Disability Insurance Glossary of Terms
– A –
ATTENDING PHYSICIAN STATEMENT (APS): A report, completed by the proposed insured’s (or, in a claim situation, the insured’s) physician which documents current and prior health history used in the evaluation process of approving an application (or claim).
AUTOMATIC INCREASE BENEFIT: A policy provision that increases, annually, the policy monthly benefit by either a stated percentage or the latest Consumer Price Index measure, without the evidence of either medical or financial insurability.
– B –
BENEFIT PERIOD: The length of time for which disability income benefits will be payable under a policy. Examples: two years, to age 65.
BUSINESS OVERHEAD EXPENSE: A policy that reimburses the insured business owner, during a disability for covered business expenses that are incurred in the day to day operation of the business.
BUY-SELL (OR BUY-OUT): A policy that pays to a corporation or co-owner either a lump-sum or installment payments on disability of an insured owner to provide the necessary funds to buy-out the business interest of the disabled owner.
– C –
CARRY-OVER ACCOUNT: In a Business Overhead Expense policy, this is the fund that accumulates unused benefits to be paid out to the insured at a later date.
CASH SICKNESS BENEFITS: A state disability income program in New York, New Jersey, Rhode Island, California, and Hawaii that provides a small benefit on a short-term basis to help replace lost earnings for a worker’s “off the job” disability.
CASH VALUE RIDER: Also called Equity Builder, this form of a return of premium begins building values equal to an ever-increasing percentage of premiums paid for a disability policy. Initial values usually appear in the third policy year and build to 100 percent at age 65, which can be returned to the insured at that time, less any claims.
CONDITIONALLY RENEWABLE: Under this policy provision, an insurance company agrees to renewal of a disability income policy providing the insured meets certain qualifications, such as full-time employment.
CONVERSION: A policy feature common in Business Overhead Expense and Disability Buy-Out plans that provides that the insured can convert to an individual disability policy if the need to have the business disability policy changes.
COST OF LIVING RIDER: An optional benefit that increases the disability benefit by a percentage or the latest Consumer Price Index measure.
COVERED EXPENSES: In a Business Overhead Expense policy, a listing of typical business expenses that are eligible to be reimbursed during an insured’s disability. Examples: rent or mortgage payments, electricity, employee salaries.
CROSS-PURCHASE AGREEMENT: In a disability buy-sell situation, this arrangement has the owners themselves as owner and beneficiary of the policy proceeds. Generally used only where two owners are involved.
– D –
DISABILITY INCOME: A monthly benefit paid to an individual in the event of an accident or sickness, to help replace earnings lost.
– E –
ELIMINATION PERIOD: The policy deductible, usually the number of days from the onset of disability for which no benefits are payable. Examples: 30 days, 180 days.
EMPLOYER-PAID LIMITS: A table used by an underwriter and agent to determine the maximum amount of monthly benefit the insured can purchase when the employer is paying the premium. This limit is higher than the ordinary issue limit because of the taxation on benefits when received due to the employer’s deducting the premium paid as an ordinary business expense.
ENTITY PURCHASE AGREEMENT: In a disability buy-sell situation, this arrangement has the corporation as owner and beneficiary of the policy proceeds. Generally used in situations where there are more than two owners.
EXCLUSIONS: A policy provision that indicates what will not be covered under the disability income policy. Example: disability as a result of war or an act of war, declared or not.
EXCLUSION RIDER: Attached to and made a part of the policy, this document, which the insured generally must sign, indicates a condition(s) which is specifically not going to be covered under this insured’s policy. Example: any disease or disorder of the lungs. This rider is placed as a result of the individual evaluation of the insured’s history.
EXECUTIVE BONUS: A premium paying arrangement for which a deduction is allowable under Section 162 of the Internal Revenue Code for salary bonus to the insured with which to pay the disability policy premium.
– F –
FINANCIAL UNDERWRITING: A method of evaluating data relevant to earned income, unearned income, net worth, fringe benefits and other components of compensation to determine the proper amount of monthly benefit for which the insured qualifies.
– G –
GUARANTEE OF INSURABILITY: An optional benefit in a disability income policy that allows the insured future increases to the policy monthly benefit at specified dates, with a requirement of only financial (and not medical) insurability.
