• Financial consequences of disability

-Increased workload for coworkers
-Possible reduced revenues of employer
-Loss of income
-Increased cost of living
-Rehabilitation expenses

• Likelihood of recovering after sustaining a lengthy disability

-Chances of recovery after one-year disability
-Chances of recovery after 2-year disability

• Likelihood of total recovery from disabilities of less than 90 days

-Psychological element seems to be involved in rehabilitation therapy
-The sooner therapy begins, the greater the likelihood of recovery

III. Sources of funds for disabled persons

• Workers’ compensation insurance (medical expenses)
• Unemployment compensation insurance (short-term)
• State nonoccupational disability funds (in five states only)
• Automobile insurance (no-fault)
• Federal government employee benefits (for civil servants and military personnel)
• Employer-provided sickness pay (short-term)
• Employer-provided salary continuation (short-term)
• Employer-provided short-term disability insurance (generally less than 5 years)
• Employer-provided long-term disability insurance
• Individually purchased disability insurance

IV. Disability income insurance policies

• Limitations on availability of coverage

-Amount of benefits limited by other sources of income or benefits
-Coverage not available for some occupations

A. Situations often warranting coverage

• Persons earning more than $20,000 per year
• Self-employed individuals
• Business owners
• Corporations

B. Policy provisions

• Multiple claims

-Sequential
-Concurrent

• Definitions of disability:

-Inability to perform the duties of any occupation for which the individual is reasonably suited by reason of education, training, or experience

-Inability to perform the material and substantial duties of the individual’s regular occupation ("own occupation" definition)

-Inability to perform duties of individual’s own occupation for a specified number of years (usually 2 to 5 years), followed by inability to perform duties of any occupation for which individual is suited by reason of education, training, or experience (two-stage definition)

-Partial disability—inability to perform some stated percentage of the duties of the insured’s occupation or performance at such a speed that completion of those duties takes a longer-than-normal amount of time

-Residual disability benefits—replacement of lost income when income reduction exceeds 20 percent of predisability income (formula approach to benefit determination)

C. Ability to keep coverage in force

• Renewability provisions

-Noncancelable to specific age—insurer cannot discontinue coverage before the specified age if premiums are paid

-Guaranteed renewable to specified age—insurer cannot discontinue coverage before specified age if premiums are paid, but premiums are subject to possible increase

-Optionally renewable—insurer can refuse to renew coverage on policy anniversary date

-Conditionally renewable—insurer can discontinue coverage if certain specified conditions occur

D. When benefits start

• Elimination period—time between onset of disability and eligibility for payments

-Common elimination periods are 30, 60, 90, or 120 days

-Shorter elimination periods cover more short-term-disabilities

-Longer elimination periods reduce premium because of reduced coverage

-Consecutive-day versus non-consecutive-day elimination periods

E. Recurring disability

• If the recovery time between two related disabilities is less than 6 months, they are treated as the same disability
• If the recovery time between two related disabilities is longer than 6 months, they are usually treated as separate disabilities with their own elimination and benefit periods

F. Duration of benefit period

1. Short-term disability

2. Long-term disability

G. Residual benefits

H. Level of benefits payable

• Specified benefit
• Inflation protection during disability (COLA riders)
• Additional purchases to cover income increases when not disabled

I. Premium payments

• Frequency of payments
• Waiver-of-premium provision
• Inflation protection

J. Return-of-premium option

K. Rehabilitation benefits

L. Presumptive disability

M. Incontestability

N. Treatment of organ donations

O. Social security rider

P. Hospitalization benefits

Q. Dividends

V. Insurance company limitations on the amount of coverage

• Percentage of earned income
• Evaluation of financial condition
• Increased premiums for higher-risk insured
• Longer elimination period
• Shorter benefit period
• Exclusion of coverage for disabilities stemming from a specified cause or condition

VI. Business uses of disability insurance

• Disability of key persons poses serious risk to financial health of business
• Small enterprises in particular need this protection (self-employed attorneys, accountants, physicians, and dentists)

A. Business overhead insurance

• Covers many ongoing costs while business owner is disabled
• Insurance companies extremely cautious in writing this coverage
• Increases chances of business continuing after business owner recovers from his or her disability

VII. Disability income coverage for key persons

• Policy is owned by the corporation and benefits are payable to the same corporation.

A. Salary continuation plans

• Can be funded by disability income policies

B. Disability buy-sell funding (transfer of business ownership)