondheartattackoccurredeightorninemonthsafterherreturntowork,itwouldbetreatedasanewclaim.Ifherseconddisabilitywasduetoabrokenlegandtotallyunrelatedtoherheartattack,italsowouldbeanewclaimregardlessofwhenithappened.

Other,optionalpolicyprovisionsaredesignedtoenhancetheoverallbenefitsofthedisabilityincomepolicy.Themostcommonoptionalprovisionsincludethefollowing:

Presumptivedisability.Thisprovidesfortotaldisabilitybenefitstobepaidwithlittleclaimsadministrationifthedisabilityresultsinthelossofspeech,hearing,visionoruseoftwolimbs.

Transplantandcosmeticsurgerybenefit.Thisprovidestotaldisabilitybenefitsforelectivemedicalprocedures,suchasdonatingabodilyorgan.

Rehabilitationbenefit.Thisenablesyouto

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undergovocationalrehabilitation,duringwhichtimetotaldisabilitybenefitswillbepaidaslongasyouremaintotallydisabledduringthetrainingperiod.

Futureincreaseoption.Thisprotectsyourfutureinsurabilitybyprovidingcertainbirthday,marriageandbirthofchildrenoptiondatesonwhichadditional,predeterminedamountsofdisabilityincomebenefitscanbeaddedtothepolicywithoutproofofinsurabilityprovidedthatyourincomewarrantstheseadditionalbenefits.

Costoflivingbenefit.Thisoptionprovidesstatedincreasesinbenefitpaymentsonceyouareonclaim,sothatdisabilitybenefitscankeeppacewithinflationandthecostofliving.

Lifetimebenefit.Althoughrare,thisoptionalbenefitprovideslifetimedisabilityincomebenefitsusuallyifthedisabilitycommencespriortoacertainage.Otherwise,benefitsmayberestricted.

Additionalindemnityriders.Theseridersprovideadditionalamountsofindemnityforshortperiodsoftime,suchassixor12months.Theprimarypurposeoftheseridersistosupplementorcoordinatewithotherdisabilitybenefits,suchasSocialSecurityorgroupdisabilitybenefits.

Conclusion

Formostpeople,aresidualpolicyoradisabilityincomecontractthatprovidesaresidualbenefitmaybemorerelevantthanthetraditionaltypeofpolicy.Disabilityincomeisdesignedtoreplacelostincome

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duetoadisability.Itseemsbothlogicalandmeaningfultoprovidebenefitsbasedonlossofincome,ratherthantheinabilitytoperformdutiesofanoccupation.

Beyondthedistinctionbetweentraditionalandresidualpolicies,mostofthenegotiabletermsofdisabilityinsurancearecontrolledbyoptionalprovisions.

Thischapterconsideredthemechanicsofdisabilityincomeinsuranceandwhatyoushouldbeawareofwhenpurchasingapolicy.Also,itexaminedwhatinsurerslookforinanapplicant,aswellassomeimportantdefinitions.Thenextchapterconsidershowinsurancecompaniespricethedisabilitypoliciestheysell.

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Chapter5HowInsuraceCompaniesPriceDisabilityCoverageInordertomakegooddecisionsasaconsumerofincomeinsurance,youshouldhavesomeunderstandingofhowinsurancecompaniesevaluatethecoverage.Becauseinsuranceisaheavilyregulatedindustry,it'spossibletolearnhowcompaniespricethecoveragestheysell.

Thischapterwilltakeabrieflookatthispricingprocessandgiveyousometoolsforaskingtherightquestionsifaninsurancecompanyquotesyouapremiumthatseemstooexpensive.

Underwriting

Underwritingistheprocessofselection,classificationandratingofrisks.Theunderwriteristhatpersonworkinginthehomeofficeoftheinsurancecompanywhoreceives,reviewsandevaluatesallrelevantinformationinordertoacceptorrejectarisk.

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Ininsurancecircles,thetermriskreferstothepersonorcompanyapplyingforinsurance.Theunderwriter'ssourcesofinformationinclude:

theagent,alsoknownasafieldunderwriter;

theapplicationincludingtheagent'sstatement;

inspectionreports;

medicalinformationandattendingphysician'sreports;and

otherinformation,suchasoccupationaloravocationalquestionnaires.

Underwritingis,bydesign,animpersonalprocess.Itfollowsstrictformulasandguidelineswithlittleregardforthesubjectivestorybehindtheapplication.Theagentisusuallytheonlypersonwhoactuallyseestherisktobeinsured.It'stheagent'sjobtodealwithsubjectiveorpersonalissuesandtoprovideclearandaccurateinformationregardingtheapplicant.

Inthisprocess,oneoftheagent'simportantresponsibilitiesisthecompletionoftheinsuranceapplication.Theapplicationistheprincipaltooloftheunderwriter.Itcontainstheimportantinformationabouttherisk,whichusuallyincludes:

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theage,sexandoccupationoftheapplicant;

pastmedicalhistoryandcurrentphysicalcondition;

moralhabits;

informationregardingotherinsuranceowned;

familyhistoryinformation;and

unusualhobbiesoravocations.

Agoodillustrationofanunderwritingissue:Canadisabledpersondemanddisabilityinsurance?Thisquestionismoreseriousthanitmightsound.The1995federalappealscourtdecisionSusanDoukasv.MetropolitanLifeInsuranceCo.consideredadisabledperson'sapplicationforacertainkindofdisabilitycoverage.

Doukashadbeendiagnosedwithbipolardisordera''mooddisorderinwhichbothmanicanddepressiveepisodesoccur"in1983.Shehadbeenunderaphysician'scareandhadtakenmedicationforherconditionsincethattime.Shehadnotbeenhospitalizedduetothedisordersince1985.

InJuly1991,DoukasappliedformortgagedisabilityinsurancewithMetLifeforacondominiumsheplannedtopurchaseinNewHampshire.MetLifedeniedherapplicationinaletterthatallegedlystatedthatMetLife'sdecisionhadbeeninfluencedbyDoukas'medicalhistory.

DoukasreappliedforinsuranceinAugust1992.MetLifedeniedDoukas'sapplicationamonthlater,againindicatingthatitsdecisionwasinfluencedby

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hermedicalhistory.Shesued,citingprotectionundertheAmericanswithDisabilitiesActof1990(ADA)andthefederalFairHousingAct.

ThefirstpartofDoukas'lawsuitinvokedTitleIIIoftheADA,whichestablishesaprohibitionagainstdiscriminationbypublicaccommodations.

TitleIIIalsoprohibitsamongotherthingsunfairdiscriminationbytheinsurancebusinessinestablishingthetermsandconditionsofanycontract.

DoukasarguedthatMetLifehadviolatedtheADAbydenyingherSeptember1992applicationformortgagedisabilityinsurance.

ShefurthercontendedthatMetLife's"actionsindenying[her]applicationformortgagedisabilityinsuranceinSeptember1992wereinconsistentand...notbasedonsoundactuarialdataandarethereforeameresubterfugeusedtoevadethepurposesofthe[ADA]."

MetLifearguedthattherelevantstatuteoflimitations180dayshadlapsed.Therefore,Doukas'sclaimwasinvalid.

Thecourtdidn'tagree.Itconcludedthat:

...requiringindividualstoidentifyaviolationoftheircivilrightsundertheADA,evaluatewhetherthatviolationwarrantstheinitiationofafederalactionandactuallyinitiatethesuitwithin180daysofthediscriminatoryconductcomplainedofisinconsistentwiththeADA'sbroadobjectives.

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What'smore,NewHampshire'sresidualorgeneralpersonalinjurystatuteoflimitationsstated:

Exceptasotherwiseprovidedbylaw,allpersonalactions,exceptactionsforslanderorlibel,maybebroughtonlywithinthreeyearsoftheactoromissioncomplainedof.

ThecourtfoundtheNewHampshirestatuteoflimitationsapplicabletoclaimsmostanalogoustoDoukas'sADAclaims.Therefore,theclaimsweresubjecttothethree-yearlimitationsperiod.MetLife'smotiontodismissthoseclaimsasbarredbythestatuteoflimitationswasdenied.

DoukasalsoallegedthatMetLife'sdenialofherapplicationformortgagedisabilityinsurancebecauseofherhandicapviolatedasectionoftheFairHousingAct.

Section3605ofthatactstates:

Itshallbeunlawfulforanypersonorotherentitywhosebusinessincludesengaginginresidentialrealestate-relatedtransactionstodiscriminateagainstanypersoninmakingavailablesuchatransaction,orinthetermsorconditionsofsuchatransaction,becauseof...handicap.

MetLifearguedthatDoukas'FairHousingActclaimfailedtostateaclaimbecausethecompanyisnot"anentitywhosebusinessincludesengaginginresidentialrealestatetransactions."

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Onthiscount,thecourtruledinfavorofMetlife:

Mortgagedisabilityinsuranceisinsurancedesignedtohelptheinsuredmeetmortgagepaymentsintheeventthattheinsuredbecomesdisabled.

Althoughsuchinsuranceisclearlyaformoffinancialprotectionagainstthelossofone'shomeduetoaperiodofdisability,thecourtfound,inthecontextofsection3605,thatmortgagedisabilityinsuranceisnotaformof"financialassistance"forpurchasingormaintainingadwelling.

SoMetLife'smotiontodismissthefinalpartofDoukas'lawsuitwasgranted.

Age,SexandOccupation

Fromtheperspectiveofunderwritingdisabilityincomeinsurance,theage,sexandoccupationoftheapplicantareimportant.(Thesefactorsaregenerallymorerelevanttotheunderwritingofhealthinsurancethanlifeinsurance.)

Thisisespeciallytrueregardingtheoccupationandsexoftheapplicant.

Afactmostpeoplefindsurprising:Womenbecomedisabledmorefrequentlythanmendo.Therefore,womenpresentahigherdisabilityrisk.Thisrunsoppositetomosttrendsinthelifeinsurancemarket,wherewomenareusuallyalowerrisk.

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Insuranceexpertshavevarioustheoriesaboutwhywomenmakedisabilityclaimsmoreoftenthanmendo.Themostcommon:Womenpaymoreattentiontotheirhealththanmendoand,therefore,usehealthinsuranceanddisabilityinsurancemorefrequently.Thiscontributestotheirlongerlifeexpectancyandlowerlifeinsurancerates.

Whateverthereason,theunderwritingimpactremainsclear.Becausewomenposeabiggerdisabilityrisk,thedisabilityincomepremiumsforwomenareusuallyhigherthanformen.

Occupationisanothercriticalunderwritingfactorfordisabilityinsurance.Mostinsurancecompaniesgroupjobsaccordingtothedegreeofinjuryrisktheypose.Thesegroupsaretypicallyidentifiedasclasses1,2,3and4(orA,B,CandD).Class1occupationsaretheleasthazardousandclass4occupationsarethemosthazardous.

Otherformsofincomeinsuranceparticularlyworkers'compcoveragealsouseoccupationalclassifications.However,theseothersystemscanbeextremelycomplicated.Thefollowingchartillustratesatypicaloccupationalclassificationtable.

OccupationalClassifications

Class1Physicians,dentists,lawyers,accountants,schoolteachers,actuaries,insurancesalesrepresenta-

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tives,corporateofficers,mostengineers,architects,corporateexecutives.

Class2Generalclericalemployees,banktellers,insidesalespersons,outsidesalespersonswithlimitedtravel,mostbuildingcontractors(officedutiesonly),barbers,electricians(nohighvoltage),chemists,registerednurses,practicalnurses.

Class3Bartenders,waitersandwaitresses,cooks,gasstationattendants,salespersonswithextensivetravel,high-voltageelectricians,plumbers,mechanics,mostfactoryworkers.

Class4Bridgeworkers,constructionworkers,truckdrivers,sanitationworkers,firefighters,policepersonnel,mineworkers,treetrimmers,windowwashers(highbuildings).

Note:Thischartisillustrativeinnatureandnottobeconsideredall-inclusive.Inaddition,certaininsurancecompaniesmayclassifythesameoccupationdifferently.Forexample,generalclericalemployeesmaybeconsideredclass1byoneinsurerandclass2byanother.

Apoliceofficerapplyingforlifeinsuranceisnormallyastandardriskanddoesnotpresentanyunusualhazardwithregardtomortality.However,apoliceofficerapplyingfordisabilityincomeinsuranceisadifferentmatter.Heorsheismorelikelytobeinjuredandthusdisabledduetotherisksfacedonthejob.

Therefore,asanunderwritingfactor,occupationismoreheavilyweightedintermsofdisabilityincomecoverage.

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Ifyouworkinaclass3or4occupation,aninsurancecompanywillmultiplyitsbaseratebyafactorofanythingfrom1.1to3.0todeterminethepremiumyouhavetopay.Thesemultiplesusuallywillbedeterminedbyacompany'sclaimshistoryforparticularoccupationsthoughthey'llalsobeinfluencedbyotherfactors.

Acaveat:Pricingmodelsfordisabilityincomeinsurancearenotstandard.Differentinsurancecompanieswillsometimesclassifythesamejobdifferently.Andthemultiplesthatoneinsurancecompanyappliestojobclassificationsmaybedifferentfromthoseusedbyanothercompany.

Butthepremiumisn'ttheonlythingaffectedbyjobclassification.Thebenefitamount,forone,alsomayberestrictedbyoccupation.

Example:Adoctormaybeabletopurchaseupto$15,000amonthofdisabilityincomeprotection,butaplumberwhomayhavethesameearnedincomeasthedoctorislimitedtoamaximumbenefitof$5,000permonthduetothehigheroccupationalrisk.Otherrestrictionsorlimitationsthatmayapplyduetoaperson'soccupationincludethetypeofdisabilityincomepolicyofferedthatis,dependingonthemaximumbenefitperiodortheeliminationperiod.

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Example:Afirefightermayhavearestrictedmaximumbenefitamountandalsoonlybeabletopurchaseadisabilityincomepolicywithamaximumbenefitperiodoftwoyearsandnothingshorterthana90-dayEP,duetotheoccupationalriskinvolved.Anotherpricingfactor:Anaccidentorsicknessmayresultinthetotaldisabilityoftheinsuredpersonfromonejobbutnotfromanother.Andthishierarchyofriskisnotnecessarilythesameasahierarchyofincomeorresponsibility.

Example:Abeauticianwithaninfectedfingerduetoatorncuticlemightbeunabletoperformthedutiesofheroccupationandbedisabled.Abankpresidentwithaninfectedfingerisnotlikelytobetotallydisabled.Therefore,inthiscontext,abeauticianwouldpresentahigheroccupationalriskthanabankpresident.Howyoufilloutthepolicyapplicationhasalottodowithhowaninsurancecompanywillviewyouasarisk.Thecompanyusuallywillwanttoknowmoreaboutyouthanthatyouareasalesperson,forexample.Asalespersonworkinginaclothingstoredoesnotpresentanyunusualunderwritingproblembutatravelingsalespersonwhodrives60,000to80,000milesperyearinanautomobileisexposedtoahigherlevelofrisk.

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Asaconsumer,yourbestapproachistocomparethepremiumquotedbyacompanytoitspolicy'sbenefitamountandbenefitperiod.

Hobbies

Hazardousavocationisapricingfactorrelatedtooccupationalrisk.

Suchhobbiesasskindiving,scubadiving,skydivingandautoracingarecertainlymorehazardousthangolfortennis.Forthisreason,theinsurancecompanywillaskyoutomakeitawareofanysuchhigh-riskhobbieswhenit'sconsideringyourapplicationfordisabilityincome.

Often,ifyou'reengagedinahazardoushobby,you'llhavetofilloutanavocationquestionnairethatprovidesmorespecificinformationconcerningthehobby.

MedicalProfile

Yourmedicalprofilenormallywillconsistofyourpastmedicalhistoryandcurrentphysicalcondition.Mostdisabilityinsurancecompaniesaskyouaboutyourmedicalhistoryandyourfamily'sonapolicyapplication.Theyalsowillaskyoutotakeaphysicalexam(usuallyatthecompany'sexpense).

Ifanapplicanthastohaveaphysicalexaminationperformedbyadoctorinlieuofsimplyansweringmedicalquestions,theapplicationisnormallyreferredtoasamedicalapplication.Ifthecompanyobtains

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medicalinformationsimplybyreviewinganswerstoquestionsontheapplication,itisreferredtoasanon-medicalapplication.

Dependingonthemedicalproblem,yourpersonalphysicianmayberequestedtocompleteanattendingphysician'sstatement(APS).Thepurposeofthisreportistoprovidemoredetailedinformationaboutyourmedicalhistoryorcurrentphysicalcondition.

Pastmedicalhistoryreferstowhatwas;currentphysicalconditionreferstowhatis.Thesetwofactors,plusanyhereditarytraitssuchasheartdiseaseordiabeteswouldindicatewhatwillbe,orprovideaprognosisforthefuture.

Example:Ralphhasjustbeengivenacleanbillofhealthfollowingaphysicalexam.Aweeklater,hehasasevereheartattackandbecomestotallydisabled.

Howcanthishappen?Thefamilyphysicianisnormallylookingatthepatienttodayataspecificmomentintime.Itisentirelypossiblethatatthatprecisemoment,Ralphappearedtobeinexcellentcondition.Hecamefromafamilywithahistoryofheartproblems,though.Andformanyyearshehadbeenoverweight,withahigh-cholesteroldietandasedentarylifestyle.Eventhoughhehadtrimmeddownabitbeforehisphysical,hewasacandidateforheartproblems.

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Duetotheevasivenatureofdisabilityrisk,aninsurancecompanymustlookatyourmedicalhistory,aswellasyourcurrentcondition,initsattempttodeterminewhetherthereisanyunusualphysicalormedicalriskinvolved.

The1993federalcourtdecisionJamesCampbellv.TheEquitableLifeAssuranceSocietyoftheUnitedStatesdealtwithinaccuratemedicaldatainanapplication.

InMarch1989,CampbellcompletedanapplicationforalifeinsurancepolicytobeissuedbyanEquitableaffiliate.Toobtainthislifeinsurance,heunderwentaparamedicalexaminationanddisclosedtotheexaminingnursethathehadreceivedcounsellingfordepressionfromapsychiatristinChattanooga,Tennessee.

TheinsuranceagentworkingwithCampbellhadthisinformationinhisfileorhadreadyaccesstoitwhenheandCampbellcompletedtheapplicationforthepolicy.

Sometimelater,Campbellappliedforadisabilitypolicyfromthesameinsurancecompany.Hewaspressedfortime,sotheagentthesameagentwhohadsoldhimthelifepolicycompletedthemedicalinformationportionoftheapplicationbasedonthedatagatheredearlier.

TheagentdidnotaskCampbellanyofthequestionsonthemedicalhistoryportionofthedisabilityapplication.Campbelldidnotstateanyuntruthinapplyingforthecoverage.

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TheeffectivedateofthedisabilitypolicywasNovember27,1989.

Printedonthedisabilityapplicationform,almostimmediatelyaboveCampbell'ssignature,wasthisstatement:

ThestatementsandanswersinallpartsofthisapplicationaretrueandcompletetothebestofmyknowledgeandbeliefandaremadetoinduceTheEquitabletoenterintothisAgreementandtoissueanypolicywhichmaybeissueduponthisapplication.NoagentormedicalexaminerhasauthoritytomodifythisAgreementortowaiveanyofTheEquitable'srightsorrequirements.

Buttheanswerstothemedicalhistoryquestionsonthedisabilityapplicationwereincorrect.Campbellhadundergonepsychiatriccounsellingandtreatmentwithpsychotropicdrugsintherecentpast.Hadthesequestionsbeenansweredaccurately,Equitablewouldhavedeclinedtoissuethedisabilitypolicy.

ThedisabilityinsurancepolicyissuedtoCampbellalsoincludedanincontestabilityclause,whichstatedinpart:

AfterthispolicyhasbeeninforceduringyourlifetimefortwoyearsfromitsEffectiveDatewecannotcontestitformisstatementsintheapplication.Wecannotcontestanypolicychangethatrequiresevidenceofinsurability,oranyreinstatementofthispolicy,afterthechangeorreinstatementhasbeenineffectfortwoyearsduringyourlifetime.Thetwoyears

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willnotincludeanyperiodduringwhichyouaretotally,partially,orresiduallydisabled.

CampbellmadeaclaimforbenefitsonNovember26,1991onedayshyoftwoyearsaftertheeffectivedateofthepolicy.Hesoughtdisabilityinsurancebenefitsinthemonthlyamountof$2,500.Heclaimed''apresentlyexistingdisabilityofindefiniteduration."

EquitablebeganpayingCampbellhisbenefits.Butlater,afterithadinvestigatedtheclaimandcomparedthedisabilityapplicationwiththelifeapplication,thecompanydiscoveredCampbell'struemedicalhistory.ItrescindedthepolicybynoticeofaletterdatedOctober20,1992.

CampbellsuedEquitableforreinstatementandcontinuationofbenefits.EquitablesuedCampbell,arguingthatbecauseCampbellhadmadematerialmisrepresentationsinhisapplicationitwasentitledtorecoverabout$20,000inbenefitspaidtoCampbellunderthedisabilitypolicy.

Thetrialcourtclarifiedthetermsofthedispute.Campbell'sexpectationofdisabilitybenefitswasbasedonthesecircumstances:

Sincetheregisterednursewhoexamined[Campbell]forthe[lifeinsurance]policyhadonherhealthquestionnairethat[he]hadbeentreatedfordepression...anditwasusedasthebasisfortheEquitablepolicyoflifeinsurance,[Equitable]hadknowledgethat[Campbell]hadbeen...treatedfordepression.

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However,Equitable'sargumentforstoppingpaymentsandrecoveringwhathadalreadybeensentwasbasedonother,equallycompellingcircumstances:

Campbellfreelyadmittedthathesignedtheapplicationfordisabilityinsurancewithoutreadingit,andthathedidnot,eitheratthetimeofapplyingorlater,afterdeliveryofthepolicy,ofwhichhisapplicationwasapart,checkforaccuracyoftheresponsestothequestionsconcerninghishealthandmedicalhistory.

ThecourtruledthatnoreasonablepersoncouldholdtheresponsesstatedontheapplicationforthedisabilityinsurancepolicyinissuetobeconsonantwithCampbell'sactualstateofhealthandmedicalhistory.ItsidedwithEquitableanddismissedCampbell'sclaims.

Campbellfiledamotionforreconsideration,claiming(amongotherthings)thatthepolicy'sincontestabilityclauseshouldhaveprotectedhimfromtheresultsofanymisleadinginformationinhisapplication.

Butthecourtstuckbyitspreviousrulingnamely,thatCampbellcouldnotasserttheincontestabilityofthepolicywithoutcontradictinghisassertionsconcerningtheonsetanddurationofhisdisability.Itdeniedhismotionforreconsideration.

MoralHazardsandMoraleHazards

Aninsurancecompany'sunderwritersalsowilltrytodeterminewhetheranapplicantpresentsamoralhaz-

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ardormoralehazardthatis,whetherthepersonbehavesorchoosesalifestylethatsuggestsclaimsproblemsorinvitesdisabilityrisks.(Someinsuranceprofessionalsusethesetermsinterchangeably.)

Apersonwhopresentsamoralhazardmightbethetypewhowouldfileafraudulentdisabilityclaimintimesoffinancialdistress.

Theoldinsuranceindustrysaying"paindoesn'tshowuponanX-ray"getstotheissueofmoralhazard.Adisabilitypolicyholdercouldclaimawhiplashneckinjuryastheresultofarelativelyminorautoaccidentwhen,infact,heisnotdisabled.

Anytendencytousethedisabilityincomepolicywrongfullyisanexampleofamoralhazard.

Evidenceofamoralhazardwouldincludethelossofadriver'slicense,ahistoryofsubstanceabuseorarecordofcriminalactivities.Inadditiontomoralhazards,adisabilityinsurancecompanyalsowilltrytoavoidanymoralehazards.Amoralehazardisanindifferentattitudedisplayedbyapersonthatincreasestheriskofloss.Apersonwhoregularlyreceivesspeedingticketsmightbedemonstratinganindifferentattitudetowardtheriskofinjuryduetohighspeeds.

Again,thepolicyapplicationisthemainmechanismbywhichacompanyevaluatesmoralormoralehaz-

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ards.Ifthecompanydoesconcludeapersonposeseitheroftheseadditionalrisks,itwilladdasurchargetothedisabilitypremiumormorelikelywilldeclinetheapplication.

OtherFactors

Anotherfactorthatimpactshowmuchadisabilityinsurancecompanywillchargeforcoverageishowmuchandwhatkindofotherinsuranceapersoncarries.Theinsurancecompany'sgoalinthisprocessistopreventoverinsurance.

Onceithasobtainedaccurateinformationregardingtheamount,eliminationperiodandbenefitperiodofothercoverageyoucarry,thecompanywillpriceitspolicyaccordingly.Itwantstoavoidgivingapolicyholdertheincentivetomakeadisabilityclaim.

Thecompanyalsowantstomakesurethatitgeneratesenoughpremiumincomefromthepolicytocoveronaverageamaximumbenefitclaim.

Finally,yourtotalnetworthalsomayaffecttheamountandpriceofdisabilityincomecoverageacompanywillsellyou.Apersonwith$1millioninthebanksimplydoesn'tneeddisabilityincomeinsurance!

Theamountoftotalnetworthandtheliquidityofsuchassetswilldeterminewhetherareducedamountofdisabilityincomewillbeissuedornocoverageatall.Ifaperson'sassetsareeasilymarketableand/orifthetotalnetworthreflectsalargeamountofunearnedincome,thentheunderwritermaydecidethattheapplicantisnoteligibleforcoverage.

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PersonalInterviews

Afteryou'vesubmittedadisabilityinsuranceapplication,apersonalinterviewusuallyisperformedbyatrainedinterviewerworkingfortheinsurancecompany.(Italsomaybedonebyanindependentthirdparty.)Theinterviewnormallyiscompletedoverthetelephone.

Generally,thepurposeoftheinterviewistoverifyapplicationinformation.Specifically,anyapplicationdataregardingmedicalhistory,hobbiesandoccupationaldutiesmayhavetobeexplained,oradditionalinformationmayneedtobegatheredthroughthisreport.

Youwillbenotifiedofthisinterviewinadvance.Typically,thisisdoneinwriting.Mostapplicationscontainadisclosurenoticethatisdetachedfromtheapplicationandgiventoorkeptbythepersonapplyingforcoverage.Theinsurancecompanyhasspecificissueandparticipationlimits,whicharebasedonvariousfactorsincluding,aswe'veseen,youroccupationandearnedincome.

Asarule,mostinsurerswilloffercoverageequalto60percentto70percentofearnedincome.Thislimitationalsomaybeadjustedandusuallydecreased,ifanythingduetotheoccupationalclassoftheapplicant.Mostinsurerswilloffersmalleramountsof

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disabilityincomeprotectiontothoseinthemorehazardousoccupations.

StandardandSubstandardRisks

Oncealltheunderwritinginformationhasbeenreviewed,aninsurancecompanymakesadecisionabouttheacceptanceoftherisk.

Mostapplicantsareclassifiedasstandardrisks,whichbasicallymeanstheyfittheprofileofanaveragepolicyholder.Inthesecases,apolicywillbeissuedasappliedforbytheapplicant.Therateorpremiumchargedwillbethestandardpremiumrelativetotheperson'sage,sexandoccupationaswellasthebenefitamount,eliminationperiodandbenefitperiodselected.Occasionally,anapplicantfordisabilityincomewillbeclassifiedasasubstandardrisk.Thisusuallywillresultfromaproblemwithoneormoreoftheunderwritingfactorswehaveconsideredinthischaptersuchasapastorcurrentmedicalproblemorevidenceofamoralhazard.

Onepointmentionedbeforebearsrepeating:Thefactorsthatimpactdisabilityinsurancecoveragearedifferentfromthefactorsthat(Continuedonnextpage)

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(Continuedfrompreviouspage)mightinfluencelifeinsuranceorothercoverages.Ifanapplicanthasahistoryofbackproblems,heorshemighthavenotroublegettinglifeinsurancebutalotoftroublegettingdisability.Apersonusuallywon'tdieduetoabackache,butcertainlycouldbecomedisabledbecauseofone.

Ifyouareclassifiedasasubstandarddisabilityrisk,aninsurancecompanyhasseveralalternativesavailableforissuingaspecialpolicy:

Anextrapremiummaybecharged,wherebythecoverageisissuedasappliedforandthehigherpremiumisusedtocompensateforthehigherriskinvolved.

Aridermaybeattachedtothepolicy,modifyingthecoverage(afullexclusionriderisusedwhenthenatureoftheconditionislikelytoresultinrecurrentdisabilitiesforexample,afullbackexclusionridermaybeusedforchronicbackdisorders).

Aqualifiedconditionexclusionridermaybeusedtoexcludecoverageforaspecifiedmedicalproblemforaspecifiedperiodoftime.

Inasimilarvein,thecompanymaychangetheeliminationorbenefitperiodfordisabilitiesrelatedtoaparticularmedicalcondition.

Ortheinsurancemayincreasetheeliminationperiodorshortenthebenefitperiodforthewholepolicytocompensateforthemedicaldisorder.

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Example:Ellenhasaproblemwithulcers.Sheappliesfordisabilityincomeprotectionwitha30-dayeliminationperiodandato-age-65benefitperiod.Duetothenatureofthedisorder,herinsurancecompanydecidestoissueEllenapolicywitha180-dayeliminationperiodandafive-yearbenefitperiod.Ofcourse,afinalalternativeavailabletotheunderwriterandtheinsurancecompanyissimplytodenycoverageduetothemedicalcondition.

