Disability income replacement policies provide monthly income benefits to lives insured should they meet the definition of “disabled” under the policy, but the disability landscape is more complex than just that. Disability insurance (DI) policies vary as to the amount of benefit paid, when benefits commence and for how long benefits might be payable, if they are payable at all in the circumstances.
Definitions of disability
The definition of when an insured is “disabled” for purposes of disability insurance is not just a single one. Disability can be measured as “partial” or “total” and within that range there are four distinct definitions that are employed by different policies:
Total disability (according to the CPP).
With the exception of Workers’ Compensation coverage (which deals exclusively with work-related injuries and illnesses), the cause of disability is generally not considered.
Amount of benefit
One of the risks is that an insured will act differently because insurance is in place. In the case of disability insurance specifically, by being or claiming to be disabled, or to still be disabled, an insured individual could potentially “earn” an “income” without having to work. One way of minimizing the risk of this occurring is to ensure that the insured person will not be better off financially while on claim than he was when he was working.
Personally owned DI policies normally pay a tax-free disability benefit. Allowing for income tax and other benefits normally applicable to income from business or employment, many insurers will not issue coverage that would pay the disabled life insured more than 60% of their net pre-tax, predisability income. This is a relatively simple calculation when the insured’s only source of income is salary or self-employment income.
The computation of maximum allowable benefit becomes more complex if the life insured had sources of unearned income that will continue during a period of disability, in addition to his earned income.
Most DI policies have a waiting period (also often called the “elimination period”), which is a time frame between the onset of disability and the commencement of benefits under the policy. The primary purpose of a waiting period is to eliminate the need for the insurance companies to process claims of very short duration, which require a significant amount of administrative effort and expense on the part of the insurance company in relation to the insured’s lost income and the benefits paid.
Some policies permit a 0-day waiting period, but waiting periods of 30 days to 12 months are more the norm, with a 90-day waiting period being the most common. The shortest waiting periods are often available only to insured individuals in the highest, less risky occupational classes. All other factors being equal, policies with a longer waiting period will charge lower insurance premiums.
The benefit period under a DI policy is the maximum amount of time for which benefits will be payable. The benefit period starts once the waiting period has expired and benefits run until the insured is well and able to return to work full-time or the benefit period has expired, whichever comes first. Generally, each instance of disability is treated individually and the full benefit period could apply to each disability (for example, under a policy with a two-year benefit period, the insured might be disabled more than once over the life of the policy and could claim up to two years of benefits for each disability). The most common benefit periods for long-term individual disability income replacement policies are:
To age 65.
Short-term disability (STD) insurance policies are more likely to have a benefit period of only 10 to 26 weeks, but this period may be longer in certain cases.
The longer the benefit period, the greater the amount of claim the insurer is at risk of paying and the greater the policy premium will be.
Exclusions and limitations
Almost all policies contain provisions for standard, common exclusions: causes of disability for which no benefits will be payable. These exclusions are not specific to the health, vocation or lifestyle of a specific insured, but apply to all persons insured under that type of policy. The most common exclusions include disabilities arising from the following circumstances:
War, whether declared or not;
Participating in illegal activities;
Normal pregnancy and delivery.