GUARANTEED RENEWABLE: Under this policy provision, insurance company agrees to renewal for as long as premiums are paid on a timely basis by the insured. Premiums may be increased with prior notification, but policy provisions can never be changed.
– I –
INSPECTION REPORT: Information, ordered by the underwriter, that provides a summary description of the insured’s employment, health history, and habits as a result of a direct interview and interviews with business and personal associates.
INSTALLMENT OPTION: In a Disability Buy-Sell policy, this policy provision offers an alternative payout to a lump-sum settlement by having the insurance company pay out a level benefit in monthly installments for a specified period of time.
– K –
KEY PERSON POLICY: A product designed to reimburse the business for financial loss during the key person’s disability until recovery or a suitable replacement can be found.
– L –
LUMP-SUM PAYMENT: In a Disability Buy-Sell policy, benefits are usually payable in a lump-sum at the trigger (or effective) date of the buy-sell. The trigger date is the day following expiration of the Elimination Period.
– M –
MEDICAL UNDERWRITING: The process of evaluating a disability income application for approval by reviewing the potential insured’s individual health history.
MINIMUM RESIDUAL BENEFIT: During the first six months of a claim under the Residual Disability provision, this benefit stipulates that the minimum benefit payable to the insured will be no less than 50 percent of the total disability benefit. Note: Some carriers are applying this benefit for longer than the first six months.
– N –
NET WORTH: The total non-business related assets of an insured used in the financial evaluation of the disability insurance application. For disability buy-sell policies, net worth is that of the business and is used in the calculation of the value of the owner’s interest.
NONCANCELABLE: The renewal provision of the policy which states that the insurance company cannot change any policy provisions or increase premiums after the policy as been issued as long as the insured makes timely payments of premium.
– O –
OCCUPATION CLASS: A category of insured based on specific job duties that dictates the premium and contractual grouping under which the insured would be placed.
OPTIONAL BENEFIT: Coverage in addition to the basic policy, this extra protection assists in the individual design of a disability income program to meet the insured’s need. Examples: Cost of Living Rider, Guarantee of Insurability benefit.
OUTLINE OF COVERAGE: A simplified benefit summary of a disability policy provided by the insurance company and required by law in many states to be delivered to the individual insured either at the time of the sales presentation or policy delivery.
OVERHEAD MAXIMUM: The total possible benefit payout under the Business Overhead Expense policy, this amount is calculated by multiplying the monthly benefit by the number of months in the selected benefit period. Example: $3,000 monthly benefit, 18 month benefit period would provide an Overhead Maximum of $54,000 ($3,000 x 18).
OWN OCCUPATION: A term that defines the most liberal wording of the total disability contractual provision, it applies only one test, that of the ability to perform the duties of one’s own occupation, in determining disability for purposes of paying a policy benefit.
– P –
PARTIAL DISABILITY: A short-term version of residual disability benefits, this policy provision, which also could be available as a rider, pays a specified percentage of the total disability benefit (usually 50 percent) if the insured is unable to perform one or more of the duties of his own occupation.
PERSONNEL REPLACEMENT EXPENSE: An optional benefit that may be added to a Key Person Disability policy, this rider reimburses the business for the costs of searching for and hiring a replacement for the disabled key person.
PHYSICIAN CARE REQUIREMENT: This policy provision states one of the eligibility requirements for disability benefits, requiring that the insured be under the regular care and attendance of a physician. Many companies waive this requirement if it can be shown that future treatment would be of no benefit to the insured.
POLICY SCHEDULE PAGE: Found in the early pages of a disability income policy, this sheet details all the specific individual policy data such as name, policy number, monthly benefit, and premium.
PREDISABILITY EARNINGS: A policy provision under the Residual Disability Benefit, it defines what constitutes prior income for purposes of calculating the Residual Benefit. Example: the average monthly earnings for the 12 consecutive months immediately prior to disability.
PREEXISTING CONDITION: This policy provision is intended to define certain illnesses or injuries that occurred or manifested themselves prior to the policy effective date for which benefits are usually not payable. Generally, conditions disclosed on the application are not considered to be preexisting.
PREMIUM MODE: The particular method of premium payment selected by the insured. The policy can be paid for annually, semi-annually, quarterly or monthly. The choice elected will be indicated in the policy schedule page.