GroupUnderwriting

Mostpeoplehaveatleastasmallamountofdisabilityincomeinsurancethroughbenefitsofferedbytheiremployers.Thesegroupdisabilityincomepolicies(likegrouplifepolicies)areunderwrittenonveryliberalterms.

Groupunderwritingusuallyisaccomplishedwithoutanyreferencetoanindividual'smedicalinformation.Mostinsurancecompanieswillrequirethataminimumnumberofemployeesparticipateinagroupplanforthatplantobeissuedwithoutevidenceofinsurability.Generally,theemployeeisrequiredtoprovidehisorheraddress,socialsecuritynumberandcertainwork-relatedinformation.

Inthesesituations,theunderwriterandinsurancecompanywillconcentrateonsuchgroupfactorsasoccupationalduties,industrytypeandtheamountsofdisabilityincomebeingoffered.Duetothenature

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orriskofanoccupation,theinsurancecompanymaylimitorrefusetowritegroupdisabilityincomecoverageforcertainoccupationalgroupssuchascoalminers,thelumberindustry,theentertainmentindustry,etc.

Groupdisabilitycoverageusuallywillbelimitedtonotmorethan70percentofyourearnedincomeandsubjecttoalowmaximumbenefitsuchas$1,000or$2,000permonthforayear.Becausethereisnomedicalunderwritinginvolvedwithgroupcases,theunderwriter'sprimaryjobistoprotectagainstoverinsuranceorlargeamountsofcoverageandadverseselectionagainsttheinsurer.

Adverseselectionoccurswhenaninsurancepolicyencouragespeoplewiththehighestriskprofilestousethecoverageandthosewithlowerriskprofilestofindmorecost-effectiveinsurance.Toavoidadverseselection,theunderwritermaylimittheamountofcoverageoffered,declinetowritethegroupatallorofferthecoverageonanon-occupationalbasis.Non-occupationalcoveragewillnotofferbenefitsforwork-relateddisabilities.

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Althoughnotgroupinsurance,strictlyspeaking,associationcoveragehassomeofthesameunderwritingcharacteristicsofgroupcoverage.Associationcoveragemightbedescribedasindividualpoliciesadministeredasgroupinsurance.Iftheassociationistoofferaguaranteed-issueplan,thentherewillbenomedicalunderwriting,asallmembersareguaranteedtheissuanceofapolicy.

However,mostassociationplansrequiresomemedicalunderwriting,orwhatissometimesreferredtoassimplifiedorprogressiveunderwriting.Associationunderwritingmaytaketheformofthreeorfourmedicalquestionsaskedoftheindividual.Duetothesizeoftheassociationmembership,relativelyminormedicalproblemsmaybeoverlookedandpoliciesissued.

Nevertheless,evenwithsimplifiedunderwriting,itispossibleforamembertobedeclinedfortheinsurance.Inaddition,theunderwritingprocedureissimplifiedbythefactthattherearelimitsastotheamountofcoveragethatmaybeissued,aswellasthelengthoftheeliminationandbenefitperiods.Thereisalsononeedtooccupationallyclassifyassociationmembers,astheyallhaveessentiallythesameoccupation,whichisnormallylowrisk.

Premiumsforassociationtypesofcoveragenormallyarebandedbyagesandamounts.Forexample,everyonebetweentheagesof25and30paysthesamepremiumfora30-dayEPanda$1,000monthlybenefit

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payabletoage65.Fromage31to35,anewbandofpremiumswouldbeused.

Anotherunderwritingconsiderationwithregardtoassociationcoveragepertainstotheplacewheretheassociationmemberconductshisorherbusiness.Forexample,anassociationcomposedofartistsmaybedifficulttowritedisabilitycoverageforbecausemanyoftheseartistswillworkoutoftheirhomes.Normally,individualswhoworkoutoftheirhomescannotqualifyfordisabilityincomecoveragebecauseitisdifficulttodetermineif,infact,theydobecomedisabled.Theirworkplaceisalsotheirrecoveryplace,andthusaconflictarises.Often,theunderwritersimplymaydeclinetoofferthistypeofassociationanycoverageatall.

Conclusion

Thischapterhasreviewedtheessentialfactorsthataninsurancecompanyconsiderswhenitpricesdisabilityincomeinsurance.Ofcourse,everycompanypricesinsurancecoverageinitsownwayonecompany'srejectedriskwill,occasionally,beanother'spreferred.But,inmostsituations,companiescalculaterisksconsistently.

Ifyouhaveappliedfordisabilityinsuranceandreceivedaquotethatseemstoohighortoorestrictive,youshouldaskthecompany'sagentorcustomerservicedepartmenttoexplainthereasonsforthequote.Injustaboutanycase,theexplanationshouldcoverinformationyou'vereadhere.

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Chapter6SocialSecurityasIncomeInsuranceAlmostalljobsarecoveredbySocialSecurityandnineofevery10workerscurrentlyarepayingintothesystem.TheSocialSecuritySystemwasenactedin1935toprovideretirementbenefitsforcoveredworkers.ItbecameeffectiveinJanuary1937;by1939,SocialSecurityalsoprovidedsurvivorsbenefitstothefamiliesofcoveredworkers.

About7millionworking-ageadultswerereceivingSocialSecuritybenefitsbasedondisabilityin1994.

Atechnicalnote:WhatwerefertoasSocialSecurityismoreproperlycalledOldAgeSurvivorsandDisabilityInsurance(OASDI).

Theprogrampaysfourtypesofbenefits:

disabilitybenefitstoworkers;

Medicarebenefits;

retirementbenefitstoworkersandtheirdependents;and

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survivorsbenefitstoaworker'sfamily.

Aswe'vealreadyseen,thedisabilitybenefitsofSocialSecurityareallthatmanypeoplehavetocoverincometheywillloseifthey'reunabletocontinueworkingduetoillnessorinjury.

AccordingtotheMarch1996SocialSecurityBulletin:

Thepurposeofdisabilityinsuranceistoprotectworkersagainstseverefinancialhardshipwhentheirabilitytoearnalivingisinterruptedbydisablingillnessorinjury.Asinanyinsuranceprogram,applicantsforbenefitsmustshowthattheinsuredeventhasoccurredbeforebenefitsarepaid.

Disabilitybenefitsaremodestinrelationtotheworker'spriorearnings.Atmostearningslevels,benefitsamounttolessthanone-halfofpriorearnings.Theaveragemonthlybenefitfordisabledworkerswas$663inJuly1995.

Formostpeople,SocialSecuritywouldnotprovideenoughmoneytomaintainamiddle-classlifestyle.Nevertheless,itisapartofjustabouteveryperson'stotalpackageofincomeinsurancesoitsmechanicsareworthconsidering.

WhoisEligible?

ParticipationintheprogramandpaymentofSocialSecuritytaxesismandatory,unlessyouroccupationoremploymentisexemptfromcoverageandthepaymentoftaxes.Buteventhoughalmosteveryonepaysthetaxesfewpeopleactuallyreceivethecoverage.

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Statistically,onlyaboutoneinthreeSocialSecuritydisabilityclaimantsevercollectsbenefits.Thisistrueforseveralreasons.Firstofall,ayoungerworkerwhohasnotachievedafullyinsuredstatusanddisabilityinsuredstatus(basically10yearsofpayingSocialSecuritytaxes)cannotqualify.

Therequirementthatthedisabilitylastatleast12monthsorendindeathautomaticallyeliminatesshort,non-life-threateningdisabilities.Thepersonwhohassufferedamildheartattackandisunabletoworkforfourorfivemonthswouldnotqualifyforbenefits.

Thedisabilitymustbesoseverethattheclaimantisunabletoengageinanyemploymentthatexistsinthenationaleconomy,regardlessofwhethersuchworkisavailableintheimmediateareawheretheclaimantlives.Thisrequirementworksagainstthehighlyeducated,highlyskilledworkerinfavorofthelesseducated,lowerskilledworker.Ahighschooldropoutwithlimitedworkexperienceismorelikelytocollectdisabilitybenefitsthanadoctor,attorney,engineer,etc.

Still,theanswertothequestionWho'seligibleforSocialSecuritydisability?isJustabouteveryone.Thelistincludes:

commonlawemployersandemployees;

mostself-employedpersons;

armedforcespersonnel;and

employeesofnon-profitorganizations.

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CorporateofficersandworkingownersofcompaniesareconsideredemployeesforSocialSecuritytaxpurposes.

Aself-employedpersonisanindividual(orindividuals)operatingabusinessorengagedinaprofessionasanon-incorporatedventure.Theself-employedpersonworksforhimselforherself.Thisbusinessmaybeorganizedasasoleproprietorshiporapartnership,orthepersonmayoperateasanindependentcontractor.

Aself-employedpersondoesnotmeettheSocialSecurityrequirementsofanemployeebutheorshemuststillpaySocialSecuritytaxes...andthereforecanreceivebenefits.ProfessionalssuchasCPAs,doctors,dentists,lawyers,etc.usuallyareself-employed.Othercommonexamplesincludemanyministers,membersofreligiousorders,independentcontractors,realestateagents,etc.

Apersonwhoisanindependentcontractororfree-lanceworkerwillhavenoSocialSecuritytaxespaidonhisorherbehalfbyanemployer.AnindependentcontractorprobablywillpaySocialSecuritytaxesasaself-employedperson.

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Asageneralrule,ifafamilymemberisemployedinthefamilybusiness,SocialSecuritycoverageandtaxesareapplicable.Anexceptionisaminorchild(undertheageof18)employedbytheparent,oraparentofthebusinessownerwhoperformsdomesticworkinthehomeofthesonordaughter.

GovernmentemployeeswerenotcoveredbySocialSecurityduringitsearlyyears.However,inthe1980s,aseriesofreformsmovedtheseworkersfromvarioussocializedprogramsintothemainSocialSecuritysystem.

Since1967,ministers,priests,rabbisandmembersofreligiousordershavebeencoveredbySocialSecurity.MembersofreligiousordersmustpaySocialSecuritytaxesprovidedthattheyhavenottakenavowofpoverty.

However,membersoftheclergyandreligiousordersmayclaimexemptionfromthepaymentofSocialSecuritytaxesbasedonconscienceorreligiousprinciples.TheywillstillbeabletoclaimSocialSecuritybenefits,includingthedisabilitycoverage.

SinceJanuary1984,allemployeesofnonprofitorganizationsschoolsystems,hospitals,churches,etc.havebeencoveredbySocialSecurity.Nonprofitorganizationsarethoseidentifiedinsection501(c)(3)oftheInternalRevenueCode.

Eligibilityisn'tqualification

AlmosteveryoneiseligibleforSocialSecuritydisabilitybenefits.Butthatdoesn'tmeaneveryonequalifies.Makingasuccessfulclaimistough.

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Thefollowingchartsummarizesdisabilityincomerequirementsandbenefits:

DisabilityBenefitsEligibilityUnderage65FullyanddisabilityinsuredWorkersatisfiesthedefinitionoftotaldisabilityThedisabilityisexpectedtolast12monthsand/orendindeathBenefitsEqualtotheworker'sprimaryinsuranceamountandsubjecttothefamilymaximumbenefitBenefitsoffsetforworkers'compensationand/orstatutorybenefits

The1993decisionBettyDodrillv.DonnaShalala,SecretaryofHealthandHumanServices,showshowharditistoqualifyforSocialSecuritydisabilitybenefits.

Dodrillappliedforthebenefits,claimingthatshesufferedfrom''arealbadproblemwithbreathing.IfImovearoundordoanyexerciseatall,Igetcompletelyoutofbreathandhavetousemybreathalizer."

Shealsotestifiedto"excruciatingpaininmylowerbackandmyrightleg,"especiallyifshesatforanylengthoftimeorwalked.Theseproblemspreventedherfromdrivingacar.

Sheclaimedshewasunabletodoanyhouseholdchoresandcouldnotbendovertogetanythingoutoftheclothesdryer,dishwasherorcabinets.

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Dodrillalsostatedthatsheleftthehouseapproximatelytwiceamonthandotherwisewouldsleepandtakecareofherself.

Therewasmedicalevidenceofanimpairment.AconsultingphysicianwhohadtreatedDodrillreportedthatshesufferedfrom"backpainsyndrome...quiteconvincingforsomedegreeofdisc[sic]diseasewithclassicle[sic]soundingsciatica."

Hesaw"noreasontodoubtheraccountofpain,madeespeciallyworsebyherobesity."Andadded,"Thiswouldcertainlybedisablingsofarasshewouldbeunabletocarryoutheavy,physicalliftingorbending."

HealsonotedthatDodrill"relatesagoodstoryforexercise-inducedasthmaandchronicbronchitis,"which"alsowouldlimitherabilitytoperformanyphysicalwork,"andsuggestedshecouldperform"clericalorothernonphysicalactivities."

Nevertheless,theSocialSecurityAdministrationruledthatDodrillhadthecapacitytoperformherpastworkasabusinesslicenseinspectorajobthatdailyentailedtwohoursofwalking,onehourofstanding,approximatelyfivehoursofdrivingandfrequentliftingofupto25pounds.

Dodrillappealedthedecision.Anadministrativelawjudge(ALJ)reviewingthecaserejectedthetestimonyofDodrillandherdoctor,notingthatDodrillhadleftherlastjobnotbecauseofmedicalnecessitybuttofollowherhusbandtothestateofWashingtonwhenheretired.Thejudgealsonotedthathergeneralcondition"appearstobethesameaswhenshewasemployed."

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Beyondtheseobservations,hemerelyrepeatedthattherewaslittleornothingintherecordtosupportDodrill'sclaimsof"fatiguability,"severepain,exercise-inducedasthmaandlimitedactivities.

Dodrillappealedtofederalcourtandgotabetterhearing.Thecourtoverturnedthejudge'srulings.Specifically,itwrote:

Dodrillofferedtestimonyoflaywitnessesastoherphysicalcondition.TheALJdismissedtheevidenceofthesewitnessesbecausehebelievedthattheyweremerelyrepeatingDodrill'scomplaints.Thatmayhavebeenthecaseastosomeofthewitnesses,suchasherdaughters,whosestatementsdidnotexplainsufficientlywhenandtowhatextenttheyhadtheopportunitytoobservetheirmother.Otherwitnesses,however,likeDodrill'shusband,grandsonandfriend,clearlysawheronafrequentbasis.Thesewitnessescouldobservehersymptomsanddailyactivitiesandwerecompetenttotestifyastohercondition.

TheALJalsohadpaidconsiderableattentiontothefactthatDodrill'sobesitycomplicated,ifnotcaused,someofherproblems.Heobservedthatshehadoncelostsignificantweightandthat"thereisnothingtoshowthat,throughproperdietandsomeexercise,shewouldnotbeabletodosointhefuture."

Theappealscourtrejectedthisargument,too:

TheALJ'sfocusonDodrill'sfailuretoloseweightsuggestedthathedidnotincludeherobesityindeterminingthedegreeofherim-

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pairmentorgiveproperweighttoitsaccompanyingsymptomsinmakinghisdisabilityevaluation.Hecouldnotdosowithoutapreliminaryfindingthattheobesitywasinfactremediable.

Thecourtruledthatthecasebereversedandremanded.Italsoruledthat,onremand,theALJshouldevaluatewhetherDodrill'sobesitywasreasonablyremediable.Ifitwasnot,he"mustconsider[her]obesityasafactorcontributingtoherdisability,"andweighthecombinationofherimpairmentsaccordingly.

InsuredStatus

InadditiontomeetingtheeligibilityrequirementsofanemployeeandpayingSocialSecuritytaxes,eligibilityforSocialSecuritybenefitsisdeterminedbyyourinsuredstatus.InsuredstatusisbasedonyourquartersofcoverageforSocialSecuritytaxpurposes.

Therearebasicallythreeformsofinsuredstatus,whichdetermineeligibilityforcertainOASDIbenefits:

fullyinsured;

currentlyinsured;and

disabilityinsured.

FullyinsuredstatusresultsineligibilityformostSocialSecuritybenefits.Thiswouldincluderetirement,survivorsanddisabilitybenefits(assumingtheworkerisalsodisabilityinsured).

Toachievefullyinsuredstatus,youmusthavepaidSocialSecuritytaxesforatotalof40calendarquartersor10years.

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Acalendarquarteristhethree-monthperiodendingonthelastdayofMarch,June,SeptemberandDecember.Aquarterofcoverageisnotrelatedtothetimethatapersonworks,butratherearningsreceivedwithintheworkperiod.Thiscancreatesomecomplexity.

Example:In1995,aworkerwascreditedwithaquarterofcoverageforeach$630ofearningstoalimitoffourquartersduringthatyear.Billworkedforafewmonthsin1995andearned$2,000.HewascreditedwiththreequartersofcoverageforSocialSecuritypurposes($630x3=$1,890).

WhetherBillworked40hoursaweekorfourhoursaweekisnotthedeterminingfactor.Thefactorthatdeterminesthequarterofcoverageistheearningsofatleast$630.Thus,$2,000ofearningsresultsinthreecalendarquartersofcoverage.Theearningsfigureisanindexedoradjustedfigure,whichchangesannuallyduetoincreasesinwages.Thus,inmostyears,theearningsfigurewillbehigherthantheyearbeforeand,consequently,therequirementsforaquarterofcoveragewillbehigher.

Thereisasecondmethodusedtodeterminefullyinsuredstatus.Youareconsideredfullyinsuredifyouhaveatleastsixquartersofcoverage,plusonequarterforeachyearelapsingafter1950or,iflater,thenumberofyearssinceyouturned21.

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Currentlyinsuredstatusisachievedifyouhaveatleastsixquartersofcoverageduringthe13-quarterperiodendingwiththecalendarquarterinwhichaSocialSecurityclaimissubmitted.Thesixcalendarquartersneednotbeconsecutive,butsimplysixquartersofcoveredemploymentduringthe13-monthperiod.

Ifaworkerisonlycurrentlyinsured,SocialSecuritybenefitsarelimitedtomonthlysurvivorsbenefitsforeligibledependentsofacoveredworker,andalumpsumdeathbenefitof$255.Aworkerwhoiscurrentlyinsuredanddieswithouteligibledependentsisnoteligibleforbenefitsasacurrentlyinsuredindividual.

Example:Sarahdiesatage64.Shehasonlyachievedcurrentlyinsuredstatusduringherbriefworkingyears.Sheleavesnominorchildrenordependentparentsandherhusbanddiedfiveyearsearlier.ThefamilyappliestoSocialSecurityforthe$255lumpsumdeathbenefit.

SocialSecuritywilldenythisclaim,becausethelumpsumdeathbenefitwillnotbepaidtoacurrentlyinsuredpersonwithouteligibledependents.(Inthisexample,evenifSarahhadbeenfullyinsured,therewouldbenobenefitpayable,sinceshehadnodependents.)Disabilityinsuredstatusinvolvestworequirements:

youmustbefullyinsured;and

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youmusthaveatleast20quartersofcoveredemploymentduringa40-quarterperiodendingwiththequarterinwhichyoufiledadisabilityclaim.

Althoughthiseligibilitymayappearsomewhatcomplicated,itreallyisn'tformostindividuals.Ifa40-year-oldpersonhasbeenworkingsteadilyduringhisorheradultlife,thenheorshewillbedisabilityinsured.

Atotalof10yearsofemploymentinwhichSocialSecuritytaxeshavebeenpaidshouldresultinaworkerbeingbothfullyinsuredanddisabilityinsured.Thosewhomayhavedifficultyachievingdisabilityinsuredstatusareyoungerworkerswhomayonlybecurrentlyinsuredandhaven'tbeenpayingSocialSecuritytaxeslongenoughtobefullyinsured.However,therearespecialrulesthatcoverthissituation.

DeterminingEligibility

EligibilityfordisabilityincomebenefitsfromSocialSecurityrequiresthefollowing:

youhavefullyinsuredanddisabilityinsuredstatus;

youareunderage65;

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thedisabilityisexpectedtolastforatleast12monthsand/orendindeath;and

youhavesatisfiedafive-montheliminationperiodfollowedbysubmissionofanapplicationforbenefits.

Theunderage65requirementisduetothefactthat,atage65,anydisabilitybenefitsbeingpaidbecomeretirementbenefits.

Inadditiontotheageandstatusrequirements,aworkeralsomustsatisfytheSocialSecuritydefinitionoftotaldisability.Totaldisabilityisdefinedas:

Theinabilitytoengageinanysubstantialgainfulactivitybyreasonofanymedicallydeterminedphysicalormentalimpairmentwhichcanbeexpectedtoresultindeathorlastforatleast12months.

Thisdefinitionisveryrestrictive.Itobviouslyeliminatesbenefitsforanyshort-termdisabilityorarelativelyinsignificant,non-life-threateningdisability.Inaddition,youmustbeunabletoperformthedutiesofyourpresentjobandunabletoperformthedutiesofanyjobrelativetoprioreducationandtraining.

Notethattheserequirementsdonotrelatetoprioreconomicstatus.Theoretically,anindividualwitha$150,000annualincomewhohassufferedatotaldisabilitymaybeunabletocollectSocialSecuritybenefitsiftherearejobsavailableforthispersonrelativetoeducationandpriortrainingorexperience.

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Generally,anapplicationforbenefitswillbefiledsometimeduringthefifthmonthofdisability,becausethereisafive-montheliminationorwaitingperiod.Claimsapplicationsmaybesubmittedretroactivelyupto12monthsaftertheonsetofthedisability.

DeterminingtheAmountofBenefit

Theactualdisabilitybenefitisequaltoyourprimaryinsuranceamount(PIA).ThePIAisbasedontheaverageearningshistoryuponwhichSocialSecuritytaxeshavebeenpaid.Inaddition,theactualdisabilitybenefitisaffectedbyyourageattheonsetofthedisabilityandyourdependentstatus.

Disabilitybenefitsmaybereducedtooffsetbenefitsreceivedfromworkers'compensationandanystatutorydisabilityplan,suchasafederalorstatedisabilityplan.ThisreductioninbenefitswillbemadeiftheSocialSecuritybenefitsplusthestatutoryplanbenefitsexceed80percentofyourpre-disabilityaverageearnings.

Example:Luis'monthlyearningspriortotheonsetofadisabilitywere$2,000.Duetoaseriouswork-relatedinjury,LuishasbeenapprovedforSocialSecuritybenefitsandalsoiseligibleforworkers'compensation.HisSocialSecuritybenefitis$1,250monthly.Hisworkers'(Continuedonnextpage)

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(Continuedfrompreviouspage)compensationbenefitis$750monthly,foratotalbenefitof$2,000100percentofhispre-disabilityincome.

Luis'SocialSecuritybenefitsmustbereducedsothattotalbenefitsdon'texceed80percentof$2,000(thatis,$1,600)monthly.So,hisSocialSecuritybenefitwillbeoffsetby$400whichreducesitto$850.Certainbenefitsarenotsubjecttothisoffsetrule.VeteransAdministration(VA)benefitsareexcluded,asareprivatepensionorinsurancebenefits.

TrialWorkPeriod

TheSocialSecurityAdministrationalsohasestablishedatrialworkperiodasanincentiveforrehabilitationand/orattemptstoreturntowork.ThismeansapersonmayreturntoworkonatrialbasiswhilecontinuingtoreceiveSocialSecuritybenefits.

Ifadisabledworkerrefusesrehabilitationwithoutajustreason,benefitsmaycease.

Ajustreasonforrefusalcouldbethatthesuggestedrehabilitationviolatesreligiousbeliefsorsimilarcloselyheldpersonalconvictions.

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Generally,disabilityincomebenefitsceaseattheearliestof:

theendofthesecondmonthafterthedisabilityceases;

themonthpriortoattainmentofage65;or

themonthpriortotheworker'sdeath.

BenefitsalsomayterminateifitisdeterminedbySocialSecuritythattherehasbeensubstantialmedicalimprovementinyourconditionorthereisevidencethatalthoughtheconditionmaynothaveimproved,youarenowabletoperformoccupationaldutiesduetophysicalorvocationalrehabilitationservices.

ThisdiscretiongivestheSocialSecurityAdministrationtheabilitytoenforceitstrialworkandreturn-to-workguidelines.

The1993federalcourtdecisionMichaelMulderigv.LouisW.Sullivan,SecretaryofHealthandHumanServices,dealtwiththeSocialSecurityAct'sdefinitionofdisabilityandaloopholeinthelaw'streatmentoftrialworkperiods.

MulderighadfiledanapplicationfordisabilityinsurancebenefitsinMay1989,claimingthathewasdisabledasaresultofaninjuryhesustainedinJune1988whileservingasaNewYorkCityfirefighter.

But,afterMulderigfiledfordisability,thecasetookastrangeturn.Hereturnedtoworklessthanamonthlater.Despitehisreturntowork,MulderigclaimedthathewasdisabledasdefinedbytheSocialSecurityAct.

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Theactdefinesdisabilityasan''inabilitytoengageinanysubstantialgainfulactivitybyreasonofanymedicallydeterminablephysicalormentalimpairmentwhichcanbeexpectedtoresultindeathorwhichhaslastedorcanbeexpectedtolastforacontinuousperiodofnotlessthan12months."

Mulderig'sapplicationwasdeniedbothinitiallyanduponreconsideration.Then,anadministrativelawjudgeconsideredhiscaseandalsoconcludedthathewasnotdisabled.AnappealscouncildeniedMulderig'srequestforreview.So,hesuedinfederalcourt.

AccordingtoMulderig,theSocialSecurityActentitledhimtoatrialworkperiod.Therefore,hisreturntoworkshouldnothavebeenconsideredindetermininghiseligibilityforbenefits.

Sullivan'sofficearguedthatMulderighadnotsatisfiedthestatutorydefinitionofdisabilitybecausehisreturntoworklessthan12monthsafterhisinjurydemonstratedanabilitytoengageinsubstantialgainfulactivity.

Governmentlawyersfurtherarguedthatonlypeoplewhohadbeenjudgeddisabledandawardedbenefitswereeligibleforatrialworkperiod.Anyotherpositionwouldbe"administrativelyunworkable."

ThecourtconsideredMulderig'sargumentseriously:

...AccordingtotheAct,"anyservicesrenderedbysuchindividualduringaperiodoftrialworkshallbedeemednottohavebeen

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renderedbysuchindividualindeterminingwhetherhisdisabilityhasceasedinamonthorduringsuchperiod."

...Aclaimant'seligibilityforatrialworkperiodturnsonwhetherheisentitledtobenefitsandnotonwhetherheisactuallyreceivingthem.AstheActstates,aclaimantiseligible"beginningwiththemonthinwhichhebecomesentitledtodisabilityinsurancebenefits."Therefore,ifaclaimanthasfiledanapplication,andhasbeendisabledforfivemonthsfromanimpairmentwhichisexpectedtolastforatleast12months,heis"entitled"tobenefitsand,inturn,atrialworkperiod.

...thelanguageoftheActdoesnotsuggestthatanindividualhastobeadjudgeddisabledandactuallyreceivingbenefitstobeentitledtoatrialworkperiod.

ThecourtruledthatthetrialworkperiodasdefinedbytheSocialSecurityActwasa"remedialstatutetobebroadlyconstruedandliberallyapplied."Itwasmeanttoencourageindividualswithdisabilitiestoattempttorejointheworkforce.

Inreachingthisconclusion,thecourtcitedanotherfederaldecisionwhichhadheldthat:

...limitingthetrialworkperiodtothosereceivingbenefits,althoughadministrativelyconvenient,isinequitable:AclaimantwhoseclaimwasfiledinanoverloadedSSAofficeorwashandledbyanincompetentemployee

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wouldbeunabletoengageintrialworkforyears,whileanotherwouldbeabletodosowithinfivemonthsoftheonsetofdisability.

ThecourtinMulderig'scasefinallyorderedthegovernmenttoreconsiderhisapplication:

...[It]mustnowconsiderwhetherMulderigsufferedunderanimpairmentthatwasreasonablyexpectedtolast12monthsandwhetherhehadbeendisabledforfivemonthsatthetimehereturnedtowork.

Ifhewaseligibleforatrialworkperiodatthetimehecommencedwork,thenhisworkforninemonthsthereaftercannotbeconsideredindetermininghiseligibilityfordisabilityinsurancebenefits.

OtherEligibilityIssues

TheSocialSecurityAdministrationusesaverystrictdefinitionofworkdisabilityinabilitytoengageinanysubstantialgainfulactivitybecauseofamedicallydeterminableimpairmentexpectedtolast12monthsorresultindeath.

Ifyouaredisabledandyourspousesuffersanattendantlossinincome,yourspouseisentitledtobenefitsinmuchthesameway,withthesamemethodofqualification,benefitamounts,etc.Thisworksmuchlikeeligibilityforretirementandsurvivorsbenefitsdoes.

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Example:Aspouseofadisabledworkeriseligibleforbenefitsiftheworkerachieveseligibility,anapplicationforbenefitshasbeensubmitted,thespouseisnoteligibleforadisabilitybenefitequaltoorlargerthantheworker'sPIA,andthespouseisunderage62orhasaminorchildundertheageof16.Thesearethesameasspousalrequirementsforretirementbenefits.

Inaddition,thespousemusthavebeenmarriedtothedisabledworkerforatleastoneyearpriortothesubmissionofthedisabilityclaimand/orbethebiologicalmotheroftheminorchild.

Adivorcedspousealsoiseligibleforbenefitsrelativetoadisabledworker.Essentially,thesameeligibilityrequirementsapplyaswouldapplytoadivorcedspouseclaimingretirementbenefits.

Asistruewithretirementbenefitclaims,thedivorcedspousemusthavebeenmarriedtothedisabledworkerforatleast10yearspriortothedateonwhichthedivorcebecamefinalandcurrentlymustbesingle.

Thespouse's(ordivorcedspouse's)benefitisequaltoone-halfoftheworker'sPIAandsubjecttothefamilymaximum.

