Disability Income and Medical Expense Insurance
Disability income
Disability income replaces a portion of earned income - typically 60–70% - because overinsurance would reduce the incentive to return to work. The definition of disability drives the price: own occupation (cannot perform the duties of your own occupation) is the broadest and most expensive, especially when it lasts the full benefit period; any occupation (cannot perform any job for which you are reasonably suited) is narrower and cheaper. Split definition policies use own-occupation for an initial period, then any-occupation. Presumptive disability pays regardless of work status for losses such as loss of sight or limbs.
Key features: elimination period (longer period = lower premium), benefit period (to age 65, or a stated number of years), residual/partial benefits for reduced earnings, and integration with Social Security to prevent overlapping benefits. Common riders: COLA, future increase option, waiver of premium, and return of premium.
Business uses include business overhead expense, key person coverage, and buy-sell funding.
Medical expense insurance
Basic coverages (hospital, surgical, physician) versus major medical, which adds a high maximum and cost sharing. Managed care models: HMO (network only, gatekeeper/PCP, capitation), PPO (in-network discounts, out-of-network allowed at higher cost), POS (hybrid), EPO (network only, no referrals). Specialty products include dental, vision, critical illness, accident, and long-term care.
Long-term care benefits trigger when the insured cannot perform 2 of 6 activities of daily living (bathing, dressing, toileting, transferring, eating, continence) for at least 90 days, or has a cognitive impairment requiring supervision. A 90-day certification is typically required.
Traps: own-occupation is the most favorable definition to the insured, not the cheapest; and a longer elimination period lowers premium.
Worked example: an insured with a 90-day elimination period and 2-year benefit period who is disabled January 1 begins receiving benefits around April 1.