PRESUMPTIVE TOTAL DISABILITY: A policy provision that waives the normal total disability eligibility requirements in the event of a catastrophic-type disability such as the loss of sight, hearing, speech or use of two limbs. PROGRAMMING: The process of determining how much disability income coverage an individual needs and the sources that will make up this coverage.
– Q –
QUALIFICATION PERIOD: Under the Residual Disability Benefit, the number of days at the start of a disability that the insured must be totally disabled before becoming eligible for Residual Benefits.
– R –
RATING: An underwriting decision to approve disability income coverage but at a higher than normal premium due to an increased risk which is usually associated with adverse medical history. An extra premium of anywhere from 15 to 100 percent or more can be applied.
RECURRENT DISABILITY: A policy provision that defines when an injury or illness will be considered continuous if there has been a recovery for a short period (usually six months) and then a recurrence of the same or related cause. A condition considered recurrent will not necessitate new satisfaction of the Elimination Period.
REHABILITATION: A policy provision under which the insurance company agrees to assist in the expenses associated with a rehabilitation program that the insured enters following disability.
RELATION OF EARNINGS TO INSURANCE: A policy provision stipulating that money received from all income sources, including insurance, will not be greater than 100% of the insured’s prior earnings.
RENEWABILITY: The policy provision that details the conditions upon which the insurance company agrees to continue to insure the disability income policy. Examples: Noncancelable, Guaranteed Renewable, Conditionally Renewable.
RESIDUAL DISABILITY BENEFIT: A policy provision or an optional benefit that promises to pay the insured a portion of the total disability benefit after a return to work based on the percentage of income loss suffered due to the disability. This benefit is usually effective until insured’s age 65.
RETURN OF PREMIUM: This optional benefit provides a refund of a specified percentage of policy premium at specified dates less any claims that have been paid during the specified time period. Example: 80 percent return of premium less claims paid after the policy has been in force for 10 years.
RETURN TO WORK BENEFIT: A provision under the Residual Disability benefit that waives some of the eligibility requirements for Residual Benefits and bases the claim upon earnings loss only. This provision operates for a short specific period of time, usually 3 to 6 months.
– S –
SALARY CONTINUATION PLAN: A program, also called a Section 105 plan, under which the employer makes deductible wage payments, in part or in full, to an individual unable to work due to illness or injury.
SHORT-TERM DISABILITY: Usually associated with group insurance, this program pays a monthly benefit for total disability after a minimum Elimination Period for up to 13, 26,39, or 52 weeks.
SICKNESS: A policy provision defined as illness or disease which first makes itself known to the insured following the policy effective date. Sickness covers both physical and mental illness unless otherwise specified.
SIGNIFICANT EARNINGS LOSS: A provision under the Residual Disability Benefit that promises the full total disability benefit if the insured is back to work and suffers a substantial loss of income, usually 75 to 80 percent.
SOCIAL SECURITY: A federal program which provides benefits to all working Americans in the form of disability, retirement or survivor benefits. Disability is strictly and narrowly defined and benefits begin in the sixth month of a disability that has an expectation of lasting at least 12 months or will result in the individual’s death.
SOCIAL SECURITY OFFSET RIDER: An optional benefit that coordinates benefits with any benefits received through Social Security disability (and, often, other public programs) to avoid either underinsurance or overinsurance.
SUBSTITUTE SALARY EXPENSE: An optional benefit available under the Business Overhead Expense policy, it reimburses the insured for expenses incurred in paying a replacement during the insured’s disability.
SUPPLEMENTAL HEALTH STATEMENT: A form that is a direct communication from the underwriter to the proposed insured that asks for more details about a specified medical condition(s).
– T –
TOTAL DISABILITY: Often the key policy provision in the disability income policy, this feature defines the eligibility requirements necessary for an individual to qualify for full monthly benefits. Usually, an inability to perform work is the major requirement in the definition.
TRANSPLANT DONOR BENEFIT: A policy provision that considers an insured to be disabled under the sickness provision if donating a body organ.
– U –
UNEARNED INCOME: Money that will be available to an individual whether or not he is disabled, it affects the amount of disability coverage that may be purchased based on earned income.
– W –
WAIVER OF PREMIUM: A policy provision that specifies the exemption of the insured from making premium payments following a specified number of days of disability, until the insured recovers. In many cases, any premium paid during the initial days following disability is refunded.
WORKERS COMPENSATION: A system administered by each individual state that provides benefits if a worker is hurt or contracts an illness on the job.