Dependentchildrenofadisabledworkeralsomaybeeligibleforbenefitsifcertainrequirementsaresatisfied.Theserequirementsincludethefollowing:

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thechildisdependentonthedisabledworkerwhichgenerallymeansthatthechildisunderage18;

thechildisnotmarried;and

anapplicationforachild'sbenefithasbeensubmitted.

Adisabledchildofadisabledparentmayreceivebenefitspastage22ifthechild'sdisabilitybeganpriortoage22.

Thesesameeligibilityrequirementsapplytosituationsinvolvinggrandchildrenorstepchildren.Again,thisissimilartothesurvivorbenefitqualificationsalreadydiscussed.Thedisabilitybenefitforachildofadisabledparentisequaltoone-halfoftheparent'sPIAandsubjecttothefamilymaximumbenefit.Also,achildwilllosebenefitsduetoexcessearningsasistruewithsurvivororretirementbenefits.

ThefollowingchartreviewstheSocialSecuritybenefitsinrelationtotheworker'sPIA.SocialSecurityBenefit EqualtoWorker'sRetirement 100%ofthePIAWidow'sBenefit 71.5%ofthePIAWorker'sDisabilityBenefit 100%ofthePIADependentSpouse 50%ofthePIADependentChild(ren) 50%ofthePIA

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Alldependentbenefitsaresubjecttothefamilymaximumbenefitwhichisapproximately20percentgreaterthanthebenefitequaltothePIA.

Allbenefitsaresubjecttoperiodicincreasesduetochangesinthecostofliving.Theworker'sbenefit,aswellasdependentbenefits,maybeincreasedannuallyinaccordancewiththeConsumerPriceIndexforUrbanWageEarnersandClericalWorkers,whichispreparedbytheDepartmentofLaboreachyear.

Incertaincases,non-familythirdpartiesmayreceiveSocialSecuritydisabilitybenefits.

Example:Adisabledworkerhasanestablishedhistoryofsubstanceabuseproblems.Infact,theyarethecauseofthedisability.TheSocialSecurityAdministrationmaychoosetosendthebenefitcheckstoarepresentativepayee.Ifitdoesthis,itmustnotifythedisabledworkerthatbenefitswillbepaidintheindirectmanner.SocialSecuritypreferstopaythesebenefitstoalocalsocialservicesagencyorgovernmentalbody,whichwillmanagethebenefitsfortheworker.Insomecases,though,itwillallowaprivate-sectororganizationoranotherpersontoreceivethecheck.

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Intheearly1990s,thepopularpressreportedseveralsituationsinwhichsmall-townpubsandliquorstoreshadbeennamedasrepresentativepayeesfordisabledworkers.ThisbadpublicityisanotherreasonthattheSocialSecurityAdministrationhasclampeddownonwhatgroupsorpeoplecanqualify.

BenefitIndexing

Since1979,CongresshasrequiredtheuseofbenefitindexingtostabilizethetrustfundsfromwhichSocialSecuritybenefitsarepaid.Theindexingsystemprovidesforcostoflivingincreases,whichareappliedtoSocialSecuritybenefitsafterapersonachieveseligibilityforthesebenefits,notbeforeeligibility.Thus,thebenefitkeepspacewithinflation.

Thismethodestablishesanearningshistoryfortheworker.Earningsareindexeduptotheindexingyear.Bydefinition,theindexingyearisthesecondyearpriortotheworker'sattainmentofage62,deathordisabilitywhicheveroccursfirst.Thus,theindexingyearistwoyearspriortoaworker'sfirsteligibilityforbenefits.

PaulbecomeseligiblefordisabilitybenefitsinJanuary1995.Hisindexingyearistwoyearspriornamely,1993.Therefore,hiswageswillbeindexedthroughthe1992workyear.

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Wagesareindexedbyapplyingaratiotothedisabledperson'sactualearningsforeachyearuptotheindexingyearbutnotincludingtheindexingyear.Thepersonisthencreditedwithanindexedwagegreaterthanhisactualearningsifappropriate.Oncetheindexingyearisreached,actualearningsarethenusedinlieuoftheindexedearnings.

SupplementaryCoverage

SocialSecurityalsooffersasupplementarylevelofcoveragecalledSSItopeoplewhoareseverelydisabledandunabletowork.

Thepurposeoftheneeds-basedSSIprogramistoprovideabasicminimumincomebelowwhichnoAmericanshouldhavetoliveifheorsheiselderlyorhasasevereworkdisability.TheSSIfederalbenefitrateismodest,amountingtoabout71percentofthepovertythreshold.

TheprogramusesthesamestricttestofdisabilityusedintheDIprogram.FocusgroupdiscussionswithDIandSSIbeneficiariesrevealedthattheyhadlefttheirjobswithgreatreluctance.Theytypicallyhadremainedonthejobaftertheonsetoftheirconditionsandturnedtodisabilitybenefitsasalastresortwhentheycouldnolongerfunctionatwork.

Medicare

Medicare,whichbecamepartofSocialSecurityin1965,isafederallysubsidizedhealthinsuranceprogramfortheagedordisabled.

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EligibilitybasedondisabilitymeansthatyouaretotallydisabledandcollectingSocialSecuritydisabilityincomebenefitsorhaveamajorkidneyproblemrequiringdialysis.Specifically,youmusthavebeencollectingSocialSecuritydisabilityincomebenefitsforatleast24monthsinordertoattainMedicareeligibility.(Thismeans24monthsofcompensabledisability,plusthefive-monthwaitingperiod.So,after29monthsofdisability,youareeligibleforMedicare.)

Eligibilityduetokidneyfailureortransplantrequiringdialysisiseffectivewiththefirstdayofthethirdmonthfollowingthemonthinwhichdialysisbegan.Inessence,thismeansthereisathree-monthwaitingperiod.

Medicareisorganizedintotwoparts.PartAisreferredtoasHospitalInsurance(HI).PartBisreferredtoasMedicalInsuranceandgenerallyprovidesbenefitsforoutpatienttreatmentandtheservicesofphysicianseitherinthehospitalorasanoutpatient.

PartAisfundedbya2.90percenttaxonallwages.Employeespay1.45percentoftheirgrossearnings;employersmatchthiswithataxof1.45percentonpayroll.Generally,PartAcoversallinpatienthospitalservices,excepttheservicesofphysicians.Specifically,itcoversthefollowinghospitalexpenses:

roomandboard;

miscellaneoushospitalbenefits;

inpatientdiagnosticservices;

inpatientmedication;

extendedcareinaskillednursingfacility;

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anunlimitednumberofhomehealthcareservices;

hospicecarefortheterminallyill;and

somebloodtransfusions.

PartBcovers:

doctor'sofficecalls;

theservicesofsurgeons;

outpatientdiagnosticservices;

outpatienttherapyandrehabilitationservices;and

certainkindsofhomehealthcare.

PartBisusuallymoreimportanttodisabledpeoplethanPartA.Butit'snotautomaticitrequiresanenrollmentandthepaymentofamonthlypremium.Typically,thisenrollmenttakesplaceatthesametimethePartAbenefitsbecomeeffective.Thepremiumisdeductedfromthedisabledperson'sSocialSecuritycheckeachmonth.

PartBcontainsa$100calendaryeardeductiblefollowedby80-percent/20-percentcopaymentsbasedontheMedicareallowableamount.Thereisnocaporstoplossonthe80/20copayments.

TheMedicareallowableamountisbasicallyMedicare'sversionofreasonableandcustomarycharges.Forexample,ifadoctorchargesaMedicarepatient$600forcertainservices,

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Medicaremayonlyapproveorallow$300forthepaymentofbenefits.Itscopaymentwillbebasedon80percentof$300.Finally,Medicarebenefitsareinfluencedgreatlybywhetherornotyourdoctorisaparticipatingphysician.AparticipatingphysicianisonewhohasbeenapprovedtoreceivepaymentdirectlyfromtheSocialSecurityAdministration.HeorshehasagreedtoaccepttheamountspaidbyMedicare.Anon-participatingphysicianisnotapprovedbyMedicarefordirectpaymentandmaychargemoreforservices.

Acaveat:AdisabledpersononMedicaremayhavetopayexcesschargesifhisorherdoctorisanon-participatingphysician.

Conclusion

ThischapterfocusedonmanyoftherequirementsforeligibilityforvariousSocialSecuritybenefits,includingretirement,survivors,disabilityandMedicarebenefits.

OnemajorwarningshouldaccompanyanydiscussionofSocialSecurityasadisabilitybenefit:Itdoesn'tprovideverymuchmoney.

We'venotedthisbefore,butitbearsrepeating.

Ifyouhavealargefamilyoraclosecircleoffriendsto

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supportyouorifyouhaveenoughcashorliquidassetstolastyouthroughadisabilitySocialSecuritymaybeenough.Otherwise,youshouldprobablylookintosupplementingthisincomeinsurancewithcommercialcoverage.

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Chapter7Workers'CompensationasIncomeInsuranceOften,whenpeoplesaysomeoneisondisability,theymeanthepersoniscollectingpermanentbenefitsfromanemployer'sworkers'compensationprogram.

LikeSocialSecurity,workers'compisamandatorybenefit.Themaindifferenceisthat,whilethefederalgovernmentadministersSocialSecurity,employershavetoadministerworkers'compthemselvesorpaysomeoneelse(usuallyaninsurancecompany)todoit.

Whateverthedifferencesbetweenthegovernmentandprivate-sectorprograms,onecriticalsimilarityremains:Neitherplanwillmakeapersonrich.

Still,manypeoplerelyonworkers'compasamajorincomeinsurancedevice.In1993,domesticworkers'compspendingincluded$23.5billionfordisabilitybenefits,$2billionforsurvivorbenefitsand$17.4billionformedicalcare.Incontrast,privatelong-termdisabilityinsurancebenefitswere$3.1billionin1992.

Inthischapter,we'llconsiderworkers'compasincomeinsurance.

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TheHistoryofWorkers'Comp

Earlyinthe19thcentury,anemployeeseekingdamagesfromanemployerforajob-relatedinjuryhadtoprovethattheinjuryresultedfromtheemployer'snegligence.Moresignificantly,anemployerevenifnegligentcouldinvokecertainlegaldefenses.

After1900,agrowingnumberofindustrialdeathsandinjurieshelpedtofuelpublicpolicychanges.Workers'compensationsystemswerespreadinginEurope,andtheconceptgainedpopularityintheUnitedStates.

In1917,aU.S.SupremeCourtdecisionupheldtherightofstatestoenactcompulsoryworkers'compensationlaws.Moststatesquicklyenactedthelaws.

Underthenewterms,employersacceptedliabilityforwork-relatedinjuryordeath,regardlessoffault.Inmostsituations,employeesnolongerhavetoprovenegligenceandhavegivenuptheirrighttofilesuitbuttheyarenowentitledtostandardbenefits.

Today,thougheverystatehassomeexemptjobs,about90percentofthenation'semployeesfallunderworkers'compensationlaws.

TheMechanicsofWorkers'Comp

Employersprovideworkers'compcoveragetotheiremployeesinoneofseveralways.Themostcommonoftheseare:

aninsurancepolicypaidforbytheemployerandnamingemployeesasbeneficiaries;

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membershipinastate-approvedemployers'groupdesignedtoprocessandpayclaims;or

abondorotherfinancialdevicethatshowstheemployerhasenoughmoneytopayanyclaimsdirectly(thisiscalledself-insurance).

Workers'compcoverageappliestobodilyinjuriesanddiseasesthatoccurarisingoutoforinthecourseofemployment.Coveredlossesmustbework-related(lossesthatarenotwork-relatedarenotcoveredbyworkers'comp).

Anycoveredbodilyinjurymustbeaccidentalandcanincludedeathresultingfromtheaccident.

However,onlyoccupationaldiseasesthatareuniquetoaparticularjobarecovered.Acause-and-effectrelationshipmustexistbetweenthejobandthedisease.Ordinarydiseasessufferedbythegeneralpublicarenotcovered.

It'simportanttodistinguishbetweenhealthinsuranceplansandworkers'comp.Withahealthinsurancepolicy,anemployermaydecidetooffercoverageonlytoacertainclassofemployees,suchasallsalariedemployeesoremployeeswhohaveworkedoneyearormoreforthefirm.Withworkers'compensationinsurance,singlingoutclassesofemployeesforcoverageisnotpermitted.Healthinsuranceandworkers'compplansaresometimescombinedbuttheseprogramshavetobeavailabletoallemployees.

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Workers'compensationlawsprovideforthepaymentoffourtypesofbenefits:

medicalbenefits;

incomebenefits;

deathbenefits;and

rehabilitationbenefits.

Inordertobeeligibleforworkers'compbenefits,adisabledworkermust:

workinanoccupationthatiscoveredbyworkers'compensation;

havehadanaccidentorsicknessthatiswork-related;and

bedisabled,asdefinedbytherelevantstateworkers'complaw.

Adisabilitymaybetotal(makingemploymentimpossible)orpartial(resultinginareducedabilitytowork).Eithertypeofdisabilitymaybetemporaryorpermanent.

Workers'CompDisabilityBenefits

Underaworkers'compprogram,disabilityincomebenefitscompensatetheinjuredemployeeforlostorreducedearningcapacitythatresultsfromacompensableinjuryoroccupationaldisease.Suchbenefitsarepaidwhentheworkerisunabletoperformallorpartofhisorherregularduties.

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Compensationispaidinfourdesignatedclassesofdisability,asfollows:

permanenttotal;

temporarytotal;

permanentpartial;and

temporarypartial.

Undermostworkers'compplans,incomebenefitsarepaidtoemployeeswhosufferwork-relateddisabilities.Awaitingperiod(usuallythreetosevendays)appliesbeforebenefitsforlossofwagesbegin.Ifthedisabilitycontinuesbeyondalongerperiod(usuallytwotofourweeks),retroactivebenefitswillbepaidfortheinitialwaitingperiod.

Forpermanenttotaldisabilityortemporarytotaldisability,thebenefitisapercentageoftheinjuredperson'sweeklywagesbeforetheinjury.Thisfigureissubjecttostatedminimumandmaximumdollaramounts.Withineachstate,thepercentageisthesameforeithertypeoftotaldisability(662/3percentismostcommon).

However,forpermanenttotaldisability,thedollarmaximumandthebenefitperiodareusuallygreater.Benefitsforpermanenttotaldisabilityoftencontinuetoage65,whilebenefitsforatemporarytotaldisabilitymaybelimitedtoamaximumnumberofweeks.

Peoplewithpartialdisabilitiesareabletoperformsomework,sothelawsprovideabenefitequaltoapercentageofthewageloss(differencebetweenearningsbeforeandaftertheaccident).Inadditiontobenefitsforlostwages,thestateprovidesscheduledben-

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efitsforspecificpermanentpartialdisabilities,suchaslossoflimbs,sightorhearing.Usually,thesebenefitsarepaidinadditiontoanyotherincomebenefits.

LikeSocialSecurityandcommercialdisabilityincomeinsurance,workers'compplansincluderehabilitationbenefitsdesignedtoreducecostsbyincentivizingdisabledemployeestoreturntowork.

Rehabilitationbenefitscanconsistof:

physicalormentalrehabilitation,intendedtohelptheinjuredorillworkerachievemaximumrecoveryfromthedisabilityeffectsoftheaccidentordisease;

vocationalrehabilitation,intendedtogivetheworkernewjobskills,sincethedisabilitypreventstheworkerfrompursuingthejobheorshehadpriortothedisability;

maintenanceallowance,whichcanincludeboard,lodgingandtravelduringrehabilitation;and

rehabilitationdevices,suchaswheelchairs.

Rehabilitationalsoaidstheinsurancecompany.Ithelpstorestoretheinjuredworkertohisformerearningcapacity.Today,insurancecompaniesareamongtheleadersinprovidingrehabilitationfortheindustriallyinjured.

Rehabilitationbenefitsareprovidedbyallstates.Somestateshavesetupaspecialfundtoprovidethesebenefits,whileothershavenot.Variousstatesimposeweeklylimits,maximumlimitsandspeciallimitsforspecifictypesofrehabilitation.

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Aninjuredordiseasedworkerisentitledtoreceiveallnecessarymedicalandsurgicaltreatmenttocureorrelieveawork-relatedcondition.Certainmaximumsorlimitsmayapplytoatypeofcareorparticularmedicalitem,butoverallbenefitsareunlimited.

Twotypesofpaymentsareprovidedunderaworkers'compplan'sdeathbenefits.Acertaindollaramountisprovidedasaburialallowance,andincomepaymentsforasurvivingspouseorchildrenareprovided.

Deathbenefitsareusuallyapercentageofthedeceasedworkers'wages,subjecttostatedminimumandmaximumdollaramountsandatimelimit.Somestateshaveanaggregatepaymentlimit.Asurvivingspousemayreceivebenefitsforlife,oruntilremarriage.Survivingchildrengenerallyreceivebenefitsuntilage18or19orage22or23iftheyarestillinschool.

WhatisinaTypicalWorkers'CompensationPolicy?

Insurancecompaniesdon'thavetouseastandardworkers'comppolicyformwhichmakesgeneralcoverageanalysisdifficult.However,theNationalCouncilonCompensationInsurance(NCCI)aFlorida-basedtradegrouphasdevelopedastandardpolicy,anditisfollowedbymanycompaniesinmostcases.

ThestandardNCCIpolicyprovidesacompletepackageofprotectionforanemployer'sobligationsunderworkers'compensationlawandliabilitythatisoutsidethatlaw.

Thecoverageappliesonlytostatutorybenefits(those

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requiredbylaw).Theinsurancecompanyagreestopaypromptlywhenduethebenefitsrequiredoftheinsuredbystateworkers'compensationlaws.

Certainpaymentswillbethesoleresponsibilityoftheinsuredemployerandnottheinsurancecompany.Theseareusuallyfinesordamagesrelatedtoillegalbehavior,willfulmisconductorfailuretocomplywithhealthandsafetyregulations.

Somegenerallegalprovisionsapply.Amongthese:

theemployerandinsurancecompanyareoneandthesame,withregardtonoticeofinjurygivenbyaworkerandwithrespecttomattersoflegaljurisdiction;

bankruptcyoftheemployerwillnotrelievetheinsurerofitspolicyobligations;and

theinsurancecompanyagreestobedirectlyandprimarilyliabletoanyoneentitledtoinsurancebenefits.

Thestandardpolicyalsowillprovidesomeemployers'liabilitycoverageforrelatedclaimsthatfalloutsidethetechnicallimitsofworkers'comp.

Example:Inrecentyears,successfulsuitsagainstemployersalsohavebeenfiledbyspousesandchildrenofinjuredworkers.Employers'liabilityinsurancecoverstheseclaimsiftheoriginalsuitisbroughtintheUnitedStates,itsterritoriesorpossessions,orCanada.

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Injuriestoworkerscoveredbyfederallawsareexcluded,becausethepolicyisdesignedtocoverexposuresthataresubjecttostatejurisdiction,butcoverageformanyoftheseexposuresmaybeaddedtoapolicybyendorsement.

Workerswhoload,unload,buildorrepairshipsarecoveredbytheU.S.LongshoreandHarborWorkers'CompensationAct.MinersmayrequireFederalBlackLungCompensationinsurance.Federallawenforcementofficersarecoveredbyspecificlaws.Sincemanyoccupationaldiseasesareslowtodevelopsuchasasbestosis,silicosisanddiseasesassociatedwithradiationexposureseveraladministrativeproblemscanresult:

aworkermaybeemployedbyseveralemployersandbeunderaconstantdiseaseexposure;

thedisablementmaytakeplacesometimeafterthelastinjuriousexposure;or

duetothetimeperiodinvolved,severaldifferentcarriersmaycoverworkers'compensationforthesameemployer.

Therealsocanbesomeoverlapbetweenworkers'compandlong-termdisabilitybenefitsandsomequestionconcerningbenefitsandincometax.Forexample,the1995UnitedStatesTaxCourtdecisionBruceandBarbaraClaussev.CommissionerofInternalRevenuedealtwiththeissueofwhetherornotwork-

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ers'compandrelateddisabilitybenefitsaresubjecttofederalincometax.

InFebruary1976,BruceClaussewasdiagnosedwithChrohn'sdisease,whichcausesinflammationofthedigestivesystem.Atthetime,hewasworkingasadeputysheriffintheSacramentoCounty(California)Sheriff'sDepartment.BoththeWorkers'CompensationBoardandtheSheriff'sDepartmentdeterminedthatClausse'sdisabilitywassustainedwithinthecourseandscopeofhisemployment.

Thedisabilityentitledhimtoreceivelong-termdisabilitybenefitsthroughagroupinsurancepolicyunderwrittenbyStandardInsuranceCo.ClaussehadbeenreceivingdisabilityincomefromthispolicysinceFebruary1976.

FromFebruary1976toMarch1990,Claussealsoreceivedworkers'compbenefits,inadditiontothemonthlydisabilityinsurancepayments.Whenhisworkers'compawardwasexhausted,hebeganreceivinglifepensionbenefitsfromthecounty.Atthetimeofthetrial,hewasreceivingboththepensionbenefitsandthedisabilityinsurancepayments.

During1990,Claussereceived$8,733.60indisabilityinsurancepayments.Atyear-end,StandardInsuranceissuedClausseanIRSFormW-2P,StatementforRecipientsofAnnuities,Pensions,RetiredPayorIRAPayments.Thisclassifiedthepaymentsastaxableincome.

TheClaussesreportedthepaymentsasnon-taxableincomeontheir1990federalincometaxreturn.Inprioryears,thecouplehadreportedthedisabilitypay-

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mentsinthisfashionandinauditsforprioryearstheIRShadagreedthatthesepaymentswerenotincludableingrossincome.

However,inthiscase,theIRSdeterminedthatthedisabilityinsurancepaymentswereincludableingrossincome,andissuedanoticeofdeficiency.(Asaresultofthisdetermination,theIRSalsomadeadjustmentstotheClausses'itemizeddeductionsformedicalanddentalexpenses.)

ForClausse'sdisabilitypaymentstoqualifyforexclusionfromgrossincomefortaxpurposes,itwouldbenecessarytofirstestablishthatthedisabilitypaymentswerereceivedundereitheraworkers'compactorunderastatutethatisinthenatureofaworkers'compact.Afterthat,itwouldbenecessarytoestablishthatthedisabilitybenefitswerereceivedforaninjurysustainedinthecourseofemployment.

ThecourtfoundthattheClaussespresentednoevidencetoestablishthatthedisabilityinsurancepaymentswerepaidpursuanttothefederalandstatestatutoryprovisionstheyhadcited.Onthecontrary,inajointexhibitstipulatedintoevidence,StandardInsurancestatedthatthepaymentstoBruceClaussewerenotpaidpursuanttoeitherlawbuthadbeenpaidbythecompanyasthird-partysickpay.

Moreover,ifthedisabilityinsurancepaymentsweremadepursuanttoastatuteconsideredtobeinthenatureofaworkers'compact,suchstatutewouldhavetolimitthedisabilitybenefitstojob-relatedinjuries.Furthermore,forthestatutetobeconsidered''inthenatureofaworkmen'scompensationact,"itmustpre-

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cludeanemployeefromfilinganindependentclaimforworkers'compbenefits.

InClausse'scase,thedisabilityinsurancepolicyprovidedforpaymentstobemaderegardlessofwhethertheinjuryordisabilityaroseinthecourseandscopeofemployment.Inaddition,theinsurancepolicyitselfstatedthat"LongTermDisabilityInsuranceisnotinlieuofanddoesnotaffectanyrequirementforcoveragebyworkmen'scompensationinsurance."

Clausseclearlywasnotprecludedfromfilinganindependentclaimforworkers'compbenefits,sincehehadreceivedthosebenefitsfor14yearswhilealsoreceivingthedisabilitybenefits.

Therefore,thecourtheldthatthedisabilityinsurancepaymentsreceivedduring1990werenotreceivedunderaworkers'compact.Assuch,theycountedasgrossincomefortaxpurposes.

ThecourtdidnotethatitwassympathetictothefactthattheClausseswereinformedbytheIRSduringseveralauditsforprioryearsthatthedisabilitypaymentswerenotincludableingrossincome.However,thefactthattheIRSoverlookedoracceptedthetaxtreatmentofthedisabilitypaymentsinpreviousyearsdidnotprecludeitfromcorrectingthaterrorinsubsequentyearswithrespecttothesametaxpayers.

Intheend,theClausseshadtopay$1,673in1990federalincometaxonthedisabilitybenefits.

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SecondInjuryFunds

Thecumulativeeffectoftwoinjuriescombinedcanbegreaterthantheeffectofthesametwoinjuriesinisolation.Thisriskhasparticularimportancetolong-termdisability.

Example:Richielosessightinoneeyebecauseofawork-relatedaccident.Hehassufferedaloss,butisstillabletofunctioninmanyjobsituations.SeveralyearslateratanotherjobwithanotheremployerRichieisinvolvedinanotherwork-relatedaccidentandlosessightinhisothereye.Nowhe'stotallyblind,aconditionfarworsethaneitherofthesingleaccidents.Shouldhissecondemployerpayabiggerdisabilitybenefitthanthefirst?Onceapersonhasbeenincapacitated,thereisagreaterriskthatanadditionalinjurymayleadtopermanenttotaldisability,requiringhigherstatutorybenefitsthanmightbeexpectedforthesecondinjuryalone.

Inthiscontext,thephysicallyhandicappedworkerfacesaseriousproblem.Asecondinjury,takeninconnectionwithapreviousinjuryorhandicap,willresultinanincapacitygreaterthanwouldhaveresultedhadtherebeennopreviousinjury.Theemployeratthetimeofthesecondinjuryisfacedwithmuchgreaterdisabilitycoststhaniftheemployeehadnotbeenpreviouslyinjured.Anemployermaywellbereluctanttohireahandicappedorpreviouslyinjuredemployeebecauseofthisincreasedrisk.

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Tocounteractthissituation,moststatesmaintainaSecondInjuryFund.Thesefundssubsidizetheadditionalcoveragebothmedicalanddisabilitythatsecondinjuriescancause.Toyou,assomeonemakingaworkers'compclaim,thesefundsareinvisible.Youwouldstilldealwithyouremployer'sinsurancecompany.

24-HourCoverage

Workers'compprovidesmedicalanddisabilitybenefitsforoccupationalinjuriesordiseasesaccidentalinjuriesthatoccuratworkoroccupationaldiseasesthatarecontractedonthejob.Itdoesnotprovidecoverageafterworkhoursoronweekends,holidaysorvacations.

Mostpeoplehavebothoccupationalandnon-occupationalhealthcoveragebecauseemployersusuallyprovideormakeavailablegrouphealthinsurance,separateofworkers'comp.Butthisdivisionofcoveragemeansthatseparateinsurancepoliciesandseparateinsurancecarriersareinvolved,sothereisaneedtodeterminewhethereachclaimiswork-relatedornot,andsomegapsincoverageorduplicationsofcoveragemayexist.

Thegoalof24-hourcoverageistoblendoccupationalandnon-occupationalcoverageintoasinglecoveragepackage,oratleastprovideasingledeliverysystemoradministrativesystem.Variousproposalsaccomplishthisgoaltodifferentdegrees.

Intheseplans,24-hourdisabilitycoverageisofferedinasinglepolicythatincludeslimitedmedicalbenefits.Disabilitybenefitsareprovidedforallofan

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employee'sinjuriesordiseases,whetherwork-relatedornot,butmedicalbenefitsareprovidedonlyforwork-relatedinjuriesanddiseases.Thus,thedisabilitycoverageisprovidedona24-hourbasis,whilethemedicalcoverageisoccupationalonly.Inthiscase,wefindbroadaccidentcoverage,butlimitedcoveragefordiseases.

Universal24-hourcoverageisapackagethatprovidesthemostcompletecombinationof24-houroccupationalandnon-occupationalcoverage.Itincludesmedicalanddisabilitycoverageforbothaccidentsanddiseasesona24-hourbasis.

SomeProblemsof24-HourCoverage

Thedifferentbenefitstructureunderworkers'compprogramsandtraditionalhealthinsuranceraisesanumberofinstitutionalbarrierstocombiningthetwocoverages.Underworkers'comp,medicalbenefitsareunlimited;healthinsurancehasallkindsoflimitsdeductibles,copaymentsandmaximumdollarlimits.

Inmoststates,thedifferenttypesofcoverageareprotectedbydifferentguarantyfundsworkers'compbyapropertyandcasualtyguarantyfundandgrouphealthinsurancebyalifeandhealthguarantyfund.Onceagain,manyofthepotentialefficienciesandcostsavingsfromblendingthetwotypesofcoverageintoasinglecontractwouldbelostifitremainednecessarytokeepseparatestatisticsofclaimsandadministrativeexpensesforratingpurposes,reportingpurposesandassessmentsmadebyguarantyassociations.

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Finally,thereareafewpotentialregulatorybarriersarisingoutofthemannerinwhichworkers'compensationisregulatedandadministered.Usually,theinsurancedepartmentregulatespolicyformsandratingsystems.Anindustrialaccidentboardorcommissionactuallyoverseesthedeliveryofbenefits,resolvesdisputesbetweenemployeesandemployers,andgathersdataaboutoccupationalinjuriesanddiseases.With24-hourcoverage,therecouldbeaconsiderablesavingsinlegalcostsifitwerenolongernecessarytodeterminewhethereveryclaimiswork-relatedornot.However,thestatemustdecidewhetheritneedsthisinformation,andhowtheratingprocesswillbeaffectedby24-hourcoverage.

