Disability Income and Related Insurance
Disability income
DI replaces a portion of income, typically 60-70%, to preserve the incentive to work. Key definitions: total disability (classically own occupation for the first two years, then any occupation); partial disability (some duties, reduced benefit); residual disability (loss of income, paid as a percentage of prior earnings). Elimination period is the wait before benefits begin; benefit period is how long they last; probationary period is the opening period when sickness is not covered. A recurrent disability within a stated period (often six months) continues the prior claim without a new elimination period.
Components and riders
Waiver of premium, cost-of-living adjustment, Social insurance supplement (offsets Social Security), presumptive disability (loss of sight, speech, hearing, or two limbs pays full benefits without proof of lost income), and relation of earnings to insurance. Benefits are taxable if the employer paid the premium and tax-free if the insured paid with after-tax dollars. Business uses include business overhead expense, disability buyout, and key person disability.
Accidental death and dismemberment
AD&D pays the principal sum for accidental death and a capital sum (a percentage of the principal sum) for dismemberment - often 50% for one limb or the sight of one eye and 100% for two. Death generally must occur within 90, 180, or 365 days of the accident.
Long-term care
LTC pays for skilled, intermediate, or custodial care. The benefit is triggered by inability to perform 2 of 6 activities of daily living (bathing, dressing, toileting, transferring, eating, continence) for at least 90 days, or by cognitive impairment. Look for elimination periods, inflation protection, nonforfeiture, renewability, and HIPAA per-diem tax limits.
Trap: the definition of disability drives everything - own occupation is broader for the insured than any occupation.