Perhapsthemostsignificantbarriertoimplementationof24-hourcoverageproposalsisapotentialconflictwithprovisionsofthefederalEmployeeRetirementIncomeSecurityActof1974(ERISA).ERISAregulationsapplytoretirementplansandalsoto"employeewelfarebenefitplans"(suchasanyplanofgroupmedical,surgical,hospitalorotherhealthcarebenefitsandgroupaccident,sicknessanddisabilitybenefitplans).Anemployerisnotrequiredtoprovideemployeewelfarebenefitsbutwhenheorshedoes,thosebenefitsbecomesubjecttoERISAregulationunderfederallaw.

Undercurrentlaw,ERISAincludesanexemptionforanyplanmaintainedsolelyforthepurposeofcomplyingwithworkers'comp,unemploymentcompensationordisabilityinsurancelaws.Theproblemisthatassoonasworkers'compensationbenefitsandnon-occupationalhealthinsurancebenefitsarecombinedina24-hourcoverageplan,theplannolongerexists

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solelytocomplywithworkers'compensationlaws.Thus,theERISAexemptionwouldnolongerapply,andtheplanbecomessubjecttofederalregulation.Stateinsurancedepartmentsthereforeareconcernedthattheycouldlosetheirauthoritytoregulatetheworkers'compensationportionof24-hourcoverageplans.

Somecourtcaseshaveupheldtherightofstatestocontinuetoenforcethetraditionalareasofworkers'companddisabilityinsurancelaws,andhavesaidthatERISAdoesnotnecessarilypre-emptstatelaw.However,thepotentialconflictbetweenstatejurisdictionandfederaljurisdictionopensthedoorforemployersandotherstochallengestateregulationof24-hourcoverageproductsonacase-by-casebasis.Itmaytakeanamendmentofthefederallawtoeliminatetheconflict,orfurtherclarificationbythecourtstofirmlyestablishanexemptionforworkers'compensationbenefitsin24-hourcoverageplans.

UnemploymentInsurance

Anotherstatutorybenefitplanlikeworkers'compisstate-administeredunemploymentinsurance.However,alsolikeworkers'compandSocialSecurity,thisbenefitdoesn'tprovidealotofmoney.

Inmoststates,peoplewhoarelaidofforterminatedthroughnofaultoftheirowncancollectaportionoftheirsalary(often50percent),usuallyforupto26weeks.Theweeklybenefitusuallyiscappedatabout$300.Thebenefitsaretaxable.

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Example:UnemployedworkersinNewJerseynormallyqualifyforupto26weeksofbenefitsthatpayroughly60percentoftheirwages,withacapof$362aweek.Unemploymentinsurancebenefitsarefundedbyataxpaidbymostemployersasapercentageofpayroll.Theratevarieswithanemployer'shistoryofclaimsandotherfactors.Incertainsituations,someemployerssuchasthosewithverysmallpayrollsareexemptfromthetaxes.

Specifically,theunemploymenttaxhastwoparts:aFederalUnemploymentTax(FUTA)of0.8percentonthefirst$7,000ofeachemployee'swages,andstateunemploymentinsurancetaxesthataverage0.9percentoftotalwages.Thesystemhastwomainobjectives:toprovidetemporaryandpartialwagereplacementtorecentlyunemployedworkersandtohelpstabilizetheeconomyduringrecessions.Unemploymentbenefitsarepaidbystateagencies.Thefederalgovernmentloansandinsomecasesgivesmoneytotheseagencies.

Example:In1995,theLaborDepartmentextendedunemploymentbenefitstoprovideanextra13weeksofpaymentstoworkerswhohadlosttheirjobs.Itdidthisbymakingmoremoneyavailabletostateagencies.

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Conclusion

Workers'compensationprovidesmedicalanddisabilitybenefitsforoccupationalinjuriesordiseasesaccidentalinjuriesthatoccuratworkoroccupationaldiseasesthatarecontractedonthejob.Workers'compensationlawshavedrasticallyalteredtheemployee/employerrelationship.

Thischapterhasexaminedvariousmethodsofcoverageandbenefitsthatareavailabletoyouasanemployee.

Inthenextchapter,wewilldiscussusingotherformsofinsurancetopreventdepletionofyourincomeandpersonalassets.

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Chapter8Long-TermCareandLifeInsuranceasIncomeProtectionManykindsofinsuranceprovidesomelevelofdisabilityincomecoverageasasecondaryoroptionalbenefit.Otherkindsofinsuranceofferyouprotectionagainstbigexpensesthus,theyindirectlyprotectyourexistingsourcesofincome.

Ifyou'reskepticalaboutbuyingstand-alonedisabilityincomeinsurance,youmaywanttolookattheotherkindsofinsuranceyoumayhaveforsomedegreeofcoverage.Long-termcareinsuranceandlifeinsurancebothcommoncoveragescanbesetuptoprovideoptionalorindirectincomeinsurance.

Inthischapter,we'llconsiderhowyoucanusetheseotherkindsofinsurancetoprotectyourincome.

Long-TermCareCoverage

A1991studypublishedintheNewEnglandJournalofMedicineestimatedthatnearlyhalfofthepeople

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whoreachedage65in1990wouldrequirenursinghomecareatsomepoint.Andthisisexpensivecare.TheaverageannualcostfornursinghomecareinCaliforniawasabout$30,700perpatientin1990,accordingtothestate'sDepartmentofInsurance.

Thegreatestriskofanextendedneedforlong-termcareisdepletionofincomeandpersonalassets.Formanyolderpeople,fixedretirementincomecan'tcovertheexpensesofalengthystayinanursinghome.Thispresentsaveryrealriskthatfamilysavingsandincomesourceswillbewipedout.

Long-termcare(LTC)insurancepoliciesweredevelopedtomeettheseneeds.

LTCinsuranceincludesapolicy,certificateorrideradvertised,marketed,offeredordesignedtoprovidecoveragefordiagnostic,preventive,therapeutic,rehabilitative,maintenanceorpersonalcareservicesprovidedinasettingotherthananacutecareunitofahospital.Long-termcareinsuranceincludesallproductsprovidingcoverageforanyofthefollowingtypesofbenefits:

institutionalcare(convalescentfacility,nursinghome,extendedcarefacility,custodialcarefacility,skillednursingfacilityorpersonalcarefacility);

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homecare(includinghomehealthcare,personalcare,homemakerservices,hospiceorrespitecare);

community-basedcare(includingadultdaycare,hospiceorrespitecare).

Whentheinsurancewasfirstavailable,nearlyallLTCpoliciesrequiredpriorhospitalizationbeforeanybenefitsbecamepayable,andnearlyallpoliciesexcludedAlzheimer'sdisease.Morerecently,anumberofstateshavepassedprogressivelegislationthatestablishesminimumstandardsforlong-termcareinsurance.

Example:InCalifornia,LTCpoliciesmaynolongerrequirepriorhospitalization,theymustcoverAlzheimer'sdisease,andbuyersmustbeofferedtheopportunitytopurchasesomeformofinflationprotectionfortheirLTCbenefits.

OtherInsuranceUsuallyFallsShort

Mosthealthinsurancepoliciesaredesignedtoprovidebenefitsforimmediatedoctor,hospital,surgicaloremergencymedicalcare.Theydonotcoverotherformsofskilledcareanddonotcovernon-medicalcarethatmaybeneededonadailybasis.

Somepoliciesmayofferoptionalbenefitsfornursinghomeorconvalescenthomecare,butthesebenefitsrequirepriorhospitalizationandgenerallyareprovidedforashorttime.Thesecontractswouldnotcover

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anextendedconfinement,andtheywouldnotcoveraconfinementiftherewerenopriorhospitalization.

Existinggovernmentprogramshavemanyofthesameshortcomingsastraditionalformsofprivatehealthcareinsurance.Manypeoplebelievewronglythat''Medicarewilltakecareofit,"iftheyshouldeverneednursinghomecare.Nothingcouldbefurtherfromthetruth!TheMedicareprogramprovidesverylittleprotectionagainstnursinghomeexpenses.

TotheextentthatMedicaremaycoversomenursinghomecare,thebenefitsareextremelylimited.Generally,Medicarepaysforallcoveredservicesduringthefirst20days.Fromthe21stthroughthe100thday,thereisan$87dailycopayment(thismeansMedicarepaysonlyabout10percentto15percentofthecost).Afterthe100thday,nothingispayable.Inshort,thepatientisstillresponsibleformostofthecost.Additionally,MedicarewillprovidethesebenefitsonlyiftheindividualisaninpatientinaMedicare-certifiedskillednursingfacility,andonlyiftheadmissionfollowsaperiodofpriorhospitalization.ManynursinghomesarenotcertifiedbyMedicare,andmanynursinghomeconfinementsdonotfollowaperiodofhospitalization.

Moresignificantly,Medicaredoesnotcovercustodialcareatall(theprimarytypeofcareofferedinnursinghomeenvironments),anditdoesnotcoverintermediatecare(whichisoftenprovidedtopatientswhodonotrequireskilledcare).

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HowtheLTCPolicyisStructured

LTCinsurancebenefitsusuallyarecharacterizedbythelevelofcareneeded.Generally,thebenefitsaredesignedtocoveroneormoreofthefollowinglevelsofcare:

skillednursingcare;

intermediatecare;and

custodialcare.

Skillednursingcareincludesdailynursingandrehabilitativecarethatisperformedonlyby,orunderthesupervisionof,skilledmedicalprofessionalsortechnicalpersonnel.Thiscareisavailable24hoursaday,mustbeorderedbyaphysician,involvesamedicaltreatmentplan,andusuallyisperformeddirectlybyorunderthesupervisionofaregisterednurse.

Intermediatecareincludesmedicallysupervisedhealthcareforindividualswhodonotrequirethedegreeofcareandsupervisionprovidedbyhospitalsorskillednursinghomes,butwhoneeddailymedicalcareofsomekindandotherassistance.Generally,24-hour-a-daynursingsupervisionisnotrequired,butsomemedicalcareisprovidedunderthedirectionofmedicalpersonnel.Thiscareisalsoorderedbyaphysicianandsupervisedbyregisterednurses,butislessspecializedthanskillednursingcare.Intermediatecarefacilitiesalsoarelicensedbythestate.

Custodialcareincludescarethatisprovidedforthepurposeofmeetingpersonalneeds,suchashelpinwalking,bathing,dressing,eatingandotheressential

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activitiesofdailyliving.Custodialcareisalsoknownaspersonalcare.Itmaybeadministeredbylicensedpracticalnursesbutitalsomaybegivenbynonmedicalpersonal,suchasvolunteerworkers,therapistsand,insomecases,otherfamilymembers.Themostcommontypeoflong-termcare,itcanbeprovidedinavarietyofsettingsrangingfromanursinghometothepatient'sownhome.

Homehealthcareisoftenanextensionofintermediatecare,custodialcareorboth.Itisprovidedwhenthepatientisinneedofsomehealthcareorpersonalassistance,butdoesnotneedtobeconfinedtoanursinghome.Thisiscarereceivedatthepatient'shome.Itmayincludepart-timeskillednursingcare,suchasoccasionalvisitsbyregisterednursesorlicensedpracticalnurses.Itmayincludespeech,physicaloroccupationaltherapy,andpart-timeservicesofhomehealthaides.Italmostalwaysincludessomedegreeofcustodialcare,suchasassistancewithmealpreparations,personalhygieneandtakingmedication.

MostLTCpoliciesareissuedonanindemnitybasis,whichmeansthecontractsprovideadailymaximumbenefitsuchas$100perday,foreachdayofconfinementinanursinghomeorotherlong-termcarefacility.Ifthepolicyalsoincludesbenefitsforhomecare,thedailylimitforhomecareexpensestypicallyis50percentofthedailynursinghomebenefitamount.

SomeLTCpoliciesareissuedonanexpenseincurredbasis,whichmeansthecontractsreimburseaproportionoftheactualexpensesincurred.Thesebenefitsfunctionmuchlikesomeformsofhospitalandmedi-

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calinsurance,becausetheinsurancepaysonlyapercentageofthecosts(usually50percentto80percent),andtheinsuredisresponsiblefortheremainderarequirementknownascoinsurance.

Regardlessofwhetherapolicyisissuedonanindemnityorexpenseincurredbasis,LTCcoverageusuallyiswrittenwithaneliminationperiod.Thisistheinitialperiodoftimeafteraninsuredisconfinedinanursinghomeforwhichnobenefitsarepayable.Benefitsbecomepayableforadditionaldaysofconfinementaftertheeliminationperiodissatisfied.Mostinsurerswilloffereliminationperiodsof15,30,60or90daysormore.

Sincetheeliminationperiodaffectstheamountofaninsuredperson'sout-of-pocketcostandtheamounttheinsurancecompanypays,theperiodselectedwillaffectthepremium.Thelongertheeliminationperiod,thesmallerthepremium;theshortertheeliminationperiod,thelargerthepremium.Oncetheeliminationperiodissatisfied,thebenefitpaymentperiodbegins.Underthelegaldefinitionoflong-termcareinsuranceinmoststates,thebenefitperiodhastobeatleastoneyear.Mostinsurersofferbenefitperiodsintermsofanumberofyears,rangingfromoneyearto10years.SomeinsurersofferlifetimeLTCbenefits.

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PurchasinglifetimeLTCbenefitsistheonlywaytoguaranteethatbenefitswillneverrunout,butthelifetimebenefitoption(whenavailable)willhavethehighestpremium.

Somepoliciessplitthemaximumbenefitperiodintotwopartsbyprovidingabenefitperiodperconfinementandaseparatelifetimemaximumbenefitperiod.

Example:SamhasLTCcoveragewithathree-yearbenefitperiodperconfinementandalifetimemaximumbenefitperiodoffiveyears.Onthreedifferentoccasions,Samisconfinedtoanursinghomeforrespectiveperiodsofsixmonths,oneyearandtwoyearsbeyondhispolicyeliminationperiod.Ineachcase,hereceivesbenefitsuntilheisreleasedbecausenoneoftheseconfinementsexceedsthreeyears.However,Samhasusedupthreeandone-halfyearsofhistotalfive-yearmaximumlifetimebenefit,leavinghimwithonlyoneandone-halfyearsofadditionalcoverageforallfutureneeds.

WhoShouldandShouldNotBuyLTCInsurance

GovernmenthealthcareprogramsincludingMedicare,Medicaidandstate-specificplansrequirepeopletospendmostoftheirpersonalassetsbeforereceivinggovernmentbenefits.

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Medicaidwillpayfornursinghomecareonlywhenapersonhaslittleincomeandveryfewassets.Thismeansthatmanymiddle-classcitizenswhoenteranursinghomewhiletheyhavesavingsandassetsarenotinitiallyeligibleforMedicaidbenefits.Asaresult,theyhavetoexhausttheirresourcesbyspendingdowntothepointofpovertyatwhichpointtheymaybecomeeligibleforMedicaidbenefits.Forthisreason,themostappropriatecandidatesforLTCinsurancearepeopleinthemiddleclassandupper-middleclass,economically.Manymembersofthemiddleclassaccumulatehundredsofthousandsofdollarsinassetsduringtheirworkingyears.Theyusuallyareentitledtoretirementbenefitsthatwillkeepthemwellabovethepovertylevel.Theyhavealotatrisk.

Sincethesepeoplearenotclosetobeingeligibleforgovernmentprograms,uninsuredLTCcostscoulddepleteassetsatanunacceptablerateforalongperiodoftime.Inordertoachievetheamountof"spendingdown"necessaryforgovernmentprogrameligibility,assetswouldhavetobeliquidated.

Forsomeonestartingoffwithasignificantamountofincomeandassetstoprotect,thiswouldmeandrasticreductionsinwealth,economicsecurityandlifestyle.

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Example:Jim,age64,willretireinanotheryear.Whenhedoes,heandhiswifewillhaveamonthlyincomeof$4,200fromSocialSecurity,aswellasJim'spensionandhiswife'spension.TheyplanonsellingtheirhomeandbuyingalessexpensivehomeinFlorida,inordertotakeadvantageoftheequitytheyhavebuiltupovertheyears.Inadditiontothehomeequity,Jimandhiswifehaveabout$12,500insavingsaccounts,CertificatesofDepositvaluedat$30,000andsomestockinvestmentswithacurrentmarketvalueof$50,000.

JimandhiswifeareverygoodprospectsforLTCinsurance.ItisnotnecessaryforLTCinsurancetocovertheentireLTCexposureinorderforthebenefitstobeworthwhile.Premiumcostsmaybereducedbypurchasinglongereliminationperiodsorlowerbenefitamounts,orboth.Inmanycases,thisapproachmaybetakentokeepcostsmoreaffordablewhileminimizingtherisk.Buyingpartialcoveragemaychangeanunacceptableexposureintoanacceptableexposure.

Generally,ifyouhavealowincomeandlittleinthewayofassets,youarenotacandidateforLTCinsurance.Thecoveragecanbeexpensiveandpeoplewithlowincomesinmostcasessimplycannotaffordit.Thepremiumpaymentsshouldnevercreateahardship,becausethereisnoguaranteethatLTCbenefitswilleverbeneeded.

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Peoplewhohavenotaccumulatedsignificantassetsusuallyhaveverylittleatrisk.Insomecases,thesepeoplearealreadyeligibleforgovernment-subsidizedprogramsthatwouldcoverlong-termcareiftheneedarises.

Example:JoeandIreneareboth67yearsold.TheironlysourceofincomeisSocialSecurityandasmallpension($200monthly).Theyrentanapartmentinaseniorcitizencomplex,haveaverysmallamountoflifeinsurance(enoughforburial)andusuallymaintainasavingsaccountbalanceofnomorethan$1,000.Theyhavenootherassetsotherthanpersonalpossessionsandanautomobile.

TheyarenotprospectsforLTCinsurance.Ontheotherendofthefinancialscale,veryrichpeopleprobablydon'tneedLTCinsurance,either.(Thisismuchlikewhatwesawwithregardtodisabilityinsurancecoverage.)

Example:Carlahashadasuccessfulcareerasanentertainerandhasaccumulatedmorethan$10millioninassets,consistingofrealestate,stocksandbonds,andotherinvestments.Theseassetswillgeneratehundredsofthousandsofdollarsinannualincomeforherwhensheretires.EvenifCarlaneedstobe(Continuedonnextpage)

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(Continuedfrompreviouspage)confinedtoanursinghome,thecostwillnotevenmakeasmalldentinherincome.CarladoesnotneedLTCinsurance.

Intheend,youcan'tknowforsurewhetheryou'lleverneedlong-termcare.So,youmayconcludethatthere'snocompellingneedtobuyLTCinsurance.

Onelastthought,though.Forsomemarriedcouples,theneedtospenddownassetsinordertoqualifyforgovernmentLTCinsurancepresentsaparticularproblem.Whenonespouseisconfinedtoanursinghomeandtheotherspouseremainsathome,theonestayingathomecanrunintoseriousfinancialproblems.

Toremedythesituation,CongresspassedtheSpousalImpoverishmentAct,whichprotectsaportionoftheincomeandassetsthatastay-at-homespousemayretainwithoutterminatingMedicaideligibilityforaconfinedspouse.

Underrulesthattookeffectin1989,anat-homespouseisallowedtokeepsomeofthecouple'sjointmonthlyincome(aminimumconsistingofthefirst$815ofmonthlyincome,uptoamaximumof$1,565ofjointmonthlyincome)andjointassets(aminimumofthefirst$12,000ofassets,nottoexceedamaximumof$60,000ofassets).Theseamountsareindexedforinflationandincreaseannually.

Thefederallawprovidesaminordegreeofprotectionforastay-at-homespouse,butitisdesignedtobeasafetynetandisnotasubstituteforinsurance.With-

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outlong-termcareinsurance,mostmiddle-andupper-classfamilieswouldstillbeexposedtoaconsiderablereductioninfamilyresourcesifanextendedstayinanursinghomebecamenecessary.

LifeInsuranceLTCRiders

Inrecentyears,someinsurershavebeguntoofferlong-termcarecoverageintheformofridersattachedtolifeinsurancepoliciesorannuitycontractsandeveninconnectionwithsomeotherpolicyforms,suchasdisabilityincomeinsurance.LifeinsuranceLTCridersprovidebenefitsverysimilartothosefoundinLTCpolicies.

OnedifferencewithLTCcoverageattachedtolifeinsuranceisthemethodofdeterminingbenefits.Theymaybeexpressedasaspecificdailyamount,asisthecasewithLTCindemnitycontractssuchas$50,$100or$150perday.Butsomeridersexpressthebenefitsasapercentageofthefaceamountofthelifepolicy.

Example:Johnhasa$100,000lifepolicywithanLTCriderthatprovidesamonthlyLTCbenefitof2percentofthefaceamount,uptoamaximumbenefitof$50,000.IfJohnwereadmittedtoanLTCfacility,hisbenefitwouldbe$2,000permonth,andJohn'smaximumbenefitperiodwouldbe25months(after25months,themaximumLTCbenefitof$50,000wouldbeexhausted).

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TherearebasicallytwoapproachestotheLTCriderconcept:ageneralizedapproachandanintegratedapproach.

Underthegeneralizedapproach,theLTCriderisindependentfromthelifepolicy,andtheLTCbenefitspaidtotheinsuredwillnotaffectthelifepolicy'sfaceamountorcashvalue.

Undertheintegratedapproach,theavailableLTCbenefitsarelinkedtothelifepolicy'sfaceamountandcashvalue.IfyoumakeanLTCclaimonthiskindofpolicy,theamountofmoneyavailabletoyourbeneficiariesshrinks.

Avariationoftheintegratedapproachismarketedasalivingneedsrider.ThisapproachdrawsonthelifeinsurancebenefitstogenerateLTCbenefits.Thus,theLTCriderisattachedtothelifepolicyatnoadditionalcharge.Inasense,it'slikeborrowingfromthelifeinsurancetopayLTCbenefits.

Generally,thelivingneedsriderprovidesfundsforLTCexpensesorforexpensesincurredinconnectionwithaterminalillness.Underthisrider,theinsuredmaybeadvancedlifeinsurancedollarstocovertheseexpenses.Thereareusuallytwobenefitoptionsassociatedwiththisrider:

theLTCOption,whichtypicallyprovidesupto70percentor80percentofthepolicy'sdeathbenefittooffsetnursinghomeexpenses;and

theTerminalIllnessOption,whichprovidesupto90percentor95percentofthedeathbenefitasapre-deathbenefittobeusedtooffsetmedicalexpenses.

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Theconditionsunderwhichthesebenefitsarepaidaredeterminedbythecontractandtheinsurancecompany.

LifeInsuranceasSourceofIncome

Alifeinsurancepolicyusuallypaysastatedsumincashonthedeathoftheinsuredperson.However,beneficiariessometimesneedastreamofincomemorethantheyneedalumpsumofmoney.Thesameholdstrueforpolicyholdersborrowingagainstanycashvaluethey'vebuiltupinthepolicy.

Tomeettheseneeds,mostinsurancecompanieswillofferalternativemethodsofsettlementwhenitcomestimetopayonalifepolicy.Themostcommonoftheseare:

interestonly;

fixed-periodinstallments;

fixed-amountinstallments;

lifeincome;and

jointandsurvivor.

Undertheinterestonlyoption,theproceedsareheldbytheinsurancecompanyandtheinterestearnedontheproceedsispaidtothebeneficiaryaccordingtoapredeterminedschedule.Theminimuminterestratethatwillbepaidisguaranteedinthepolicy.Usually,thepolicyalsoprovidesthatifthecompanyearnsinterestinexcessoftheminimumguaranteed,itwillpayexcessinterestontheproceeds,usuallyonaninstallmentbasis.

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Youcanspecifythatnopartoftheprincipalisevertobepaidtothebeneficiary;youalsocanspecifythatthebeneficiarymaywithdrawtheprincipalinwholeorinpartorelectanotheroptioninthepolicy.Youalsomaypreferthattheproceedsremainonaninterestonlybasisforastatedperiodoftimeoruntilastateddate,andthenbepaidincashorunderoneoftheotheroptions.Underthefixed-periodinstallmentoption(alsoreferredtoasinstallmentscertainortimeoption),proceedsareretainedbytheinsurancecompanyandpaidinequalinstallmentsoveraspecifiedperiodofmonthsoryears.Paymentsarecomprisedofbothprincipalandinterest.Thepaymentsalsoareestablishedwithoutregardtothelengthoflifeoftheprimarybeneficiary.Ifthebeneficiarydies,thepaymentsarecontinuedtoasecondbeneficiary.

Thefixed-amountinstallmentoptionissometimesreferredtoastheamountoptionandsometimestheprincipalandinteresttoexhaustionoption.Itcallsforthepaymentofafixed,periodic(annual,semiannual,quarterly,monthly)benefitofapredeterminedamountuntiltheproceeds(principal)andinterestthereonareexhausted.Thesizeofeachinstallmentdeterminesthedurationofthepaymentsincontrasttothefixed-periodoption,wherethelengthoftheincomeperiodselecteddeterminesthesizeoftheinstallment.Excessinterestwillincreasethedurationoftheinstallmentsratherthanthesizeoftheinstallment.Fractionalamountsarepaidinfullwiththelastfullinstallment.

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Underthelifeincomeoption,theproceedsareretainedbytheinsurerandpaidinequalinstallments(monthly,quarterly,semiannuallyorannually)aslongasthebeneficiarylives,evenifthetotalpaidexceedstheamountofprincipalplusinterest.However,whenalifeincomeonlyoptioniselected,thereisnorefundwhenthebeneficiarydiesevenifonlyoneinstallmenthasbeenpaid.

Toreduceoreliminatethisrisk,manyrecipientswanttohavepaymentsguaranteedforaspecifiedperiodoftime.Thiscanbearrangedbyelectingalifeincomewithperiodcertainoption.Underthisoption,thebenefitsareguaranteedforacertainperiod(usuallyfive,10or20years).Ifthebeneficiarydiesbeforetheendoftheperiod,benefitswillcontinuetobepaidtoanotherpersonfortheremainderoftheperiod.Iftheoriginalrecipientlivesbeyondtheperiodcertain,thebenefitpaymentscontinueforaslongasheorshelives.

Finally,somelifeinsurancepoliciescontainajointandsurvivoroption.(Mostcompaniesthatdonotincludethisinthecontractwillgrantitasaspecialsettlementagreement.)Underthisoption,twobeneficiariesreceivetheproceedsofalifeinsurancepolicy.Whenthefirstbeneficiarydies,thesecondbeneficiary(ifheorsheisstillliving)continuestoreceivetheproceedsofthepolicy,ininstallments,forhisorherlifetime(orforaspecifiedperiod).

Oneoftheprincipaladvantagesofselectingoneofthevarioussettlementoptionsisfreedomfrominvestmentconcerns.Ifabeneficiaryreceivesalumpsumsettlementofthedeathbenefit,heorshemustdecidehowtouseorinvestthemoney.Byelectinga

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settlementoptionotherthanalumpsum,you'retrustingintheexpertiseandknowledgeoftheinsurancecompanytoadministertheproceedstoprovideastreamofincome.

However,insurancecompaniesdonotprovidetrusteeservices.Forexample,theinsurancecompanywouldnotacceptasettlementoptionunderwhichthecompanywouldmakepaymentoftheproceedstobeneficiaries''accordingtotheirneeds"sinceitwouldrequirethattheinsurancecompanymakeajudgmentdetermination.

DisabilityIncomeRiders

Disabilityincomeinsurancenormallyisconsideredaformofhealthinsurance.Butlifeinsurancepoliciessometimeswillincludedisabilityincomebenefitsasanaddedelementofcoverage.Thiscanhappeninacoupleofways.

Thewaiverofpremiumriderprovidesthatintheeventoftotaldisabilityasdefinedbythepolicy,premiumsforthepolicywillbewaivedforthedurationofthatdisability.Therideristemporaryinthatitusuallyexpiresatage65.

There'susuallyasix-monthwaitingperiodbeforetherider'sbenefitsarepayable.Thismeansthatyoumustbetotallydisabledforsixmonths(afewinsurersonlyrequirethreemonths),andthenfuturepremiumswillbewaivedforthedurationofthetotaldisability.Oncethesix-monthwaitingperiodhasbeensatisfied,anypremiumspaidduringthewaitingperiodalsowillberefundedtoyou.

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Asmalladditionalpremium(usuallyaboutadollarayearperthousanddollarsofinsurance)ischargedforthisrider.

Inothercases,alifeinsurancepolicymayincludeasimpledisabilityincomerider.Thesametermsusuallyapplyaswithwaiverofpremium.Thisriderwillprovideaweeklyormonthlydisabilityincomebenefittoyouinadditiontothelifeinsurancepremiumsbeingwaived.

Conclusion

ProbablythemostimportantreasonforpurchasingLTCinsuranceisprotectionofassets.Mostpeopleaccumulateassetsduringtheirworkingyearsandrelyontheseassetstoaddtoeconomicsecurityduringretirement,bycontributingtomonthlyincomeorprovidingfundsforemergencies.Sincenursinghomecostsaresubstantial,anuninsuredconfinementinanursinghomecouldrapidlydeplete,andevenwipeout,assetsthatwereaccumulatedovermanydecades.

LTCandlifeinsurancecanbestructuredtoprotectincomeandevengeneratestreamsofincomeforyouoryourbeneficiaries.Butthesekindsofinsurancearenot,strictlyspeaking,disabilityinsurance.Theyareindirectcoverage,atbest.Ifyou'reseverelydisabled,disabilityincomeinsuranceisthemosteffectiveformofprotection.

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Chapter9DeferredCompensationasanIncomeInsuranceToolDeferredcompensationisanemploymentbenefitthatenablesanemployeetodefercurrentincomesuchasacommissionorbonusandhaveitpaidascompensationatalaterdate(retirement,deathordisability).Theprocessworksprimarilyasamechanismforavoidingtaxesbutitcanbeusedasaformofincomeinsurance.

Generally,inadeferredcompensationplan,youwillenterintoanagreementwithyouremployerthatspecifies:

theamountofmoneytobepaid;

whenitwillbepaid;and

theconditionsunderwhichitmayormaynotbepaid.

Theagreementusuallywillspecifythattheamountdeferredwillbepaidasaretirementbenefitorintheeventofprematuredeathordisability.Italsomaystate

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thatyouwillforfeittherighttothemoneyifyouleaveyouremployerexceptforretirement,deathordisability.

Theadvantageofthisagreementisthatitallowsyoutoavoidcurrenttaxation.However,therearesomedisadvantages.Usually,deferredcompensationisanon-qualifiedplanand,assuch,maybefundedorunfunded.

Afundedplanisoneinwhichtheemployeractuallywillsetasideasumofmoneyorotherassetsintoanaccountortrustassecurityfortheemployer'spromisetodeliverthedeferredbenefitsatalaterdate.Theemployeeusuallyisnamedasthebeneficiaryofthistrust,cashorproperty.

Thefundeddeferredcompensationplantiesyoutothecompanyandtheemployerexceptforretirement,deathordisability.Ifyouleaveforanyotherreason,thedeferredamountswillbeforfeited.Thus,youwillavoidcurrenttaxationduetotheelementofsubstantialforfeiture.

Anunfundedplanisnothingmorethananunsecuredpromisetopayafuturebenefit.Inafundedplan,theassetsdoingthefundingremaincorporateassetsandaresubjecttotheclaimsofcorporatecreditorsorotherusesbytheemployer.

Fundeddeferredcompensationplansusuallyuselifeinsurancecontracts,disabilityincomepolicies,annuities,mutualfunds,etc.,toprovidetheneededbenefits.

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Inshort,adeferredcompensationplanservesasadisabilityincomepolicyprovidedbyanemployer.High-incomeexecutivesandprofessionalsoftenusetheplansforexactlythispurpose.

QualifiedorNon-Qualified

Deferredcompensationplansmaybeclassifiedasqualifiedornon-qualified.Mostoften,theseplanswillbenon-qualified.Asanon-qualifiedplan:

theemployerisfreetodiscriminateastowhichemployeeswillparticipateinthisprogram;

theplanneednotbefiledwiththeIRS;

anyinvestmentincomeoncontributionsmadetotheplanisnottax-deferred(fortheemployer);

theemployerdoesnotenjoyacurrenttaxdeductiononcontributions;and

theplanmustbeinwritingandcommunicatedtotheemployee(s).

Theprincipalappealofanon-qualifiedplanformostcompaniesisthattheplancanbediscriminatory.Itcanbeselective.Theemployercanincludeasinglepersonorasmallgroupofkeypersonnelandexcludeotherworkers.

Aqualifieddeferredcompensationplanissimilartoanyotherqualifiedretirementplan:

theemployercannotdiscriminateastoparticipation;

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theplanmustbefiledwithandapprovedbytheIRS;

investmentincomeistax-deferred;

theemployerwillreceiveacurrenttaxdeductionforcontributions;and

theplanmustbeinwritingandcommunicatedtotheemployee(s).

TheMechanicsoftheAgreement

Thedeferredcompensationagreementislikeanyothercontract.Itusuallyprovidesthefollowingtermsandconditions:

Agreementidentities:Theeffectivedateoftheagreement,partiestotheagreement,nameandaddressoftheemployer,etc.,willbeidentified.

Theemploymentprovision:Theemployeragreestoemploytheemployeeinaspecificcapacityandtocompensatehimorheraccordingtoapredeterminedsalary.Generally,thisprovisionalsowillindicatethattheemployeewillcontinuetoworkfortheemployeruntildeath,disabilityorretirement.

Retirementbenefits:Theamountandcommencementdateofretirementbenefitsshouldbespecified,includingaprovisionforearlyretirementandreducedbenefits.

Disabilitybenefits:Theamountofbenefits,dateonwhichbenefitsbeginanddurationofdisabilitybenefitsshouldbespecified.Inaddition,a

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determinationshouldbemadewithregardtowhatconstitutesatotaldisability.Frequently,adisabilityincomepolicy'sdefinitionoftotaldisabilitymaybeusedintheagreement.

Pre-retirementdeathbenefits:Thebenefitamount,commencementdateanddurationofanypre-retirementdeathbenefittobepaidtotheexecutive'ssurvivorshouldbeidentified.

Forfeitureprovision:Basically,thisprovisionwillidentifywhatwillhappenintheeventthattheexecutiveterminatesemploymentandcompetesagainsttheemployer.Theemployerhasverybroaddiscretionaryauthorityregardingthisprovision.Mostoften,thisprovisionwillindicatethattheexecutivewillforfeitthedeferredcompensationbenefitunlessthebenefitistriggeredbydeath,disabilityorretirement.

Post-retirementconsulting:Thisprovisionisusuallyoptionalandprovidesthatasaconditionforreceiptofthedeferredcompensationbenefits,theexecutiveagreestoprovideconsultingservicestotheemployerafterretirement.

Terminationofemployment:Thisprovisionwillindicatewhatwilltakeplaceregardingtheemployee'sterminationpriortoretirementwithregardtothedeferredcompensationbenefits.Theremayormaynotbeanypaymentsmadeor,possibly,someformofreducedbenefitmaybepaid.

Terminationforcause:Ifthecorporationterminatestheexecutiveforadverseconductoractivitythatisdetrimentaltothecompany,nodeferredcompensationbenefitswillbepaid.

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Communicationsprovision:Thisprovisionspecifiesthatallcommunicationsregardingthedeferredcompensationplanmustbeinwrittenform.Therewillbenoverbalagreements.

Claimsprocedures:Benefitsdueundertheplanaredetailedwithregardtoclaimsprocedureshowtoreceivethebenefits,aswellasdenialofanyclaims.

Planadministrator:Aperson(theemployerorsomeoneelse)shouldbeidentifiedastheplanadministrator.

Non-competeprovision:Theemployeeagreestoremainwiththecorporationuntilretirementandagreesnottobecomeemployedbyacompetitoratanytime,includingafterretirement.

Basically,youagreetodefercurrentreceiptofincomeinreturnforafundedorunfundedpromisebyyouremployertopayabenefitatalaterdate.Akeypartoftheagreementistheprovisionwhichstatesthatyoumayforfeitthisbenefitifyouleaveorgotoworkforacompetitor.Theagreementlocksyouin,whileatthesametimelockingoutthecompetition.Generally,thisprovisionmustbeincludedintheagreementfortaxpurposes.

EstablishingDeferredCompensation

Deferredcompensationcanbeestablishedinoneoftwowaysasasalarycontinuationplanorasasalaryreductionagreement.

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Thesalarycontinuationapproachmeansthatthedeferredcompensationisactuallyanadditionalbenefitoverandaboveyourpresentcompensation.ThisissometimesreferredtoasaSelectiveExecutiveRetirementPlan(SERP).SinceaSERPisdiscriminatory,itisofcoursenon-qualified.InaccordancewiththeprovisionsoftheSERP,theemployerpromisesorelectstopayadeferredbenefit,inadditiontoyoursalary,intheeventofretirement,prematuredeathordisability.

Noteverybusinessisaprospectfordeferredcompensation.Thebestprospectsusuallywillbefoundinprofitablecorporations,partnerships,soleproprietor-shipsandcertainnonprofitorganizations,suchascolleges,universitiesandhospitals.

Noteveryemployeeisaprospectfordeferredcompensation,either.Ifyou'reconsideringthiskindofarrangement,youneedtoreviewyourotherpensionbenefitstodeterminewhetherdeferredcompensationwilladverselyaffectanyretirementbenefit.

Example:Izzy'spensioncontributionamountisbasedonhiscurrentsalary.Deferralofsomeofthiscurrentcompensationwillresultinasmallerpensionplancontribution.Thisreductionmaycreateabiggerlossthanthegaincreatedbythetaxadvantage.Izzyprobablyshouldn'tdeferhisincome.

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Asarule,aparticipatingemployeemustnothaveanybeneficialinterestinaplan'sfundingtoavoidcurrenttaxation.Theassetsusedtofundtheplanmustbeownedbytheemployerandmustbesubjecttotheclaimsoftheemployer'screditors.Duetotheproblemsthisscenariocreates,unfundedplansareusedmoreoften.

Example:CurlycohiresBenasCEO.Aspartofhiscompensationpackage,Benhasapercentageofhissalarydeferredintoatrustaccount,whichwillbepaidinmonthlyinstallmentsuponhisretirementatage65.Ben'scontractincludesstandardnon-competeandforfeitureclauses.

Afterfiveyears,BengrowsdisenchantedwithCurlycoand,despitebeing10yearsawayfromretirement,decidestoleavethecompanytopursuehisdreamofplayingontheprofessionalgolfseniorstour.AccordingtotheforfeitureclauseofhiscontractwithCurlyco,Benwillnotreceiveanyofthemoneydeferredintothetrustasheputtshiswayintohisgoldenyears.Despitesomeofitsdisadvantages,thefundedplandoesprovidesomesecurityforthekeyexecutive,inthatthereissomeassurancethatthepromisedbenefitwillbedeliveredatalaterdate.Conversely,theunfundedplanoffersnosuchassurance.

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Eventhoughtheplanisunfunded,therestillmustbeasubstantialriskofforfeiturespecifiedintheagreement,sothattherewillbenocurrenttaxliabilitybasedontheconceptofeconomicbenefit.

Iftheemployerdoesnotdeliverthedeferredbenefits,theretiredordisabledparticipatingemployeebecomesacreditorofthecompany.Theemployercouldelecttopayothercreditorsaheadoftheemployee.Asyoumightguess,thislackofsecurityisamajordisadvantageofanunfundedplan.

Toovercomethisdisadvantage,theIRSpermitsadeferredcompensationplantobeinformallyfunded.Thispermitstheuseoflifeinsurance,annuitiesandtrusts,withoutjeopardizingthefavorabletaxstatusoftheunfundedplan.

TheIRShasruledthatanemployermaypurchaseinsuranceonthelifeofakeyemployee(oranannnuity),inordertoassurethatnecessaryfundswillbeavailablefortheplan.Therewillbenopresenteconomicvalueorbenefittotheemployee,andthusnocurrenttaxation,providedtheemployeristheowner,paysthepremiumsandisbeneficiaryofthelifeinsurancepolicy.

FundingOptions

Followingaresometechniquesthatmaybeemployedtohelpsolvethisproblemofuncertainfuturedeliv-

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ery,andthusprovidesomesecurityforakeyemployeewhileassuringthattheplanremainsunfunded.Thisassuranceisrealizedaslongastheassetisaccessibletotheemployerortheemployer'screditors.

Lifeinsurance.Corporate-ownedlifeinsuranceonthekeyexecutive'sliferesultsinfundsthatcanbeusedtofinancetheemployer'sresponsibilityinaccordancewiththedeferredcompensationagreement.Iftheemployeediesprematurely,adequatecashisavailabletopaythedeferredcompensationbenefit.Thepolicy'scashvaluealsocanbeusedtohelpprovideretirementordisabilitybenefits.

Annuitycontracts.Corporate-ownedannuitiescanprovidenecessaryretirementfundinginaccordancewiththedeferredcompensationagreement.

Disabilityincomeinsurance.Acorporate-owneddisabilityincomepolicyonthelifeofthekeyexecutivecouldprovidethenecessaryfundswithwhichtopayadisabilitybenefitinaccordancewiththeagreement.

Anemployerinvestmentaccount.Theemployerinvestsinstocks,bonds,mutualfunds,etc.,andmaintainsthisinvestmentaccountforthepurposeofhavingfundstoimplementthedeferredcompensationplan.Aslongastheaccountisaccessibletotheemployerandtheemployer'screditors,itwillnotbeconsideredafundedplan.

Moneymustbegeneratedoraccumulatedwithwhichtopaythelifeinsurancepremiums.Thisisgenerally

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consideredalegitimatebusinessexpenseifitenhancesthebusiness,itsgoalsandneeds.However,ifitonlysatisfiestheneedsofamajoritystockholder/owner,thenthiswouldnotbealegitimatebusinessexpensefortaxpurposes.Asmoneywouldbeaccumulatedtopaythepremiumsforthisinvalidbusinessexpense,thecorporationmaybesubjectingitselftoanaccumulatedearningstaxliability.

TaxIssues

Becausedeferredcompensationplansworkprimarilyasadeviceforavoidingtaxes,theIRSplaysabiggerroleherethanitdoesinasimpleinsurancearrangement.

Taxationofdeferredcompensationinvolvesfourcategoriesoftaxliability:

incometaxtotheemployee;

incometaxtothecorporation;

federalestatetaxation;

othertaxconsiderations.

Thefirsttwoofthesecategoriesarethemostimportant.

Employeeincometaxisgenerallynotaconsiderationduringtheperiodoftimethattheincomeisdeferred.Anactualsalaryreductionplanwherebyyoudeferreceiptofcurrentincomeusuallyresultsinnocurrentfederaltaxliability.

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Benefitsreceivedasaresultofthedisabilityofthekeyexecutivealsoaresubjecttoordinaryincometaxasreceived.

Ifbenefitsarereceivedduetothedeathoftheemployeepriortoretirement,partofthebenefitwillnotbetaxableandpartwillbetaxable.Thefirst$5,000ofbenefitspaidmaybeexcludedfromtaxationtothebeneficiary,providedthedeceasedhadasubstantialriskofforfeitureperthedeferredcompensationagreement.Amountsreceivedinexcessof$5,000aretaxabletothebeneficiaryasreceiptofthedeceased'scompensation.(Thisisdifferentfromthemoneypaidunderalifeinsurancecontractwhichisnottaxable.)

Thecorporatetaxliabilityissomewhatdifferentthantheindividualsituation.Generally,thecorporationwillreceiveataxdeductionforthedeferredcompensationamountpaidtotheemployeeatretirement,disabilityordeath.Toachievethisdeduction,thedeferredcompensationplanmustrepresentareasonableamountandmustservealegitimateorvalidbusinesspurpose.

DeferredCompensationasaPensionBenefit

Asaformofretirementorpensionplan,deferredcompensationissubjecttosomeoftherequirementsoftheEmployeeRetirementIncomeSecurityAct(ERISA).

Non-qualifiedplansdon'thavetobefiledorapprovedbytheIRSfortaxpurposes.However,ERISArequiresthattheemployernotifytheDepartmentofLaboroftheplan'sexistenceandwhotheparticipantsare.

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ERISAhascertainreportinganddisclosure,aswellasfiduciaryresponsibilityandadministrativecompliance,requirementswithspecificemployeewelfarebenefitplanregulations.Italsoimposescertainnon-taxrequirementsforemployeebenefitpensionplans.

Non-qualifieddeferredcompensationplansfitthedefinitionofanemployeepensionbenefitplanand,tothedegreethattheyalsoprovidedisabilityordeathbenefits,theyareconsideredemployeewelfarebenefitplans.So,they'reusuallysubjecttosomeofthereportingrequirementsofERISA.

Theserequirementsinclude:

filingaplandescriptionwiththeDepartmentofLabor(DOL)everyfiveyears;

providingeachparticipantwithasummaryplandescription,whichmustberevisedeveryfiveyearsifthereareanyplanamendments(otherwise,theplanmustbeupdatedevery10years);

maintainingrecordsandmakingplandocumentsavailabletoanyinterestedparty.

Analternativemethodofcomplianceavailableforunfundeddeferredcompensationplanssimplypermitstheplanadministratortofileageneralstatementregardingcertainaspectsoftheplan.ThisstatementisfurnishedtotheDOL.

Ifthedeferredcompensationplanisaqualifiedplanandincludesalleligibleemployeesasparticipants,thentheplanadministratormustcomplywiththeparticipation,vestingandfundingrequirementsofERISA.Inaddition,aqualifieddeferredcompensa-

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tionplanalsomustcomplywiththefiduciarydutiesandresponsibilitiesimposedbyERISA.

The1993federalappealscaseJoanWeberv.SaintLouisUniversityconsideredadisabilityclaimmadeunderakindofdeferredcompensationplan.

Between1981and1984,Weberwasstudyingforhermaster'sdegreeinbusinessadministrationattheuniversity.In1983,shewashiredasanassistantwiththeuniversity'sSmallBusinessDevelopmentCenter.Sheworkedthereparttimeuntilshereceivedherdegreein1984;shethenbecameafull-timeemployeeuntiltheeliminationofherpositionandtheconsequentterminationofheremploymentinSeptember1986.

Weberwaseligibletoparticipateintheretirementplanineffectattheuniversity.Sheappliedtodosoinearly1986andwasacceptedforparticipationthatApril.TheretirementplanusedthecontributionsofparticipantstobuyannuitycontractsfromTIAA/CREF(alargeinsurancecompanyprimarilyservinguniversityandcollegeemployees).Afteranemployeecompletedthreeyearsofcontinuousemployment,theuniversitywouldmatchanycontributionsmadebytheemployee.

WeberalsowascoveredundergroupdisabilityinsuranceobtainedthroughTIAA/CREF.Thatplanprovidedtwodifferenttypesofbenefitintheeventanemployeebecamedisabledmonthlyincomepaymentsbasedonapercentageoftheemployee'sregularsalaryandmonthlypremiumpaymentstowardanyannuitiesalreadypurchasedundertheretirementplanbytheuniversity'smatchingcontributions.

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Theonlyconditionontheincomepaymentswasthattheemployee'speriodofdisabilityhadbegunwhiletheemployeewasinsured(inotherwords,whiletheemployeewasworkingfortheuniversity).Tobeeligiblefortheannuitypremiumpayments,however,anemployee'speriodofdisabilityhadtohavebegunatatimewhentheuniversitywasmakingmatchingcontributionstowardtheemployee'sretirementplan.

In1988,Weberappliedfordisabilitybenefitsunderthegroupdisabilityinsuranceineffectatthetimeofheremploymentwiththeuniversity.TIAA/CREFinitiallyapprovedWeber'sapplicationforincomepaymentsandannuitypremiumpayments,buttheuniversitychallengedthatapprovalwithrespecttotheannuitypremiumpayments.(Underthetermsofthegroupdisabilityinsurancecontract,theuniversityhadtherighttooverruleapreliminarydeterminationbyTIAA/CREFofcoverageforanemployee.)

Theuniversitycontendedatthattimebecauseofherpart-timeemploymentWeberhadnotcompletedenoughyearsofservicetohavebecomeeligibleformatchingretirementcontributionsfromtheuniversityand,accordingly,fortheannuitypremiumpayments.Consequently,TIAA/CREFmadeonlytheincomepaymentstoWeber.

In1989,Webersuedtheuniversityinfederalcourt.SheallegedthatshehadcompletedenoughyearsofservicetohavebecomeeligibleformatchingretirementcontributionsfromtheuniversityasofJune1986,andwasthereforeentitledtothosecontributionsundertheretirementplan.(Interestingly,shedidnotarguethateligibilityformatchingretirementcontribu-

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tionsalsowouldallowtheannuitypremiumpaymentsunderthegroupdisabilityinsurance.)

Thetrialcourtruledthat,becausetheuniversityhadnotchallengedWeber'sdisabilityattherelevanttimes,itwouldnotallowdiscoveryontheissueofwhenWeberbecamedisabled.

Atthispoint,theuniversitymadesometacticalerrors.ItconcededthatWeberhadcompletedenoughyearsofserviceasofJune1986tobecomeeligibleformatchingretirementcontributions.ButitarguedthatWeber'speriodofdisabilityhadbegunatapointwhenitwasnotmakingmatchingcontributionstowardherretirementplan.Therefore,itwasnotliableforanyannuitypremiumpaymentsunderthegroupdisabilityinsuranceplan.

Thetrialcourtrejectedtheuniversity'sargumentsandgrantedasummaryjudgmentinfavorofWeber.

Onappeal,theuniversityarguedthatthetrialcourterredinrefusingtoallowittohearevidenceregardingwhenWeberhadbecomedisabledand,therefore,whethershewascoveredundertheuniversity'sgroupdisabilityinsuranceatthattime.

TheappealscourtagreedwiththeuniversityandorderedtheissueofwhenWeberhadbecomedisabledtobepartofthecase.Thisessentiallydestroyedherargumentsoshesettledforthedisabilitybenefits.

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Conclusion

Deferredcompensationisanimportantandvaluabletool.Itisanagreementbasedontherespectiveneedsandobjectivesofbothyouandyouremployer.

Adeferredcompensationplanenablesyoutorealizeacurrenttaxadvantage,andallowsyouremployertorealizeataxdeductionwhenthedeferredcompensationispaid.

Usedcorrectly,thedeferredcompensationplancanbeaneffcetiveformofdisabilityincomeinsurance.However,ittendstoworkmoreeffectivelyforexecutivesandotherhighlypaidemployeesthanforfront-lineworkers.

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Chapter10PersonalUmbrellaLiabilityInsuranceDisabilityisn'ttheonlythreattoyourabilitytoearnanincome.Evenifyouworkthroughoutahealthy,longlife,legalorfinancialcrisescanencumberthemoneyyoumake.Weconsideredthesekindsofrisksalittleinthechapteronlong-termcareinsurance.Butthere'sanevenmoredevastatingfinanciallossthatsomepeoplesuffer:personalliability.

Weliveinaverylitigioussociety.Muchofsocietynowbelievesthataninjuredpartyshouldsueanyoneandeveryoneheorshecanandcollectasmuchmoneyaspossiblewhetherornotthepaymentisjustifiedbytheactualdamagesincurredorbytheotherparty'sactualliabilityfortheloss.

Thisenvironmentcanbeamajorrisktoanysourcesofincomeyoumightbuildduringyourlifetime.

Personalumbrellapoliciesplayavitalroleinprotectingyourfinancialsecuritybyprovidingbroadcoverageandhighlimitsofcoverageagainstliabilities.Manyofthemostcommonlysoldpersonalliability

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coverages,knownasunderlyingpolicies,donotprovideenoughcoverageanddonotcoveralllosses.

Inthischapter,we'llconsiderthewaysinwhichanumbrellapolicycanprotectyourincome.

WheNeedsUmbrellaCoverage?

Anyonewithcurrentorfutureassetstoprotectmayneedpersonalumbrellacoverage.Whenaliabilityjudgmentishandeddownthatexhaustsyourunderlyingpolicylimit,wheredoestheremainderofthemoneycomefrom?Well,youareresponsible,soitmustcomefromyourassets.Perhapsyourhousewillhavetobesold,orretirementIRAswillneedtobecashedout,orotherassetsmustbeliquidatedinordertomakepaymentonthejudgment.

Ifyourassetsareexhaustedandajudgmentisnotfullysatisfied,futureearningsmaybeattachedorgarnishedinfurthersettlementoftheoutstandingjudgment.Amajorliabilitylosscanwipeoutassetsthattookalifetimetoaccumulate.

Whilecommonpersonalliabilitypolicies(suchasahomeownersorpersonalautopolicy)doprovidecoveragefortheirrespectiveliabilitysituations,oftenthelimitsaren'thighenoughtopayallthedamagesthatcouldbeawardedinevenamoderatelyseverecase.Whatifyouhavea$250,000limitforautomobilebodilyinjury,andacourtentersajudgmentof$500,000againstyou?

Isanyoneexemptfrompersonalliabilityexposures?Veryfewofuslacktheexposure.Exceptforminors,

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thelegallyincompetentandtheindigent(whohavenoassetsatrisk),mostofushaveexposures.Howcananyonewhodrivesanautomobilebeabsolutelypositiveheorshewillneverbeinvolvedinanat-faultaccident?Howcananyhomeownerbecertainthatnovisitorwilleverbeinjuredonthepremises?Howcananyonebesurethatapersonalliabilityclaimwillneverariseoutofpersonalactionsorstatements?

Yousimplycan't.

Peoplearebeingsuedtodayforvariousliabilityeventsthataren'tcoveredbytheirunderlyingliabilitypolicies.Inmanycases,anumbrellapolicywillcoveraneventthatisnotcoveredbytheunderlyinginsurance.

TheLegalTheoryBehindLiabilityIssues

Whenyouviolatesociety'slaw,youhavecommitedacrime.Whenyouviolatetherightsofanotherperson,youhavecreatedatort.Thepersoncommittingatortisknownasthetortfeasor.

Itisimportanttonotethatliabilityinsuranceappliesonlytothefinancialconsequencesoftorts.Youcannotbuyliabilityinsurancetoprotectagainsttheconsequencesofcrimes.

Themajorityofpersonalliabilitycasesinvolveunintentionaltorts.Thebasisforunintentionaltortsisusuallynegligence,sowehadbetterhaveaworkingdefinitionofnegligence.Inorderfornegligencetoexist,fourelementsmustbepresent:

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Dutytoact.Thedutytoactinareasonablyprudentmannertowardanother(suchasdrivingyourcarsafelydownthestreetinamannerthatavoidshittingothercarsorpedestrians).

Breachofthedutytoact.Thetortfeasordoesnotactintheprudentmannerdescribedabove.

Occurrenceofinjuryordamage.Anotherpartyactuallysuffersinjuryordamage.

Negligenceistheproximatecauseoftheinjuryordamage.Thetortfeasor'sbreachofdutyisactuallywhatcausedtheinjuryordamage.

Ifanyoftheseelementsisabsentfromanevent,negligencedoesnotexist,andthetortfeasorwillnotbeheldliableduetonegligence.Butwhentherequiredelementsarepresent,theinjuredpartyusuallyhasavalidclaimfordamagesbasedonnegligence.

Damagesisanimportanttermtounderstandinanydiscussionofliability.Whensomeoneisheldliableforinjuryorpropertydamagetoanother,thatpersoncanberequiredtopaycompensationtotheinjuredparties.Forthesetypesofclaims,weneedtobeconcernedwithtwobroadtypesofdamages:

Compensatorydamageswhichsimplymeanscompensationforthelossincurred.Thesemayincludespecificdamages(thedocumentable,actualexpensesincurredbytheinjuredparty,suchasmedicalbills,wageslostandpropertyreplacement),andgeneraldamages(monetaryawardsformoresubjective,lessquantifiableaspectsoftheloss,suchaspainandsuffering,orlossofconsortium).

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Punitivedamagesthesearedamagesthatthecourtcancompelthetortfeasortopay,inadditiontothecompensatorydamagesawarded.Punitivedamagesrepresentafine,orpunishmentforoutrageous,severeorintentionalconductbythetortfeasor.

CommonKindsofLiability

Vehicle-relatedliabilityisthegreatestsinglesourceofpersonalliability.Youruseofavehiclegenerallycausesyoutobeintheproximityofmanyotherpeopleandvehicleoperators,whileoperatingaseveral-thousand-poundmachinemovinginandaroundothersuchmachineoperators.It'sawondertherearen'tmoreaccidents.

Vehicleliabilitycanarisefrompropertydamagetootherpeoples'cars,injurytopeopleoccupyingothercars,injurytopedestriansanddamagetopropertyotherthancars(suchastheneighbor'sbrand-newfence).

Injuriesanddamagesrelatedtovehicleusealsomaybecausedoraggravatedbymanyfactors,suchasexcessivespeed,driverinexperience,disobedienceoftrafficlaws(runningastopsign),useofintoxicants(drugs,alcohol)orsimplecarelessnessbroughtonbyinattention(drivingacarwhilesomethingmajorisonyourmind,orwatchingthesceneryinsteadoftheroad).

Whetheryouownorrentresidentialpremises,controlofthepremisescanresultinpersonalliabilityexposuresforinjuryordamagetoothers.Suchsituationscouldinclude:

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tripandfallincidentsoccurringforanynumberofreasons(iceandsnow,debris,stairways,etc.);

swimmingpoolsorotherattractivenuisances,suchasjunglegyms;

propertydamagescenarios(arentercausingdamagetothepremisesbycarelesssmokingorahostofothercauses);

domesticandyardworkers(injuriessustainedby,orinjuriestootherscausedby,domesticworkers,suchasmaids,gardeners,etc.).

Generally,apersonalumbrellapolicywillnotcoverbusinessliability.However,alimitedrangeofbusinessexposuresmaybecoveredbypersonalliabilitypolicies.Anumbrellapolicymaycovercertainhomeofficeexposures.

Intentionaltortscaninvolveinfringementofpropertyandprivacyrights(forexample,trespassing).Propertyrightsalsocanbeviolatedbynuisance-typeactivities,whichinterruptthepropertyowner'sabilitytousetheproperty(theneighborwhoteststhevolumelimitonhisnew2500-wattCDplayer).Otherintentionaltortsinvolvepersonalinjury,whichincludes(besidesthetraditionalbodilyinjury)damagetoreputationthroughuntruestatements,beitlibel(inprint)orslander(spoken).

Thesearebynomeanstheonlyexamplesofpersonalliabilityexposures.Yourchildren,yourpets,yourpremises,yourhobbies,yourcarandmanyofyourdailyactivitiescreateexposuretopersonalliability.

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TheMechanicsofUmbrellaCoverage

Manyinsurersofferwhattheycallpersonalumbrellainsurance.However,personalumbrellapoliciesarenotstandardizedforms(likethehomeownerspoliciesorpersonalautopolicies).Thismeansumbrellapoliciescandifferfromoneanotherinsignificantways.

Mostofthevariouspersonalumbrellapoliciesonthemarketcanbeorganizedintotwocategories:

Followingformexcesspolicies.Theseprovidehighlimitsovertheexactsameperils,coveragesandexclusionsfoundinalloftheunderlyingpoliciesoverwhichcoverageisbeingprovided.

Trueumbrellapolicies.Inadditiontohighlimitsofliabilitycoverage,theseprovidebroadercoveragethanisprovidedbytheunderlyingcoverages.

Trueumbrellacoveragewillprotectyourpresentandfutureincomestreamsmosteffectively.Itprovidesthreeessentialthings:

excesslimitsoverunderlyingpolicies;

broadercoveragethantheunderlyingpolicies;and

defensecostsinadditiontothelimitofinsurance,andwilldefendaclaimevenifitisgroundless.

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BroaderScopeofCoverage

Animportantfunctionofatrueumbrellaisthatitprovidesbroadercoveragethantheunderlyingpolicies.Thetermdropdowncoveragesisoftenusedtonamethecoveragesprovidedbythepersonalumbrellathatarenotprovidedbytheunderlyingliabilitypolicies.Someoftheseinclude:

Personalinjurycoverage.Thetypicalunderlyinghomeownerspolicyprovidesliabilitycoverageforaccidentalbodilyinjury(meaningphysicalinjuryordeath),butnotforeventsinvolvinglibel,slander,falsearrestandthelike.Thepersonalumbrelladoescoveryouforliabilityarisingoutoftheseevents.

Regularlyfurnishedautos.Thestandardpersonalautopolicycontainslanguagethatprecludesliabilitycoveragefortheuseofvehiclesmadeavailableforyourregularuse(suchasacompanycar).Thepersonalumbrelladoesnotexcludesuchsituations.

Contractualliability.Thestandardhomeownerspolicyseverelylimitscoverageforliabilityassumedbycontract.Thepersonalumbrellaismuchbroaderinitsprovisionofcoverageforsuchevents.

Damagetopropertyofothersthatisinyourcare,custodyorcontrol.Thestandardhomeownerspolicyexcludescoveragefordamagetopropertyleftinyourcare.Thepersonalumbrelladoesnotexcludecoveragefordamagetosuchproperty.

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Animportantconceptthatcomesintoplaywhenapersonalumbrellarespondstoalossviaadropdowncoverageistermedaself-insuredretentionorSIR(it'scalledaretainedlimitinsomepolicies).Whentheumbrellaaloneprovidescoverageforaloss,theinsuredbearswhatamountstoadeductiblebyretainingthefirstsmallportionoftheloss(typically$250).

Losspaymentisadministeredsomewhatdifferentlyfromtraditionaldeductibles.YouwriteachecktoyourinsurancecompanyfortheamountoftheSIR,anditpaystheinjuredpartytheentireamountforwhichitisliable.

DefenseCostsProvided:DutytoDefend

Athirdmajorbenefitofpersonalumbrellacoverageisthatthecontractprovidesforpaymentofdefensecosts.Whenyouareaccusedofbeingliablefordamagestosomeoneelseandaretakentocourtoverit,legalcostswillbeincurredbytheaccused,evenifthesuitistotallygroundlessandendsintheaccused'sfavor.Fortunately,mostunderlyingliabilitypoliciesprovidecoveragefordefensecosts,whetherornotthesuitisgroundless.Also,thesecostsarepaidinadditiontotheavailablelimitsofliability(inotherwords,theentireliabilitypolicylimitsareavailabletopaydamages).

Actually,theinsurancecompanydoesmuchmorethansimplypaydefensecostswhenasuitisbroughtagainst

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aninsured.Theinsurernotonlyassumesthecostfordefendingaclaim,italsohasadutytodefendtheclaimorsuit.

Inotherwords,theinsurancecompanystepsinandprovidesthedefenseanddoessoatitsownexpense.However,theinsurancecompany'sdutytodefendendswhenithaspaidorofferedtopayitsmaximumlimitofliability.

Mostpersonalumbrellapoliciesalsoagreetoprovideadefenseandtopaydefensecostsinthisway.Thiscanbeveryimportantinvarioussituationswhereadefensebyanunderlyinginsurermaynotbeprovidedormaynotbeavailable.Sayyouhaveahomeownerspolicyproviding$100,000ofpersonalliabilitycoverage,andyoualsohave$1millionofpersonalumbrellacoverage.Oneday,yourpitbullterrierbitesandseverelyinjuresavisitingchild,andthechild'sparentssuefor$500,000.

Iftheunderlyinginsurerbelievesadefensemaybesuccessful,itmaydefendtheclaimtoconclusion,regardlessoftheoutcome.Perhapstherewillbenoliability.Perhapsanyliabilityawardedwillbelessthanthehomeownerspolicylimit.Perhapstheawardwillexceedthatlimit.Theumbrellainsurerobservesbutdoesnotparticipateinthedefense.Itwill,however,payitsshareofanyawardinexcessofthe$100,000homeownerslimit.

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However,theunderlyinginsurermightnothavetoprovideadefense.Ifitbelievesasuccessfuldefenseisdoubtful,andthatanysettlementisgoingtoexceeditspolicylimit,itmightimmediatelyoffertopayits$100,000limitandavoiddefensecosts(itsobligationendswhenitexhaustsitslimit).Younolongerhavetheunderlyinginsurerdefendingitsclaim.

Thepersonalumbrellabecomesveryvaluableatthispointfortworeasons:First,theumbrellacompanywillstepinanddefendtheremainderoftheclaim;second,theumbrella'sliabilitylimitcanmakeuptheremaining$400,000ifthechild'sparentswintheirentiredemand.

Anunderlyingdefensemightnotbeavailablewhenalossoccurs.Generally,thisoccurswhenalossisnotcoveredbyanunderlyingpolicy,butiscoveredbythepersonalumbrellaonadropdownbasis.Obviously,ifasituationisnotcoveredbyoneoftheunderlyingpolicies,thereisnounderlyinginsurertoprovideadefenseoftheclaim.

Example:Calhasahomeownerspolicy,butitisnotendorsedtoprovidepersonalinjurycoverage.Calissuedbysomeoneforslander.Thereisnocoverageforthisclaimunderthehomeownerspolicythatinsurancecompanyisnotobligatedtoprovideadefenseorpaydefensecosts.Inthiscase,thepersonalumbrellacompanywillstepinandprovideadefense,paythedefensecostsandprovidedropdownpersonalinjurycoveragefordamagesthatmaybeawardedinadditiontothedefensecosts.

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Evenifyouhaveumbrellacoverage,youneedtobecarefulaboutdefensecosts.Manypoliciesdocoverdefensecostsinadditiontothelimitofliability.Butbeawarethatunderthetermsofsomepersonalumbrellas,defensecostsareincludedinthepolicylimitandarenotadditionalcoverage!

Conclusion

Intoday'ssociety,alargeliabilitylawsuitcouldbefiledagainstalmostanyone.Weallhaveliabilityexposures,andthereisagrowingtendencyamongthosewhosufferdamagestosue,andtosueforlargeamounts.So,weareallatrisk.

Inbusinesssituations,manyofusareprotectedbyliabilitycoveragescarriedbyouremployer.Butweoftenoverlookthemanyexposuresthatcouldresultinapersonalliabilityclaim.Personalumbrellapoliciescanprovideaconsiderableamountofprotectioninthisareaataveryreasonablecost.

Thesepoliciesprotectyourincomebycoveringyouforlarge,long-termlegaljudgmentsthatyoumightsuffernomatterhowcarefullyyouliveyourlife.Theworst-casescenariointhesesituationsisthatacourtissuesajudgmentagainstyouthatgarnishesfutureincome.Anumbrellapolicycanpreventthatfromhappening.

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Chapter11OptionalDisabilityBenefitsandRidersThebasicbenefitprovidedbyanydisabilityincomecoverageisreplacementoflostincome.Forthisreason,disabilitycoveragewhetherastand-alonepolicy,aridertoalifepolicyoranyotherformofinsuranceisusuallyreferredtoasincomereplacementinsurance.Allofthesecoveragesshareabasicformat:Followinganeliminationperiod,benefitsarepaidtoreplaceincomelostduetoadisability.

Inadditiontothebasicbenefits,thereareanumberofoptionalfeaturesthatcanenhancedisabilitycoverage.Wehavediscussedsomeoftheseoptionsbeforebuttheymayseemmoreunderstandableifyouthinkaboutthemasagroupofrelatedincomeinsuranceissues.

Inthischapter,wewillconsiderthevariousoptionalbenefitsandcoveragesthatcanexpandorotherwiseimpactincomeinsurance.

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RehabilitationBenefits

Rehabilitationbenefitsareanoptionalcoveragethatcanbepurchasedwithadisabilityincomepolicy,andanoptionalbenefitthatcanbeclaimedundermostworkers'compsystems.

Asaresultofadisability,youmaynotbeabletoreturntotheworkyouweredoingbeforebutmaybeabletoworkanotherjob.Movingtoanewjoborcareermaynecessitatesomevocationaltraining.

Ifyouelecttoparticipateinvocationalrehabilitation,totaldisabilitybenefitswillbecontinuedaslongasyouareactivelyparticipatinginthetrainingprogramandremaintotallydisabled.Someinsurersmayprovidealumpsumpaymentforvocationaltraining.Whetheralumpsumoramonthlypayment,thisbenefitenablesyoutotakepositivestepstowardreturningtoworkeventhoughitmaybeinanotheroccupation.Thus,thisoptionbenefitsbothyouandtheinsurancecompany.

FutureIncreaseOption

Thisoptionalsomaybereferredtoastheguaranteedinsurabilityoptionorguaranteedpurchaseoption,sinceitenablesyoutopurchaseadditionaldisabilityincomeprotectionregardlessofyourinsurabilityatspecifiedfuturedates.

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Thisbenefitcomeswithseverallimitations:

thepremiumchargedforthefuturecoveragewillbebasedonyourageatthetimeofpurchasenotyouragewhenthepolicywasoriginallyissued;

youwillbeabletopurchaseonlyaspecified,predeterminedamountofadditionaldisabilitycoverageateachoptiondate(manyinsurancecompanieslimittheamountofadditionalcoverageavailabletohalftheoriginalamount);

yourearnedincomemustwarrantadditionalcoveragethatis,it'spresumedthatyourincomewillincreasesubstantially,whichwillleaveroomformorecoverage.

Anotherlimitationisthenumberofoptiondatesonwhichyoumaypurchaseadditionalcoverage.Usually,theseoptiondateswillbeeverytwoorthreeyearsfromages25to40(or,sometimes,toage50).Thesedatesmaybearbitrarilyselectedbyyourinsurancecompany,ortheymaycoincidewithyourbirthday,marriageorbirthofchildren.

Example:George,age24,earns$3,000permonthandcurrentlyhasadisabilityincomepolicythatprovidesamonthlybenefitof$2,000.Hiscompany'sissueandparticipationlimitsare70percentofmonthlyearnings.Hispolicycontainsafutureincreaseoption,whichallowsGeorgetopurchaseanadditionalbenefitof$300permonthonhis25th,28th,31st,34th,37thand40thbirthdaysplusuponmarriageandthebirthofchildren.(Continuedonnextpage)

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(Continuedfrompreviouspage)Georgedoesn'tseeanyincreaseinhissalarybythetimeheturns25,sohe'sunabletoexercisethefull$300optionamount($2,300inbenefitswouldexceed70percentofhismonthlysalary).

However,whenheturns28,Georgeismaking$3,500amonth.Hecanexercisethe$300increase($2,300islessthan70percentofhismonthlysalary).Ayearlater,Georgegetsanotherraiseandgetsmarried.Withhissalaryat$4,000amonthandhishoneymoonabouttostart,hecanexercisehisoptionagainandincreasethemonthlybenefitto$2,600.

CostofLivingBenefit

Thepurchasingpoweroffixeddisabilitybenefitsmaybeerodedduetoinflationandincreasesinthecostofliving.Toprotectagainstthesetrends,mostinsurancecompanieswillofferanoptionalcostoflivingbenefit.

Underthisoption,yourmonthlydisabilitybenefitwillbeincreasedautomaticallyasneeded,onceyouareonclaim.Typically,thisincreasewilloccurafteryouareonclaimfor12months,andeach12-monthperiodthereafter,aslongasyouremainonclaim.

Also,manyinsurerswillpermitapersontobuybacktheadditionalmonthlybenefitwhencomingoffclaim.Thismeansthepolicyholder'savailabledisabilitybenefitwillbeincreasedtoincludecostoflivingadjustmentsandthepremiumchargedwillbeincreasedtoreflectthebiggerbenefit.

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Example:Lucyhasadisabilityincomepolicywitha$1,000monthlybenefitandacostoflivingbenefit.She'stotallydisabledforfiveyears.Duringthattime,shegetsa$200amonthincreaseinherdisabilitybenefit.Eventually,sherecoversfromherdisabilityandcanreturntowork.Whenshedoes,shecanpayaslightlyhigherdisabilitypremiumandkeeptheextra$200amonthinforce.Withoutthisprovision,onceyou'reoffclaim,thetotaldisabilitybenefitrevertsbacktotheoriginalamount.

LifetimeBenefits

Thisoptionextendsyourbenefitperiodfromage65toyourlifetime.Theextensionmayapplytoaccident-onlybenefitsortoaccidentandsicknessbenefits.

Normally,ifthetotaldisabilityisduetoanaccidentanditoccurspriortoage65,benefitswillbepaidforthelifetimeoftheinsured,providedheorsheremainstotallydisabled.

Mostcompanieswillplacesometimelimitationsonthelifetimesicknessbenefit.Thatis,thedisablingsicknessmustbeginpriortoaspecifiedagesuchas50or55.Apolicyprovidinglifetimesicknessbenefitsmaystipulatethatifthesicknessbeginsatage55orearlier,then100percentofthetotaldisabilitybenefitwillbeprovidedforthelifetimeoftheinsuredperson.Ifthedisabilitybeginsafterage55,areducedbenefitwillbepaidforlife.

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Forexample,apolicymightstatethefollowing:

Iftotaldisability,duetosickness,beginsatage55orearlier,totaldisabilitybenefitswillbepaidforthelifetimeoftheinsured.Iftotaldisabilitybenefitsbeginatage:

56totalbenefitsarepaidtoage65;then90percentofthebenefitforthelifetimeoftheinsured;

57totalbenefitsarepaidtoage65;then80percentofthebenefitforthelifetimeoftheinsured;

58totalbenefitsarepaidtoage65;then70percentofthebenefitforthelifetimeoftheinsured...

Theprogressionofbenefitswouldcontinueinthismanneruntilage65.Ifthetotaldisabilitybeganatage65(normally,thepolicyisnotrenewedpastage65),thenthepaymentoftotaldisabilitybenefitswouldbelimitedtooneortwoyears.

SocialSecurityandAMBRiders

TheSocialSecurityAdministrationdefinestotaldisabilityastheinabilitytoperformanysubstantialgainfulworkthatmayexistinthenationaleconomy.Inaddition,thedisabilitymustbeexpectedtolastatleast12monthsorendindeath.Thisisaveryconservativedefinitionoftotaldisability.

Asaresult,theSocialSecurityAdministrationdeniesabouttwo-thirdsofdisabilityclaimsfiledeachyear.

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Forthatreason,manypeoplebuyspecialdisabilitycoveragethatwilltakeeffectwheneverSocialSecuritywon't.

ThiscoveragemaybecalledaSocialSecurityriderorsimplyanadditionalmonthlybenefit(AMB)rider.Regardlessofthename,thepurposeisthesametoprovideadditionaldisabilityincomebenefitsduringthefirstyearofaclaimwhileyouarewaitingforSocialSecuritybenefitstobegin.

TheseAMBridersalsoareusedtocomplementotherdisabilityincomesources,suchasshort-termgroupdisabilitybenefitsprovidedthroughtheemployer.

Therearetwodifferentmethodsbywhicharidermayprovidebenefits:

Allornothingrider:Underthisconcept,youwillbepaidabenefitifSocialSecuritypaysnothing.Conversely,ifSocialSecurityprovidesanybenefit,thentheriderpaysnothing.

Offsetrider:ThebenefitprovidedbytheSocialSecurityriderwillbereduced,oroffset,bytheamountofbenefitprovidedbySocialSecurity.

Example:Jackhasashort-termgroupdisabilitybenefitthroughwork.Thisprovideshimwithabenefitof$1,000permonthforaperiodofoneyear,afterwhichnobenefitisprovided.Jackneedsandcanqualifyforadisabilityincomebenefitof$1,500permonth,payabletoage65.(Continuedonnextpage)

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(Continuedfrompreviouspage)Tocoordinatehisindividualplanwiththegroupplan,Jackshouldpurchasea$1,500totaldisabilitybenefitpayabletoage65withaone-yearEP.Thiswilltakeoverwhenhisgroupcoveragestops.

Healsoshouldbuya$500additionalmonthlybenefitriderwitha30-dayEPandabenefitperiodofoneyear.Thiswillsupplementhisgrouppolicy.

OtherSocialInsuranceSupplements

Oneoftheproblemsprivateinsurershaveisprovidingdisabilityincomeformiddle-andlow-incomefamilieswithoutoverinsuring.Itispossibleforalow-incomeworkertoreceivemoreindisabilitybenefitsthanhisorherearnedincome.Becauseofthis,manyinsurancecompaniestakepainstoaccountforbenefitsprovidedbySocialSecurityorworkers'compwhenwritingdisabilityincomeformiddleandlowincomegroups.

Theproblemhere:SocialSecurityandyourinsurancecompanygetintoabattletoseewhocanbemoretight-fisted.Ifthishappens,theonlysureloserisyou.YoucanendupwithyourinsurancecompanydockingyouforSocialSecuritybenefitsyoudon'treceive.

Tosolvethisproblem,someinsurersareusingsocialinsurancesupplements.Thesesupplementsmaybeincludedaspartofthedisabilityincomepolicybenefits,ortheymaybeaddedtothepolicybyrider.

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Underthissupplement,totaldisabilitybenefitswillbepaiduntilworkers'compensationorSocialSecuritybenefitsbegin.Also,ifforanyreasongovernmentbenefitsstop,theinsurancecompanywillbeginthemonthlypaymentsagain.Thebenefitsareonlypaidduringthebenefitperiod,andonlyifyouarestilldisabled.

WaiverofPremium

Thisriderspecifiesthatintheeventofacovereddisability,premiumswillbewaivedretroactivelytothebeginningofthedisability.Thewaiverusuallyrequirespermanentandtotaldisabilitythoughsomepoliciesallowbroaderclaims.

Acaveat:Manypeopleassumewronglythatallformsofinsuranceincludethiskindofwaiver.Unlesstheyincludeitspecifically,almostnonedo.

AccidentalDeathandDismemberment(AD&D)

Accidentaldeathpoliciesorridersincludeadeathbenefit,whichispayableintheeventofdeathresultingfromaccidentalbodilyinjury.Acompanioncoverageisprovidedforlossoflimbsorsight,oftencalleddismembermentcoverage.

Whenyoubuythisadditionalcoverage,yourinsurancecompanywillattachaschedule,whichlistsvariousdismembermentsandlossesofsightforwhichspecifiedsumswillbepaid.Inpolicieswithweeklydisabilityincomebenefits,thesumpayableusuallyisexpressedasamultipleoftheweeklyindemnity.In

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policieswithoutweeklydisabilityincomebenefits,thesumspayableusuallyareexpressedaspercentagesofthedeathbenefitlimit,orsometimesaspercentagesofalimitinthepolicyknownastheprincipalorcapitalsum.

Theintentofthedismembermentfeatureistoprovideyouwithalumpsumthatwillhelpyouthroughanyperiodofrehabilitationortrainingforworkotherthanwhatyouusedtodo.

Insomecases,youmightbedisabledforawhileandduringthedisabilitysufferoneofthelosseslistedintheschedule.Inthissituation,youwouldbepaiddisabilityincomeuptothetimeofthelossoflimborsightonly.

Mostcompanypoliciesprovidethat,evenifyouarenotdisabledafteranaccident,ifalossoflimborsightoccurswithin90daysofthedateoftheaccident,thesumsintheschedulewillbepaid.

Accidentaldeathanddismembermentcoverageprovidesbothalifeinsuranceandahealthinsurancebenefit.However,thelifeinsurancebenefitappliesonlytoaccidentaldeathandisnotpaidfordeathbynaturalcauses.

PresumptiveDisability

Thisbenefitusuallyisconsideredoptionalandprovidesfortotaldisabilitybenefitsifaninjuryorsicknesscausesyouthetotalandirrecoverablelossof:

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speech;

hearinginbothears;

sightinbotheyes;or

useofbodilylimbs(hands,legs,etc.).

So,ifyouhaveastrokeandasaresultlosetheabilitytospeak,youhavesufferedapresumptivedisabilityandwouldbeentitledtototaldisabilitybenefitsforthedurationofthebenefitperiod.

Usually,therequirementthatyoubeunderthecareofaphysicianiswaivedduetothenatureofpresumptivedisabilities.

Theclaimsprocessusuallyissimplifiedwithpresumptivedisabilities.Normally,whenyouhaveadisabilityclaim,youandanattendingphysicianmustcompleteaclaimformperiodicallyeverymonth,onceaquarter,etc.forthedurationoftheclaim.

Forapresumptivedisabilityclaim,thereisasingleclaimformcompletedattheonsetoftheclaim.Duetotheseverityofthedisability,nofurtherclaimformsusuallyareneeded.

TransplantandCosmeticSurgeryBenefits

Mosthealthinsurancepoliciesexcludeelectiveorvoluntarysurgicalproceduresascoveredexpenses.

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Ifapersonchoosestohavenosesurgerypurelyforcosmeticreasons,theexpensewillnotbecovered.Thesameconceptgenerallyholdstrueinthecaseofapersonwhovoluntarilydonatesabodyorganaspartoftransplantsurgery.However,somedisabilityincomepolicieswillcoverinjuriesthatoccurastheresultofelectivesurgery.Underthesepolicies,ifaninsuredpersonbecomesdisabledasaresultofatransplantorcosmeticsurgery,heorsheonlyhastosatisfytheeliminationperiodanddisabilityincomebenefitswillbepaid.

LifeInsuranceandCash-ValueProvisions

Whileincomeinsurancepoliciesdonottypicallyaccumulatecashvalueorhavealifeinsurancecomponent,itispossibletopurchaseriderstoapolicythatprovidebenefitssimilartolifeinsurance.

Anannualrenewabletermlifeinsurancefeaturemaybeattachedtoadisabilityincomepolicy,providingadeathbenefit,aswellasdisabilityincomecoverage.

Similarly,areturnofpremiumridermaybeattachedtoadisabilityincomepolicy.Thisriderprovidesforthereturnofapercentageofpremiumspaid(usually80percent)duringaspecifictermperiod(usuallyevery10years),minustheclaimspaidduringthetermperiod.Therefundismadeevery10yearsandatage65orasofthedateofdeath.Essentially,foranaddi-

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tionalpremium,youget80percentofyourmoneybackeitherinclaims,premiumrefundsoracombinationofthetwo.

Varioussettlementoptionsareofferedforreceivingthepremiumrefund.Amountsleftondepositwiththeinsurancecompanyearninterestandconstitutecashvalue,ormaybeappliedtowardfuturepremiumpayments.

Conclusion

Optionalpolicybenefitsmaybeaddedtoeithertraditionalorresidualdisabilityincomeinsurancepolicies.Thepurposeoftheseoptionalbenefitsistoenhanceoverallprotectionandtohelpmeetyourspecificneeds.

Themorecommonoptionalbenefitsincludethefutureincreaseoptions,costoflivingrider,SocialSecurityriderandtheadditionalmonthlyincomerider.

Ofcourse,thisisnotanall-inclusivelistofoptionalincomebenefits.Theseoptionsarethemorecommonoptionalbenefitsprovidedbymostinsurers.Formarketingpurposes,acompanycancreateanytypeofrideroroptionalbenefitthathelpstomeettheneedsofthepublic,aswellasitsownmarketinggoals.

Ifyouneedanoptionalcoveragethat'snotincludedinanyofthesalesmaterialyou'veseen,askanagentorcustomerservicereptoaskaround.Aninsurancecompanycanalwayscustomizeamanuscriptendorsementthatmeetsyourneeds.

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Chapter12HowtoMakeanIncomeInsuranceClaimThroughoutthisbook,we'veconsideredanumberofdifferentkindsofinsuranceaspossibleincomeinsurancemechanisms.Thismakesitdifficulttodrawgeneralconclusionsabouthowtomakeclaimseffectively.Still,inthischapter,we'llconsiderhowtomakesureyouuseincomeinsurancewellwhenthetimecomestouseit.

Sincethemostspecificallyappropriateformofincomeinsuranceisdisabilityincomecoverage,we'llstartthere.Thismakessense,becauseotherformsofincomecoveragewhetherhealthinsurance,lifeinsuranceorstatutoryprogramstendtofollowthebasicrulesofdisabilityincomeclaims.

Short-TermDisability(STD)

Mostgroupshort-termpoliciesprovideforshorteliminationperiods(usually30daysorless)andshortbenefitperiods(usuallybetweensixmonthsandoneyear).Thebenefitamountislimitedtoapercentageofyourpre-disabilityearnedincomesuchas60percentor70percent.

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Theclaimsprocessforthesebenefitswillbefairlysimple.Youwillneedanattendingdoctor'saffidavitthatyouareinjuredseriouslyenoughthatyoucan'twork.You'llalsoneedtofilloutasimpleclaimformmostlyattestingtothefactthatworkers'comporothercoveragesdon'tapply.

Oneoftherationalesforshort-termdisabilityhasbeenthataninjuredpersonshouldbeeligibleforSocialSecuritydisabilitybenefitsafterthefive-monthSocialSecuritywaitingperiod.Inreality,thismayormaynotbetruedependingonwhetherthepersoncanmeetthestrictdefinitionofSocialSecuritydisability.

Inaddition,ifthepersondoesqualifyforbenefits,thefirstbenefitchecklikelywillnotbereceivedbeforeoneyearfromtheonsetofdisability.Inanyevent,STDbenefitsweredesignedtofillthegapuntilSocialSecuritybeganpayingbenefitstotheclaimant.

Long-TermDisability(LTD)

Long-termdisabilitypoliciesprovideforlongereliminationandbenefitperiodsthanshort-termpolicies.Typically,theeliminationperiodwillbe90daysorsixmonths.Mostoften,LTDpoliciesprovidebenefitstoage65;sometimestheyprovidebenefitsfortherestofyourlife.

Theamountofthelong-termbenefitalsoislimitedtoapercentageofyourpre-disabilityearnedincomefromalowof60percenttoahighof75percent,dependingonthepolicyandinsurancecompany.

TheclaimsprocessforLTDbenefitsisalittlemore

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complicatedthanforSTDbenefits.Normally,youandanattendingphysicianmustcompleteaclaimformperiodicallyeverymonth,onceaquarter,etc.forthedurationoftheclaim.Thiswillbeinadditiontotheinitialclaimformyou'llneedtocompletewhenyoufirstnotifythecompanythatyou'vebeeninjured.

Acaveat:Makesurethatyouinformthedisabilityinsurancecompanyassoonaspossiblewhenyou'vesufferedadisablingsicknessorinjury.Inmanycases,thecompanywon'tbegintheeliminationperioduntilit'sbeeninformedsobenefitsdon'tstartuntilsixmonthsorayearafterthat.InsurancecompaniespayingLTDbenefitsalsomaylookmorecarefullyintothestatusoftheclaim.(Theyaresupposedtousetheeliminationperiodtodothis,thoughmanydon'tstarttheirinvestigationsuntilthey'vestartedpayingbenefits.)

Acompanywilllookforanythingabouttheclaimthatmightdisqualifyitundertheexclusionssectionofitspolicy.Commonobjectionsinclude:

aclaimhasarisenfromoroccurredinthecourseofworkandthereforeshouldbecoveredbyworkers'comp;

thepolicyholderdidnotinformthecompanyabouttheinjuryorsicknessinatimelymanner;

thepersonmakingtheclaimisnottotallydisabledasthistermisdefinedinthepolicy;

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otheravailableinsurancereducesthebenefitsitmustpaytoasmallpercentageofpreviouslyearnedincome.

Thislastissuecanraiseallkindsofproblems.LTDpoliciesusuallyprovideforintegrationofplanbenefitswithotherdisabilityincomebenefitspayabletotheinsured.TheLTDbenefitmaybeoffsetbyanyofthefollowing:

anybenefitsprovidedbyanotherformalemployerplan;

benefitspayableunderworkers'compensationoranysimilarstatutoryprogram;

anybenefitspayableunderSocialSecurity.

Thepurposeforhavingintegrationwiththeseothersourcesofdisabilityincomeistopreventoverinsur-ance.

Theclaimsprocessusuallyissimplifiedwithpresumptivedisabilitieslikelossofvisionoralimb.Forthiskindofclaim,thereisasingleclaimformcompletedattheonsetoftheclaim.Duetotheseverityofthedisability,nofurtherclaimformsusuallyareneeded.

OccupationalVersusNon-Occupational

Bothshort-termandlong-termdisabilityincomepoliciesmaybeoccupationalornon-occupational.

Occupationalcoverageprovidespaymentfordisabilityarisingoutofaccidentsoccurringonoroffthejob.

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Non-occupationalcoverageprovidespaymentonlyfordisabilitythatisnotwork-related.

Usually,grouphealthinsurancepoliciesdonotincludeoccupationalcoverage,becauseitiscoveredbyworkers'compensationinsurance.Anoccupationalpolicypaysbenefitswhetherornotthedisabilityiscoveredunderworkers'compensation;anon-occupationalpolicydoesnotpayifworkers'comppays.

Non-occupationalcoveragecostslessthanoccupationalcoverage.

BenefitsCalculation

Youhavecontroloveronecriticalpieceofhowyourdisabilityincomebenefitsarecalculated.Becausethesizeofthechecktheinsurancecompanysendsyouisbasedonwhatpercentageofyourpre-disabilityincomeyou'remaking,youhavesignificantinfluence.Withinsomelimits,youcandecidewhetherornotorhowquicklytoreturntowork.

But,asidefromtheissueofhowquicklyyoureturntowork,theinsurancecompanycontrolsmostoftheprocess.

Becauseofthenumerousotherfactorsinfluencinganydisabilityclaim,insurancecompaniescanusesomesubjectivejudgmentindeterminingthesizeofbenefittheywillpayinanygivenclaim.Butthisdiscretionisn'tabsolute.Thecompany'scalculationshavetofollowtherulesestablishedinthepolicy.

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Akeyissueinthiscalculation:residualbenefits.Adisabilityincomepolicythatpaysresidualdisabilitybenefitsprovidesanincentiveforyoutoreturntowork,becauseitpaysproportionalbenefits.Atotaldisabilityonlypolicyimpliesthatyoucannotreturntoworkforanylengthoftimewithoutlosingallbenefits.

Residualpoliciesmayrequireaminimumlossof20percentofpre-disabilityincomebeforebenefitsareprovided.So,a5percentor10percentlossofpre-disabilityincomewouldnotresultinanyresidualbenefit.

Conversely,manyinsurerswillpay100percentofthetotaldisabilitybenefitifyouhavesufferedmorethanan80percentlossofpre-disabilityearnings.Soapersonwitha90percentlossofpre-disabilityincomewouldreceivearesidualbenefitequalto100percentofthetotaldisabilitybenefit.

Intermsofclaims,animportantfactorishowtheinsurancecompanyviewspre-disabilityincome.Generally,acompanymayrequireevidenceofincomebymeansoftaxreturnsorcopiesofW-2s.Thissolvestheproblemofwhatismeantbyincome.

Ontheotherhand,taxformsdon'talwaystellacompletestory.Certainkindsofemployeescommissionedsalesrepresentativesareagoodexamplehaveearningsthatfluctuate.Inthesesituations,pre-disabilityincomemaybedefinedastheaverageearnedincomeforaspecifiedperiod(suchastwoyears)priortotheonsetofadisability.

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LumpSumBenefits

Lumpsumbenefitsunderdisabilityincomeinsurancepolicieswereoncepaidmorefrequentlythantheyaretoday.

Withmodernsafetymeasuresandenforcement,accidentsintheworkplacearelessfrequent.Withtheincreaseinmedicaltechnology,totalandpermanentdisabilityisalessfrequentoutcome.Therefore,installmentdisabilityincomepaymentsaremorefrequentlyusedtopaydisabilityincomebenefits.

Lumpsumbenefitsusuallywillbepaidunderpresumptivedisabilityorunderspecialpoliciescoveringacompany'sbuy-sellagreements.

LifeInsuranceClaims

Lifeinsuranceclaimsrelatedtolostincometaketwoforms:disabilityincomeriderstolifeinsurancepoliciesandacceleratedorlivingneedsbenefits.

Thedisabilityincomeridersusuallywillfollowtheclaimsprocessesusedbystandarddisabilityincomepolicies.

Theacceleratedorlivingneedsbenefitsaremorelikelifeinsurancebenefits.Thismeansthey'resometimeseasiertoclaimthandisabilitybenefits.Mostimportantly,theyleaverelativelylittletothediscretionoftheinsurancecompany.Ifyouqualifyforacceleratedbenefits,thecompanyhastogivethemtoyouwhenyoufiletheappropriateclaim.

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(Thesameistrueforloansonaccumulatedcashvalueandotherlifeinsurance-relatedprocedures.)

Acaveat:Thisdoesn'tmeanacceleratedbenefitsareawonderfulsolution.Theyusuallycomeatasteepdiscountfromthefacevalueofyourpolicy.Ifyouhaveawholelifepolicywithafacevalueof$100,000,youmayonlybeabletoget$70,000inacceleratedbenefitsandaslittleas$5,000or$10,000inapolicyloan.

Long-TermCareClaims

ThemainconcernspeoplehavewhentheymakeLTCinsuranceclaimsaretax-related.

Whiledisabilityincomebenefitsunderindividualpoliciesarereceivedtax-free,LTCbenefitscurrentlyaretaxableinmostcases.ThedebateoverthenatureofLTCinsuranceisnotfullyresolved.

Manyoftheservicesprovided(housing,meals,etc.)donotreflectmedicalcareortreatment,butotherservices(nursingcare,homehealthcareandphysicaltherapy),whichmayincludeelementsofmedicaltreatmentormayrequireacertificationofmedicalnecessity.SomelawmakersarearguingthatLTCinsuranceshouldbetreatedmorelikemedicalcoverage,andthatthetaxlawsshouldbechanged.

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SocialSecurityClaims

TheclaimsissuesrelatingtoSocialSecuritydisabilityincomecoveragerelatemostlytothedifficultdefinitionofdisabilitytheprogramuses.

Statistically,onlyaboutoneinthreeSocialSecuritydisabilityclaimantsevercollectsbenefits.Thisistrueforseveralreasons.

Eligibilityrequiresthefollowing:

youhavefullyinsuredanddisabilityinsuredstatus;

youareunderage65;

thedisabilityisexpectedtolastforatleast12monthsand/orendindeath;and

youhavesatisfiedafive-montheliminationperiodfollowedbysubmissionofanapplicationforbenefits.

Theunderage65requirementisduetothefactthat,atage65,anydisabilitybenefitsbeingpaidbecomeretirementbenefits.Thus,thedisabilitymustbeginpriortoage65.

Inadditiontotheageandstatusrequirements,aworkeralsomustsatisfytheSocialSecuritydefinitionoftotaldisability.Totaldisabilityisdefinedas:

Theinabilitytoengageinanysubstantialgainfulactivitybyreasonofanymedicallydeterminedphysicalormentalimpairmentwhichcanbeexpectedtoresultindeathorlastforatleast12months.

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Thisdefinitionisveryrestrictive.Itobviouslyeliminatesbenefitsforanyshort-termdisabilityorarelativelyinsignificant,non-life-threateningdisability.

Generally,anapplicationforbenefitswillbefiledsometimeduringthefifthmonthofdisability,becausethereisafive-montheliminationorwaitingperiod.Claimsapplicationsmaybesubmittedretroactivelyupto12monthsaftertheonsetofthedisability.Thedisabilitymustbesoseverethatapersonisunabletoengageinanyemploymentthatexistsinthenationaleconomyregardlessofwhethersuchworkisavailableintheimmediateareawherethepersonlives.

InadditiontomeetingtheeligibilityrequirementsofanemployeeandpayingSocialSecuritytaxes,eligibilityforSocialSecuritybenefitsisdeterminedbyyourinsuredstatus.

Therearebasicallythreeformsofinsuredstatus:

fullyinsured;

currentlyinsured;and

disabilityinsured.

Theactualdisabilitybenefitisequaltoyourprimaryinsuranceamount(PIA).ThePIAisbasedontheaverageearningshistoryuponwhichSocialSecuritytaxeshavebeenpaid.Inaddition,theactualdisabil-

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itybenefitisaffectedbyyourageattheonsetofthedisabilityandyourdependentstatus.

Disabilitybenefitsmaybereducedtooffsetbenefitsreceivedfromworkers'compensationandanystatutorydisabilityplan,suchasafederalorstatedisabilityplan.ThisreductioninbenefitswillbemadeiftheSocialSecuritybenefitsplusthestatutoryplanbenefitsexceed80percentofyourpre-disabilityaverageearnings.

Certainbenefitsarenotsubjecttothisoffsetrule.VeteransAdministration(VA)benefitsareexcluded,asareprivatepensionorinsurancebenefits.

Thesummaryjudgmentinthe1995federaldistrictcourtcaseVirginiaRommelv.FirstUnumLifeInsuranceCo.dealtwithwhetherornotFirstUnumcoulddeducttheamountofSocialSecuritydisabilitybenefitsRommelreceivedfromtheamountofbenefitsitpaidtoherunderalong-termdisabilityinsurancepolicy.Rommelarguedthatitcouldnot,andthisdeductionconstitutedabreachofcontract.

InOctober1990,Rommelwasinjuredinanautomobileaccident.Atthetime,shehadbeenemployedbyUticaMutualInsuranceCo.inNewHartford,NewYork,forabout18years.Heremployerpurchasedlong-termdisabilityinsuranceforitsemployeesfromFirstUnum.AlthoughRommelbrieflyreturnedtoworkparttimeinearly1991,shecompletelystoppedworkinginMay1991.

Afterexhaustinghershort-termdisabilityinsurancebenefits,whichSecurityMutualpaid,Rommelbeganreceivinglong-termdisabilityinsurancebenefitsfrom

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FirstUnuminApril1992.ShealsoreceivedbenefitsfromAllstate,herautomobileinsurancecarrier,underherpolicy'sno-faultlostwageandpersonalinjuryprotectionprovisions.

RommelappliedfordisabilitybenefitsfromtheSocialSecurityAdministrationasrequiredbyherinsurers.AlthoughSocialSecurityinitiallydeniedherclaim,theagencygrantedRommel'sappeal.InadecisiondatedJune1992,SocialSecurityawardedRommeltotaldisabilitybenefitsretroactivetoMay1991.Shereceivedanawardletterfromtheagencyinmid-July1992.

AfterRommelbeganreceivingSocialSecuritybenefits,eachoftheinsurersdeductedtheSocialSecuritybenefitamountfromtheamountofmoneyitwaspayingherunderitsrespectivepolicy.TheinsurersalsodemandedreimbursementforcertainbenefitstheyoverpaidbetweenMay1991andJune1992,becausetheretroactiveSocialSecurityawardcoveredthatperiod.

Rommelattemptedtoresolvethedisputethrougharbitrationinearly1993,butonlyAllstateparticipatedintheproceedings.ShesubsequentlycommencedalawsuitinNewYorkStateSupremeCourtinOctober1993.

Rommelrequestedadeclaratoryjudgmenttodeterminewhatbenefitseachinsurershouldpayher.ShealsoclaimedthattheoffsetsofherSocialSecuritybenefitsbyFirstUnumandAllstatebreachedherinsurancecontracts.SecurityMutualraisedacounterclaimagainstRommelforreimbursementof$3,599.34inbenefitspaidthatshouldhavebeenoffsetbyRommel'sSocialSecuritybenefits.

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FirstUnumremovedtheactiontofederalcourtonJanuary5,1994.Initsmotionforsummaryjudgment,FirstUnumcontendedthatRommel'sstatelawclaimsagainstitwerepre-emptedbytheEmployeeRetirementIncomeSecurityAct(ERISA).

Rommelcontendedthatpre-emptionwouldbeinappropriatebecause''thereisabsolutelynolanguageconcerningmyrightsunderERISAasalleged[bythedefendant]."However,theversionsoftheinsurancepolicyprovidedtothecourtbyRommelandFirstUnumeachcontainedidenticalcoverpageswithanexplicitreferencetoERISA.Further,thecourtdeterminedthetriggerforERISApre-emptiongenerallyis:

astatelaworcauseofactionhaving"aneffectontheprimaryadministrativefunctionsofbenefitplans,suchasdetermininganemployee'seligibilityforabenefitandtheamountofthatbenefit."

SinceRommel'sstatelawclaimsclearlyrelatetothecalculationofherlong-termdisabilityinsurancebenefits,thecourtconcludedthattheywerepre-emptedbyERISA.Therefore,shewaslimitedtotheremediesaffordedbythestatute'scivilenforcementprovisions.

Thecourtpointedout:

Importantly,ERISAdoesnotmandateparticularbenefits,butinstead"governsplanoperations,providesrulesoffiduciaryresponsibilityandsetsforthdisclosurerequirementstofurtherERISA'spolicyofprotectingtheinterestsofplanparticipantsinthebenefitsthatemployersdoelecttoprovide."

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Section1132ofERISAprovidesthataplanparticipantorbeneficiarymaybringacivilaction"torecoverbenefitsduetohimunderthetermsofhisplan,...ortoclarifyhisrightstofuturebenefitsunderthetermsoftheplan."AplanparticipantorbeneficiaryalsomaybringalawsuitunderERISA"toenjoinanyactorpracticewhichviolatesanyprovisionofthissubchapterorthetermsoftheplan."Finally,ERISAprovidesacauseofactionforbreachoffiduciaryduty.

Atthispoint,FirstUnumcontendeditwasentitledtosummaryjudgmentbecausethepolicylanguageunambiguouslypermitstheinsurertosetoffSocialSecuritybenefitsfromlong-termdisabilityinsurancepayments.Inthealternative,FirstUnumcontendedthatRommel'sclaimsmustbedismissedasprematurebecauseshefailedtoexhaustrequiredadministrativeremedies.

RommelrespondedthatFirstUnumbreacheditsfiduciarydutytoherunderERISA.

WhileRommelcomplainedthatitwasimproperforFirstUnumtooffsetherSocialSecuritydisabilitybenefitsfromtheamountofbenefitstheinsurerpaidher,thecourtfoundthat"undertheclearlanguageoftheFirstUnumpolicy,suchdeductionsarepermissible."Thus,thecourtdeterminedthatRommelwasnotentitledtogreaterbenefitsfromFirstUnum,andtheinsurer'sactionsdidnotviolatethetermsoftheplannordidtheybreachanyfiduciarydutybyimplementingtheplanlanguage.

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WhileRommel'scounselarguedthatimposingtheoffsetswasunfairinRommel's"particularsituation,"therebygivingrisetoafiduciarybreach,thecourtdidnotagree:

...JustasERISAdoesnotmandatetheprovisionofspecificbenefits,thestatutedoesnotrequireplanfiduciariestorenegotiateplanbenefitsonanindividualbasis.Moreover,itmaybeafiduciarybreachifplanadministratorstreatbeneficiariesdifferentlyfromoneanotherinvariancewiththeplan'sprovisions.

Thecourtdecidedthatsummaryjudgmentwasappropriateonthesegrounds,andgrantedit.

Workers'CompClaims

Underaworkers'compprogram,disabilityincomebenefitscompensatetheinjuredemployeeforlostorreducedearningcapacitythatresultsfromacompensableinjuryoroccupationaldisease.Thebenefitsarepaidwithoutmuchdiscretionontheinsurancecompany'spartwhentheworkerisunabletoperformallorpartofhisorherregularduties.

Acaveat:Theonepieceofcontrolinsurancecompanieshaveoverworkers'compdisabilitybenefitsisevidencethataclaimisfraudulent(andtherearequiteafewofthese).Ifyou'remakingadisabilityclaimunderoneoftheseplans,bepreparedtoreportyourstatusonaregularbasisandtodealwithskepticalclaimsreps.

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Workers'compbenefitsarepaidinfourdesignatedclassesofdisability,asfollows:

permanenttotal;

temporarytotal;

permanentpartial;and

temporarypartial.

Awaitingperiod(usuallythreetosevendays)appliesbeforebenefitsforlossofwagesbegin.Ifthedisabilitycontinuesbeyondalongerperiod(usuallytwotofourweeks),retroactivebenefitswillbepaidfortheinitialwaitingperiod.

Forpermanenttotaldisabilityortemporarytotaldisability,thebenefitisapercentageoftheinjuredperson'sweeklywagesbeforetheinjury.Thisamountissubjecttostatedminimumandmaximumdollaramounts.Withineachstate,thepercentageisthesameforeithertypeoftotaldisability(662/3percentismostcommon).

However,forpermanenttotaldisability,thedollarmaximumandthebenefitperiodareusuallygreater.Benefitsforpermanenttotaldisabilityoftencontinuetoage65,whilebenefitsforatemporarytotaldisabilitymaybelimitedtoamaximumnumberofweeks.

Peoplewithpartialdisabilitiesareabletoperformsomework,sothelawsprovideabenefitequaltoapercentageofthewageloss(differencebetweenearningsbeforeandaftertheaccident).Inadditiontobenefitsforlostwages,thestateprovidesscheduledbenefitsforspecificpermanentpartialdisabilities,such

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aslossoflimbs,sightorhearing.Usually,thesebenefitsarepaidinadditiontoanyotherincomebenefits.

MedicareClaims

MedicareeligibilitybasedondisabilitymeansthatyouaretotallydisabledandcollectingSocialSecuritydisabilityincomebenefitsorhaveamajorkidneyproblemrequiringdialysis.Specifically,youmusthavebeencollectingSocialSecuritydisabilityincomebenefitsforatleast24monthsinordertoattainMedicareeligibility.(Thismeans24monthsofcompensabledisability,plusthefive-monthwaitingperiod.So,after29monthsofdisability,youareeligibleforMedicare.)

(There'soneexception:Eligibilityduetokidneyfailureortransplantrequiringdialysisiseffectivewiththefirstdayofthethirdmonthfollowingthemonthinwhichdialysisbegan.Inessence,thismeansthereisathree-monthwaitingperiod.)

Finally,Medicarebenefitsareinfluencedgreatlybywhetherornotyourdoctorisaparticipatingphysician.AparticipatingphysicianisonewhohasbeenapprovedtoreceivepaymentdirectlyfromtheSocialSecurityAdministration.HeorshehasagreedtoaccepttheamountspaidbyMedicare.Anon-participatingphysicianisnotapprovedbyMedicarefordirectpaymentandmaychargemoreforservices.Medicarewillcoverthesechargesonlyuptoitspredeterminedlimit.

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Acaveat:AdisabledpersononMedicaremayhavetopayexcesschargesifhisorherdoctorisanon-participatingphysician.

Conclusion

Makinganincomeinsuranceclaimcanbedifficult,becausetheamountofmoneyinvolvedcanbesubstantialoveralongperiodoftime.Bepreparedtodealwithabureaucracywhenyoumakeaclaimit'showthesystemweedsoutfraudulentorquestionableclaims.

You'llhavetofileinitialclaimformsandmaintainregularstatusupdatesinordertokeeplong-termbenefitscomingin.

Theprocesscangetevenmoredifficultifyou'rerelyingononeofthestatutoryprogramsworkers'comp,stateunemploymentinsuranceorSocialSecurityforcoverage.Theseprogramsareevenmorebureaucratic.Andtheyofferevensmallerbenefits.

Whileyoumaychoosetousealifeinsurancepolicy,statutoryprogramorsomeotheralternativetoinsureyourincome,theclaimsprocessmakesonepointstrongly:ThebestwaytohaveaclaimpaidpromptlyandwellistomakeitonanindividualLTDpolicy.

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Chapter13BusinessUsesofDisabilityInsuranceManyproblemsarisethatcanaffectthefinancialsecurityofabusinessanditsheirs.Ofprimaryconcernistheeconomicdeathofthebusinessowner.Economicdeathiscausedbyadisabilityduetoaccidentorsickness.

Whenadisabilitystrikes,yourmostvaluableassetislostyourabilitytoearnanincome.Whenyouaretheownerofabusinessorakeyemployee,thereexistsadualfinancialimpact:onyourfamilyandonyourbusiness.

Thischapterwillcoverthebusinessusesofdisabilityincomeinsuranceasprotectionagainsttheriskofeconomicdeathcausedbyadisability.

DisabilityBuy-SellAgreements

Theeffectofapermanentdisabilityoradisabilityofseveralyearsdurationcanbefinanciallydevastatingforthefamilyofthedisabledperson.Ifthispersonistheownerofabusiness,thefinanciallosscanaffectfarmorepeople.

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Therisksareevenmorecomplexwhentheownershipstructureisapartnershiporacorporationwithseveralkeystockholders.

Thechanceofadisabilitystrikingoneofseveralindividualsduringa20-yearbusinessrelationshipisveryhigh.Thefollowingchartillustratestheprobabilityofadisabilitystrikingamemberofasmallgroup.TheProbabilityofaLong-TermDisabilityOccurring

WithinaSmallGroupNumberofPeopleintheGroup

Age 2 3 4 5 625 82.2% 92.5% 96.8% 98.7% 99.4%35 75.1% 87.6% 93.8% 97.0% 98.5%45 63.6% 78.0% 86.7% 92.0% 95.2%55 43.2% 57.2% 67.7% 75.7% 81.7%Source:1985CIDATableandthe1980CSOTable

Buy-sellagreementsarecommonenoughincloselyheldbusinessesbuttheyareusuallybuiltaroundthedeathofanowner.However,theycanbebuiltaroundthedisabilityofanowner.

Example:PamandDebbieoperateapreschoolnurseryprogramasapartnership.Pamisseverelyinjuredinanautoaccidentandistotallydisabled.Theprognosisisthatherdisabilityprobablywilllastseveralyears,andthatshewillneverfullyrecoverfromherinjury.(Continuedonnextpage)

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(Continuedfrompreviouspage)Debbienowhastoworktwiceashardtokeepthebusinessonitsfeet.Atthesametime,Pamneedsherincometocontinue.HowlongcanDebbiecontinuetoworktwiceashardandprovideanincometohernon-productivepartner?EvenifthepartnersdecidetohireandtrainareplacementforPam,thereareproblemswherewillDebbiefindthetimeandmoneyneededtoaccomplishthistask?

WithoutdisabilityincomeinsurancetocoverPam,thepartnershipseemstobedoomedtofail,andDebbiemaybeforcedtoassumetheroleofaliquidatingtrustee.Adisabilitybuy-sellagreementisusuallypartofadeathagreement.Mostoftheprovisionsapplicableintheeventofdeathalsoapplyintheeventofdisability.Themaindifferenceisamatteroftiming.

Inthetypicalbuy-selldealtriggeredbythedeathofanowner,theprocessisdesignedtobecompletedwithinafewweeksofthedeath.Fundsbecomeavailablefromalifeinsurancepolicyforthepurchaseofthedeceased'sinterest.Thetermsofthedealhavebeensetinadvance.Thedealcloses,andtheotherownersmoveon.

Whenanownerbecomesdisabled,otherissuescomplicatetheproceedings.Thedisabledownermaynotwanttosell.Partnersormanagersmaynotwanttoseethedisabledownerleave.Sometimes,anowner'sfamilymembersgetinvolvedinthesituationpromotingtheirownagendas.

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Adisabilitybuy-sellagreementshouldcontainprovisionswhichstatethat,intheeventofadisability,thepartiesinvolvedwillbeboundbytheagreementandthebuyoutwillbetriggeredafterareasonablelengthoftimehaselapsed.

Dependingonthedisability,youmayormaynothavetheopportunitytorecoverfully.Recoverymightoccurwithinamatterofweeksormonthsorpossiblyyears.Orthelengthofthedisabilitysimplymayremainunknown.Adisabilitybuy-sellprovisionwillhavetoallowforthisuncertainty.Forthesereasons,oneofthecriticalconsiderationswithreferencetoadisabilitybuy-sellagreementistheeliminationperiodofthecoveragethatwillfundthebuyout.Oncetheeliminationperiodissatisfied,benefitswillbegintobemadetothebusinessforthepurposeofbuyingouttheinterestofthedisabledownerorpartner.

Inmostcases,oncethebuyoutbegins,itcannotbestopped.So,ifadisabledpartnerdoesnotwanttobeboughtouttoosoon,theagreementshouldincludealongeliminationperiod.(Thishastheaddedadvantageofmakingthefundinginsurancepolicycheaper.)

It'scommonfordisabilityincomeinsurancelinkedtoabuy-sellagreementtohaveaneliminationperiodofoneortwoyears.Thisgivesadisabledownerachancetorecoverandprotectshisorherbusinessinterestsfromtoo-quickliquidation.

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FundingaDisabilityBuyout

Wherewillthemoneycomefromtocompletethedisabilitybuyout?Andwillthedisabledstockholderhaveadequatefamilyincomeduringtheeliminationperiod?

Theanswertobothquestionscancomefromdisabilityincomeinsurance.Adisabilityincomepolicyalsowillanswerotherquestionsthatoftenoccurinstressfulcircumstances:

Whatistheexactsumofmoneythatwillbeavailable?

Willitbetherewhenweneedit?

Whowilldefinewhenanowneristotallydisabled?

Whattaximplicationswillfollowanybuy-selldeal?

Usually,thebusinessistheownerandpremiumpayorforthepolicyorpolicies.Thepremiumsarenotdeductible,butthebenefitsreceivedbythebusinessaretax-free.

Theamountnecessarytocompletethebuyoutwillbedeliveredexactlywhenneeded,duetothefilingofthedisabilityclaim.Inaddition,thepolicy'seliminationperiodnormallywillcorrespondtothewaitingperiodintheagreement.Thus,ifthebuyoutistobeginoneyearaftertheonsetofdisability,thedisabilitypolicywillbeissuedwithaone-yeareliminationperiod.

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Theinsurancecompany,inaccordancewiththepolicy'swording,willdeterminetotaldisability.Totaldisabilityofanownerwill,inturn,triggerthebuyout.

Typically,totaldisabilityisdefinedasthe''inabilitytoperformthedutiesofone'soccupation."(Thisisaliberaldefinition,though.Somepoliciesmayuseadefinitionthat'smorerestrictiveandspecificaboutwhatapersonmustnotbeabletodoinordertobeconsideredtotallydisabled.)

Usingthepolicy'sdefinitionoftotaldisabilityremovesanydoubtorargumentastothedegreeofdisabilityanownerhassuffered.Stockholdersorpartnersdonotdecidewhenapersonisdisabled.Thepolicyandtheinsurancecompanydo.

Providingafundeddisabilitybuyoutoffersthefollowingadvantagestotheremainingowners:

itassuresthattheremainingstockholderswillmaintaincontrolofthebusiness;

itenablesthestockholderstokeepinexperiencedfamilymembersofthedisabledstockholderfromengaginginthebusiness;

itguaranteesthatacompetitorwillnotpurchasetheinterestofthedisabledstockholder;and

itprovidesforcontinuityofmanagementandbusinessactivity,whichisbeneficialtocustomersandexistingemployees.

Theadvantagesofafundeddisabilitybuyoutforthedisabledownerinclude:

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theestablishmentofadefinitemarketandvalueforhisorherbusinessinterest;

assurancethatfamilymemberswillnotbeforcedintothebusinessinordertomaintaintheireconomicwelfare;and

assurancethatthebuyoutwillonlyoccurafteranagreed-uponperiodoftimehaselapsed.

Inaccordancewiththeagreement,thebuyoutmayconsistofalumpsumsettlementafterthewaitingperiod,oritmaybeaseriesofmonthlyinstallmentsforaperiodofafewyears.Thedisabilityincomepolicy'sbenefitperiodnormallywillmatchthisinstallmentprovisionbyprovidingmonthlybenefitsforaperiodoftwo,threeorfiveyears.Italsomayprovideforalumpsumpaymentfollowingtheeliminationperiod.

Toaccompanythegeneralconceptofthedisabilitybuy-sell,therealsoshouldbeindividualdisabilityincomeinsuranceforeachofthestockholdersorpartners.Thepurposeofthisadditionalcontractistoprovidemonthlyincometothedisabledstockholder.Thisrelievesthecorporationofanymoralobligationordilemmaregardingtheneedtoprovideincometotheindividualfollowingthedisability.

Afinalnote:Acompanycanbuydisabilityinsuranceonanykeyemployeenotjustowners.Thebenefitissuesandtaxissuesworkthesameway.

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BusinessOverheadExpenseInsurance

Whensomesmallcompaniesloseanownertoadisability,someoralloftheircashflowcanbeinterrupted.Thisisparticularlytrueofprofessionalservicesgroups,suchaslawfirms,adagenciesormedicaloffices.

Onesolutiontothisproblemisthebusinessoverheadexpense(BOE)policy.

Thistypeofdisabilityincomepolicyreimbursesthebusiness(notthebusinessowner)foractualoverheadexpensesincurredduringaperiodoftotaldisabilityoftheowner.Typically,thispolicyissoldwithaneliminationperiodof30to90daysandabenefitperiodofoneortwoyears.Theamountofcoverageprovidedisdirectlyrelatedtotheaverageoverheadexpensesincurredbythebusiness.

ExamplesofcoveredoverheadexpensesundertheBOEinclude:

employeesalaries,fringebenefitsandpayrolltaxes;

rent,telephoneandotherutilities;

accountingandlegalfees;

insurancepremiums;and

othernecessaryexpensesincurredintheoperationofthebusiness.

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Acaveat:Thedisabledowner'ssalaryisnotcoveredundertheBOE.Thecostofequipmentorfurniturealsonormallyisexcluded.MostinsurancecompaniesonlyofferBOEpoliciestorelativelysmallbusinesses.GeneralMotorswouldnotbeeligibleforaBOE,duetotheamountofoverheadexpensesnecessarytooperatethecompanyandthefactthat,ifitsCEObecamedisabled,GMwouldcontinuetooperatewithoutsufferinganydirectfinanciallosses.

SincetheBOEreimbursesforexpensesactuallyincurred,themonthlybenefitpayableunderthepolicymayvary.Thus,ifthepolicyownerhasamaximumbenefitof$5,000permonth,theactualbenefitpaidcouldbelessthan$5,000dependingontheamountofoverheadexpensesinaparticularmonth.

OnevariationonthestandardBOEpolicypermitsthepolicyholdertoapplyunusedbenefitdollarsfromonemonthtocoverexpensesthatexceedthemaximumbenefitinanother.

Anothervariationpermitsunusedbenefitamountstobeappliedtoexpensesincurredaftertheendofthebenefitperiod.Inessence,thisextendsthebenefitperiodequaltotheamountofunusedbenefitdollars.

AuniquefeatureoftheBOEpolicyisitstaxtreatment.Thepremiumpaidistax-deductibletothebusinessasanecessarybusinessexpense.Thisresultsintaxablebenefitspaidtothebusinessduringaperiod

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ofdisability.However,thesebenefitpaymentsareusedtopaytax-deductiblebusinessexpenses,thuswashingawaythetaxliability.

DisabilityReducingTermInsurance

It'scommonforabusinesstoincuraloanorotherfinancialobligationthatrequiresmonthlypayments.Insomecases,themonthlypaymentcanbemadeonlyaslongastheownerremainsabletorunthebusiness.

Toprotectthefinancialobligationandtheassetsthatcouldbelostincaseofdefaultthebusinesscanpurchaseadisabilityreducingtermpolicy,whichprovidesamonthlybenefittocoverloanobligationsinthecaseoftotaldisability.

Thebusinesspurchasesandownsthepolicy,theowneristheinsuredperson,andthebusinessisthebeneficiaryofthemonthlybenefit.Premiumsarenottax-deductibletothebusiness,butbenefitsarereceivedtax-free.

Thephrasereducingtermreferstothefactthatthefullmonthlybenefitispayableonlyfortheremainingtermofindebtednessorobligation.

SalaryContinuationPlans

Anotherusefordisabilityincomeinsuranceistofundaformalsickpayplanorsalarycontinuationagreement.

Asickpayplanisaformalprogramforcontinuing

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thecompensationofkeyemployeesincludingthebusinessownerandworkingstockholders.Theplanisusuallybestfundedwithdisabilityinsurance(individualorgroupdisabilitypoliciesmaybeused).

IftheplanisestablishedinaccordancewithSection105oftheInternalRevenueCode,ithascertaintaxadvantages.Forasickpayplantobevalidandthustax-deductibletothecorporationitmustbe:

effectivebeforethedisabilitycommences;

formalizedinwriting;and

communicated(inwriting)totheemployees.

Non-compliancewiththeIRSrequirementswillcostthecorporationthetaxdeduction.

Whenakeypersonbecomesdisabled,itistoolatetoinstallaplan.Ifmoneyispaidtoadisabledownerduetotheimplementationofasickpayplanaftertheownerhasbecamedisabled,itistreatedasadividendandnotadisabilityincomebenefit.

ByestablishingaformalplaninaccordancewithIRSCode,anypaymentsmadearenecessarybusinessexpenses.Ifthecompanyfundsthesickpayplanwithdisabilityincomecontracts,thepremiumspaidaretax-deductibletothecorporation(thoughtheywillbetaxabletoemployeesassickpayusuallyis).

ItalsoshouldbenotedthatsickpaybenefitsaresubjecttoSocialSecuritytaxes(FICA)forthefirstsixmonthsofsuchdisabilitybenefits.

Ifthesalarycontinuationplanisunfunded,corpo-

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ratepaymentsmadetothedisabledemployeearestilltax-deductible(justasinsurancepremiumswouldhavebeen).Anunfundedplanoffersthedisadvantageofusingcorporatedollarsinsteadoftheinsurancecompany'smoney.Also,whenthedisabilitystrikes,there'snoassurancethatcorporateincomewillbeabletosustainthenecessarypayments.

Thefundedsalarycontinuationagreementcomplementsthedisabilitybuy-sellorBOEplan.Neitheroftheseplansprovidereplacementoflostincometothedisabledowner.

Finally,aformalsickpayplancanattractandhelpkeepkeyemployees.Keyemployeesaredifficulttofindandoftenarejustasdifficulttoretaininacompany.Generally,thistypeofemployeeconsiderswork-relatedbenefitsavitalpartofthetotalcompensationpackage.Employeeswhoparticipateinaformalsalarycontinuationplanhaveatendencytostaywithcompaniesthatprovideahighdegreeoffinancialsecurity.

GroupDisabiltyPlans

Whenafirmimplementsaformalsalarycontinuationprogramforkeyexecutives,itiscustomarythatasimilarprogrambeinstalledforthebenefitofallemployees.Mostoftenthiswilltaketheformofgroupdisabilityincome.

Agroupdisabilityincomeplanmaybeinlieuofaformalsalarycontinuationprogramandthuscoverallemployees,includingthekeyemployees.Italsomaybeforthoseemployeesnotcoveredbyaformalsickpayplan.

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Groupbenefitsmaybeshort-termorlong-term.Short-termbenefitsusuallyarepayableforuptooneortwoyears.Mostfrequently,theshort-termbenefitperiodisoneyear.Short-termpoliciesusuallyhaveshorteliminationperiodssuchas15or30days.

Generally,thegroupdisabilitypolicyispaidforbytheemployeronatax-deductiblebasis.Benefitsaretaxabletotheemployee.However,theseplansmaybeimplementedonapayrolldeductionbasis,wherebytheemployeespayallorpartofthecostoftheplan.

Inapayrolldeductionplan,anycontributionfromtheemployeewillnotbetax-deductibletotheemployee,butanybenefitsreceivedwillbetax-free.(Payrolldeductionplansmayuseindividualdisabilityincomepoliciesinlieuofgroupcontracts,particularlyiftheentirepremiumisbeingpaidbytheemployee.)

Manyoftheadvantagescommontothesickpayplanforkeyemployeesareapplicabletogroupdisabilityplans.Thesewouldincludethefactorofincreasedemployeeloyalty,improvedworkperformanceandtheelementofattractingandretaininggoodemployees.Theemployeesexperienceadegreeoffinancialsecurity,shouldtheybestruckwithatotaldisability.

Underagroupdisabilitycontract,thereisnormallynorequirementforindividualstoproveinsurability.Thisenablessomeonewhoisasubstandardrisktoacquiredisabilityincomeprotectionregardlessofhowshakyhisorherhealthhistoryorcurrentphysicalconditionmaybe.

Generally,groupcoveragewillbelesscostlyfortheemployeethanindividualcoverage.Forsomehigh-riskprofessions,thisisavaluableconsideration.

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Acaveat:Whenanemployeeparticipatesingroupcoverage,hisorhercoverageisbasicallyrented.Theemployeedoesnotownthepolicy.Theemployeristhepolicyowner.Theemployercanterminatethepolicy.Iftheemployeeterminatesemployment,thedisabilitycoveragealsoisterminated.Workingfortheemployerisaconditionofhavingthecoverage.

AssociationDisabilityPlans

ProfessionalassociationssuchastheAmericanMedicalAssociationortheAmericanBarAssociationofferassociationdisabilityincomecoveragetotheirmembers.Often,thiscoverageisprovidedasaninducementtoattractmembership.

Associationdisabilityplansfunctionverymuchlikegroupplans.However,therearesomedifferences.

Technically,associationcoverageisindividualcoverage.Asamemberofaprofessionalassociation,thepersonwillcompleteanapplicationforinsurance,andanindividualpolicywillbeissuedthroughtheassociation.

Associationplansarepackagedplans,inthatonlycertaineliminationperiods,benefitperiodsandbenefitamountsareofferedtomembers.

Premiumsforassociationcoverageusuallyarebanded.Thatmeanstheyaregroupedbasedonincrementsof

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age.Forexample,everyonebetweentheagesof25and30paysthesamepremium;otherbandsoffive(or10)yearscontinuetoage55or60.

Typically,theamountsofcoveragealsoarepredeterminedsuchasa$1,000benefitora$2,000plan.Thispackagingoftheproductisfacilitatedbythefactthatallmembershavethesameoccupationalclassificationandjobdutiesi.e.,physicians,lawyers,etc.

Associationplansmayofferaminimumguaranteedissuepolicywithoutregardtotheinsurabilityofthemember.This,ofcourse,isanadvantagefortheuninsurableindividual.Throughtheassociation,heorshecanacquiredisabilityincomeinsuranceregardlessofhealthhistory.

Disadvantagesofassociationcoverageincludethefactthatthepolicymaybecancelledbytheinsurerortheassociation.Inessence,theassociationmembersarerentingthecoverage,muchliketheparticipantinanemployergroupplan.Inaddition,theindividualcanlosethecoverageifheorshenolongermaintainsmembershipintheassociation.

Afinaldisadvantageisthefactthatthepremiumsarenotguaranteed.Theinsurercanraisethepremiumfortheentireplan.Also,thememberwillpayhigherpremiumswheneverheorshemovesintoanewageband.

Conclusion

Aprimaryconcernwhenitcomestothefinancialsecurityofabusinessistheeconomicdeathofthebusi-

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nessowner.Ifthisoccurs,itcanbeevenmoredevastatingthananowner'sdeath.Thischapterhasexaminedvarioususesofdisabilityincomeinsurancetoassureabusinessofprotectionagainsttheimpactofaneconomicdeathcausedbyadisability.

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Chapter14CurrentTrendsintheDisabilityIncomeFieldInrecentyears,primarilyduetopoorclaimsexperience,manyinsurancecompaniesofferingdisabilityincomeproductshaveexperimentedwithwaystocontrolclaims.Thishasresultedinchangesinunderwriting,changesinamountsofcoverageofferedandchangesintheactualcontractitself.

Thischapterwilladdressthesetrends,aswellasthedirectioninwhichtheindustryappearstobemovingwithregardtodisabilityincomepolicies.Asaconsumer,youneedtobeawarecontinuouslyofthechangingfaceofincomeinsuranceandthetrendsemerginginthisfield.

BadMarketAssumptions

Insurancecompaniesclassifypeoplebasedonthejobstheydotheirexposuretoriskandtheprobabilitythatadisabilitywilloccur.

Inthepast,insuranceprofessionalsgenerallyassumedthatmostdisabilityclaimswouldcomefrompeople

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injobsconsideredhigh-risksuchasconstructionworkers,manuallaborers,truckdrivers,etc.Ontheflipside,theyassumedthatpeopleinprofessionaloccupationssuchasdoctors,lawyersandCPAswouldmakefewerclaims.Theseassumptionswerebasedpartlyontheworkitself;buttheyalsowerebasedonstereotypesaboutthekindofpeoplewhotookthejobs.

Insuranceunderwritersfiguredthattheprofessionalorcorporateexecutivewashighlymotivatedbyhisorhercareer.Therefore,theyfiguredprofessionalswhosuffereddisablinginjuriesorillnesseswouldreturntoworksoonerthanbluecollartypes.

Sincemanylow-riskoccupationsalsoearnedmoreincome,higheramountsofdisabilityincomewereofferedtothem,and,conversely,loweramountsofdisabilityincomewereofferedtothehigh-riskgroups.Inshort,insuranceagentsandbrokerswereencouragedtosellhigh-ticket,big-commissionpoliciestoyuppies.

Thepoliciesthemselvesweremuchmoreliberalforpeopleinthelow-risk,high-payoccupations,too.

Example:Theyouroccupationdefinitionoftotaldisabilitywasverycommoninthesepolicieswhereastheanyoccupationdefinitionappliedtopeopleinhigh-risk,low-payjobs.Lifetimeaccidentandsicknessbenefitswereavailableforthelow-riskgroups,butgenerallywerenotavailableforthehigher-riskgroups.

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Mostpoliciesissuedtopeopleinthelow-riskgroupswerenon-cancellable,whichmeantthatthepremiumscouldnotbechanged,norcouldthepolicybecancelled.Incontrast,peopleinthehigher-riskgroupsusuallyhadtobuyguaranteedrenewable,cancellableoroptionallyrenewablepolicies.Theinsurancecompanieshadanoutwiththesepolicies.

HarshMarketReality

Inrecentyears,mostoftheseclassassumptionshavenotheldtrue.

Inreality,adoctorwhomakesaclaimmayhaveadisabilityincomebenefitof$10,000amonthormorepayabletoage65.Aconstructionworkerwhogoesonclaimoftenwillhaveadisabilitybenefitof$2,000permonthpayablefortwoyears.

Inaddition,thedoctormayhavetheyouroccupationdefinitionoftotaldisability,whichmeansthatheorshecanearnsubstantialincomeinanotheroccupationandstillcollectdisabilityincomebenefits.Theconstructionworkerismorelikelytohavetheanyoccupationdefinitionwhichmeans,ifheorshemovestoanotherjoboroccupation,thedisabilitybenefitsend.

Claimspatternsinthe1990sshowthatmanyinsurancecompaniesmiscalculatedthefrequencyandnumberofthehigh-pricedclaimsemanatingfromtheprofessionalmarket.Formanyinsurers,themajorsourcesofcurrentclaimsexpensesandproblemsaretheyuppiestheysoughtsoeagerly.

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Insurancecompaniesareexperiencingahighfrequencyofclaimscomingfromtheprofessionalmarketduetopsychologicalstress.Theproblemwiththistypeofclaimisdeterminingwhetherapersonisreallystressedouttothepointofdisability.

Plus,apersonwhomakesastressclaimislesslikelytoreturntothestressfulenvironmentofhisorherformeroccupationwhichlengthensthedisability.

Thisisnottosuggestthattheprofessionalclassisfakingstress-relatedclaims.Psychologicalpressurecanmanifestitselfintermsofphysicalproblems.Whenthisoccurs,thesourceoftheproblemneedstoberemoved.Butstressclaimsaredifficulttomeasurewithanycertainty.Stresstendstobeassociatedwiththehigher-salaried,professionaloccupations.So,manyinsurancecompanieshavefoundthemselvesleftwithexpensive,difficult-to-measuredisabilityincomeclaims.

Manysimplyarenotwritingnewdisabilityincomepolicieshavingbeendelugedwithpriceyclaimsoriginatingfromsupposedlylow-riskoccupations.

Thishurtseveryone,though.Abetterprescriptionwouldbeforinsurancecompaniestousebetterjudgmentinchoosingandhandlingdisabilitybusiness.

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TheClaimsPrescription

Theremedyfortheinsuranceindustry'sincomeinsuranceproblemsincludes:

stricterunderwriting;

shorterbenefitperiods;

lowerbenefitlevels;

deletingcost-of-livingincreases;

modifyingthedefinitionoftotaldisability;

deletingnon-cancellablecoverages;and

limitingbenefitsformentalandnervousdisorders,aswellassubstanceabusedisorders.

StricterUnderwriting

Underwritingistheplacewhereinsurancecompaniescanstarttocontrolclaimsexpenses.Frequently,theunderwritingofdisabilityincomeforprofessionalshasnotbeenverytight.Inanefforttoobtainalargeshareofthesupposedlydesirablemarket,underwritingbecameasliberalasthepoliciesbeingsold.

Stress,mentalandnervousdisordersmustbeseriousunderwritingconsiderations.Andthereareothers.Historically,anyhistoryofbackproblemshasalwaysresultedinamajorprobleminobtainingdisabilityincomecoverage.Insuranceprossaythatabadbackseldomimproves.Theyneedtorememberthiswhenthey'reinterviewinglawyersanddoctors.

Andthesameattitudemayneedtobetakenwithre-

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gardtostressandnervousdisorders.Aperson'shistoryoftheseproblemsshouldbecloselyreviewed.

Disabilityincomeinsurerstraditionallyhaverefusedtowritecoverageforairtrafficcontrollers.Thereasontheearlyonsetofstress,andsubsequentearlymedicalretirement.Theairtrafficcontroller'sworkingenvironmentisadailyeight-hourshiftwithhighstress.Frequently,afteronly10yearsorsoonthejob,anairtrafficcontrollerisforcedtoretireduetostress-relatedhealthproblems.Perhapsasimilarapproachneedstobeimplementedwithregardtootherhigh-stressprofessionaloccupations.

ShorterBenefitsPeriods

Insurersalsowillneedtoshifttoshorterbenefitperiodstoreduceclaimsexpenses.A40-year-olddoctorwhogoesonclaimwithalifetimebenefitperiodcouldlivetobe80yearsoldorolder.A$10,000monthlyclaimcouldbecomeaclaiminexcessof$5million.

Evenato-age-65benefitperiodplacestheinsureratconsiderableclaimsrisk.Ifaparticularoccupationlendsitselftoahighdegreeofstress-relateddisabilities,thenpossiblythebenefitperiodsshouldberestrictedtoamaximumoffiveor10years.Bythetimethe21stcenturydawns,itispossiblethatevenato-age-65benefitperiodmaywellbeathingofthepast.

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LowerBenefitLevels

Anotherwayinsurerscanlowertotalclaimspaymentsisviareducedbenefitamounts.Limitsontheamountofdisabilityincomethatanindividualcanpurchasetraditionallyhaverangedbetween60percentand75percentofpre-disabilitygrossearnedincome.

However,anindividualearning$300,000ormoremayhavesomeunearnedincomeinterest,dividends,etc.thatwouldoffsetearnedincomeloss.Thissameindividualmaywellhaveahighnetworth,too,andsimplymaynotneedalargeamountofdisabilityincomeinsurance.Heorshecouldself-insureapotentialdisability.

Inthefuture,thehighissueandparticipationlimitsofferedbyinsurancecompaniesprobablywillbereplacedwithlower,moremeaningfulbenefitamountsbasedonaperson'stotalfinancialpicture.

CostofLivingBenefits

Thesebenefitsareofferedbymostinsurancecompanies.Onceapersongoesonclaim,thecompanywillautomaticallyincreasetheamountofthebenefittoreflectchangesinthecostofliving.

So,notonlyisthehypotheticaldoctorreceiving$10,000amonth,butwiththeCOLAbenefittheinsurancecompanyhastoincreasethebenefitbyasmuchas5percentperyear.Bythetimethedoctoris60andstillcollectingbenefitsthemonthlypaymentwillhavedoubled.

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Theonlyanswerherefromaninsurer'sperspectivemaybetoeliminatethisbenefitcompletelyorreducetheamountofsuchincreasestoapointwherebytheymaybeonlytokengesturestocompensateforinflation.

DefinitionofTotalDisability

Thedefinitionoftotaldisabilityisaprimaryplacethatinsurancecompaniescanhelpcontroldisabilityclaims.Thereiscurrentlyatrendawayfromtheyouroccupationdefinitionoftotaldisabilityforalloccupationalclasses.Theanyoccupationdefinitionlessenstheimpactofapotentialclaim,sincetheclaimantwillgooffclaimifheorshemovestoanotheroccupation.

Someinsurersuseacombinationofthetwodefinitions,underwhichapersoniscoveredonayouroccupationbasisforafewyearsand,iftheclaimcontinueslonger,thedefinitionchangestoanyoccupation.

Benefitsforyouroccupationpoliciesaretheresultoftheinabilitytoperformfunctionsofaparticularjob.Basically,thedisabilityincomepolicyisinsuringjobfunctions,whenitshouldbereplacinglostincomeduetoadisability.Theresidualapproachtodisabilityincomecoveragealsoplaysaroleinthisremedy.Payingaproportionatebenefitinsteadofafullbenefitthusprovidinganincentivefortheindividualtoattemptareturntoworkreducesthesizeanddurationofaclaim.

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EliminatingNon-CancellabelPolicies

Eliminatingnon-cancellablepoliciesisanotherindustrysolutiontoreformproblemsinthedisabilityincomemarket.Apersonwhobuysanon-cancellabledisabilityincomepolicyatage35isguaranteednocancellationandnoincreaseinpremiumatleastuntilage65.

Byreducingoreliminatingthistypeofrenewabilityfromthelow-riskgroup,aninsurancecompanycanraisepremiumsasnecessarytohelpcoverclaims.

Toprotectconsumers,insurancecompaniesmightemphasizeguaranteedrenewablepolicies,insteadofnon-cancellableones.Guaranteedrenewabilityassuresapersonthatthepolicycannotbecancelledthoughpremiumsmayincrease.

LimitingBenefitsforSubstanceAbuseandMentalDisorders

Limitationsforsubstanceabuseandmentalandnervousdisordersalsoarebeingconsideredbymanydisabilityinsurers.Theselimitationsarefairlycommononotherformsofhealthinsurance,suchashospitalizationcoverage.(Manymedicalexpensepolicieslimittheamountofbenefitstobepaidforsubstanceabuseormentalandnervousdisorderstoarelativelysmallsum,comparedwiththeoveralllifetimebenefitsunderthepolicy.)

Stress-relatedclaimsfallintothecategoryofmental

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andnervousdisorders.Fortheseclaims,insurancecompaniesmightlimitdisabilityincomebenefitstoaspecifieddollaramountorareducedbenefitperiod.

Example:Apolicypaying$5,000permonthuntilage65mayincludeasubstanceabuseandmental/nervousdisorderbenefitof$2,500permonthpayablefortwoyears.

Conclusion

Insurersofferingdisabilityincomeproductsaretryingtofindbetterwaystocontrolclaims,duetopoorclaimsexperience.Theonce-liberalcontractprovisionsforpeopleinprofessionaloccupationsarebeingre-evaluated,sincetheassumptionthattheseoccupationswerelow-riskisprovingtobefaulty.

Underwritingisbeingusedtocontrolfutureclaimsexpenses,asareshorterbenefitperiodsandreducedbenefitamounts.Costoflivingbenefitsalsomaybereducedoreliminatedinanefforttocontrolclaimsexpenses.

Diversifiedmarketingeffortswillhelpspreadtheclaimsriskoverlargergroupsofinsuredpeople,aswellasprovidingcompetitiveandfairdisabilityincomeinsurancepoliciesforalloccupationalclasses.

Butthemostimportanttrendindisabilityincomeinsuranceisthatmorepeoplearebecomingawareofitsimportance.Thisisagoodthing.

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Dependingonyourage,statistically,lossofincomeduetoadisabilityismorelikelytooccurthandeath.And,asweallknow,deathisinevitable.

Statistically,atage60,20outof100personswillbecomedisabled,butonlytwooutof100willdie.Also,thereisasignificantamountofinformationthatindicatesthatifadisabilitylastsatleast90days,itmayextendfromfourtosixyearsinduration.

That'sasignificantrisk.Youshouldprobablybedoingsomethingtoinsureagainstit.

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Index

A

accident5,11,13-14,17,20,32,45-49,51-53,57-58,67,70,75-78,94,101,141,142,144,151-157,199,201,204,213,218-219,227,229,233,239,241-242,258

accidentonlyinsurance14

accidentalbodilyinjury45,77,204,218

accidentaldeathanddismemberment(AD&D)13,75,218-219

accidentaldeathbenefit46,47,75

accidentalmeans46,77-78

additionalmonthlybenefitrider42,216

allornothingrider215

annualrenewableterm220

annuitycontracts171,188,193

associationcoverage108-109,255-256

attendingphysician'sstatement58,86,96,220,225

averageearningsclause60,81

B

benefitperiod29,32-34,42,47,70,73-74,82,93-95,102,104-108,143,165,166,172,213,216-217,219,223-224,238,247-248,250,253,255,261-262,266

businessoverheadexpense(BOE)248

buy-sellagreements229,241-242

C

changeofoccupationprovision48,80

considerationprovision48

creditinsurance14

creditor14,56,180,186-189

custodialcare160-164

D

damagetopropertyofothers204

death1-7,11,13-16,46-47,75,113,116,122-124,127-128,130,134,140-142,145,173,176,179-180,182-183,185,190-191,204,215,218-221,231-232,241-243,256-267

deathbenefit2,46-47,75,122,142,145,173,176,183,191,218,221

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deferredcompensationagreement182,188,190

agreementidentities182

claimsprocedures184

communicationsprovision184

disabilitybenefits182-183,188,193,195

employmentprovision182

forfeitureprovision183

non-competeprovision184

planadministrator184,192

pre-retirementdeathbenefits183

terminationforcause184

terminationofemployment183

deferredcompensationplan179-181,184,187,189-192,195

establishingdeferredcompensation185

salaryreduction185,190

fundedplan180,186-187,189,252

disability1-159,169,171,176-183,185,188,189,190-195,209-267

durationofadisability5,28

permanentdisability5,33,56,229,241

probabilityofdisability15

temporarydisability62

totaldisability3,11,16-17,33,47,49,55,62-64,67-69,71-76,81,83,94,116,124,143,152,177,183,210,213-217,219,228,231,234,238-239,246,248,250,254,258-259,261,264

disabilityincomeinsurance7,13,16,25,39,43,54,65,67,69-70,75,84,90,92-93,102,106,109,144,159,171,178,195,221,229,241,243,245,248,251,256,263,266

disabilityreducingterminsurance250

dividend50

E

earnedincome7,19,25-28,34,35,39-40,46,50,70,74,81,93,103-104,107,211,217,223-224,226,229,263

earningsfigure120

economicdeath1,6-7,15,16,241,256

eligibility18,41,57,74,119-120,123,128-132,134-135,138,167,170,194,232,235,239

eliminationperiod29-33,46-47,49-51,59,71-72,74,76-77,93,102,104,106,123,165-166,209,220,224-225,231,244-248

employeeincometax190

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EmployeeRetirementIncomeSecurityAct(ERISA)154,191,235

employerinvestmentaccount189

exclusions51,79,203,225

aviation80

warandactofwar51

expenseincurred164-165

F

fixedobligations24

forfeiture180,186-187,190

fraud21,49

freelookprovision52

G

governmentbenefits25,166,217

graceperiod52

groupdisability9,25,28,36,55,58,75,84,106-107,193-195,215-216,251,253-254

guaranteedinsurabilityoption210

guaranteedpurchaseoption210

H

hazardousavocation95

I

illegaloccupation53

indemnity83,164-165,171,218

intermediatecare162-164

issueandparticipationlimits34,35,40,46,81,103,211,263

L

liabilities54,197

businessliability202

crime199

damages140,146,197-198,200-201,205-206,208

compensatorydamages200-201

punitivedamages201

tort199

intentionaltort199,202

unintentionaltort199

liabilitycoverage147,197,203-204,206,208

lifeinsurance2-3,7-8,13,15-16,21-22,47,76,90-92,97,99,105,159,169,171-173,176-178,180,187-190,219,221,223,229-230,240,243

lifetimebenefit83,165,166,213,262,265

limitedhealthinsurancecontracts14

long-termcare(LTC)14,159-161,164-165,169-171,197,230

custodialcare160-164

homecare14,159-162,164,166

institutionalcare160

intermediatecare162-164

skillednursingcare163-164

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long-termdisability(LTD)6,28,35-36,139,148,151,224,226,233-236,242

long-termpartialdisabilitybenefit70

lossofincome13,33,67,70,73,84,267

losspayee56

lumpsumpayment210,247

M

medicalprofile95

Medicare111,135-138,162,166,239-240

misstatementofageorsex49,54

monthlybenefit13,29,32,34,42,47,49,51,63,68,81,109,112,211-213,215-216,247,249-251

moralhazard100-101,104

moralehazard100-102

N

needsanalysis17-18,28,43

assets2,3,8-9,14,16,18,24,31,39,54,102,138,157,160,166-171,177-178,180,186,198,250

networth39,54,102-103,263

noticeofclaim54

nursinghomecare14,159-160,162,166

O

occupationalclassification29,80,91,255

occupationalcoverage55,78,108,153,227

offsetrider215

oldagesurvivorsanddisabilityinsurance111

optionalbenefits29,40,42-43,161,209,221-222

additionalmonthlybenefit42,213,215-216

costoflivingrider41,222

futureincreaseoptions41,221

lifetimeaccidentandsicknessbenefit41,258

non-disablinginjury42

rehabilitationbenefit83,142,144-145,209

SocialSecurityrider41-42,215,222

transplantandcosmeticsurgerybenefit83,220

otherinsuranceyouown18

overinsurance40,60,81,102,107

P

partialdisability55,69-70,72

pensionbenefit7,18,149,185,191

personalassets2,8-9,24,157,160,166

personalsavings24-25

personalinformation18

personalinjurycoverage204,207-208

personalumbrellaliabilityinsurance197-207

followingformexcesspolicies203

trueumbrellapolicies203

physicalexamandautopsy46,56,95-96

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potentialearnings3

presumptivedisability58,82,219-220,229

primaryinsuranceamount116,125,233

principalsum13

probationaryperiod58

proofofloss58,62

proportionatebenefit71-72,264

Q

qualificationperiod59,71-72

R

recurrentdisability59

regularlyfurnishedautos204

rehabilitationbenefits83,142,144-145,209

maintenanceallowance144

physicalormentalrehabilitation144

rehabilitationdevices144

vocationalrehabilitation83,127,144,210

reinstatement59-60,98-99

renewability60-61,265

replacementoflostincome209,252

residualdisability49,67,70,72-75,221,228

resources7,16,33,167,171

borrowing12,172-173

businessassets9,16,39

cashsavings8,28,31

retirementbenefits111,124,131-132,167,182,231

retroactivebenefits143,238

returnofpremiumrider221

S

salarycontinuation9,25,185,251-253

secondinjury151-152

selectiveexecutiveretirementplan(SERP)185

short-termdisability(STD)32,36,124,223-224,232-234

sickness5,11,13-14,17,24,32,49,53,55,58,61-62,67,70,76,78,94,142,155,213-214,219,225,241,258

simplifiedorprogressiveunderwriting108

skillednursingcare163-164

socialinsurancesupplement216-217

SocialSecurity3,7,10-11,18,25,28,31,41-42,84,111-139,144,156,168-169,215-217,222,224,226,231-236,239-240,252

insuredstatus10,113,119-123,231-232

currentlyinsured120-123,232

disabilityinsured10,113,116,120,123,231-232

fullyinsured10,113,120-123,231-232

SocialSecurityrider41-42,215,222

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SpousalImpoverishmentAct170

standardrisks104

statebenefitsfornon-occupationaldisabilities13

statutorybenefits18,116,146,152,156

substandardrisks104-106,254

extrapremium105

qualifiedconditionexclusion105

rider105

substantialgainfulactivity11,124,127-128,130,231

survivorbenefits132,139

T

taxconsiderations43,190

terminalillnessoption173

timedeductible30

trialworkperiod126-130

24-hourcoverage152-155

universal24-hourcoverage153

U

underwriting35,85-87,90-92,94,104,106-109,257,261,266

unearnedincome25-27,39-40,50,103,263

unemploymentinsurance156,240

unpaidpremium64

V

variableexpenses24

W

waitingperiod11,29,50,58,64,124,135-136,143,177,224,232,238-239,246-247

waiverofpremium64,177,217

workers'compensation139-157

deathbenefits142,145

incomebenefits142-144

medicalbenefits142,153-154

rehabilitationbenefits142,144-145

work-relatedbenefits9,10,18,25,252

cappedbenefitplans9

Z

zero-dayqualificationperiod71