Disability Income and Medical Expense Insurance
Disability income basics
Disability income replaces part of earned income - typically 60–70% - so the insured has an incentive to return to work. Key terms:
- Total disability - defined as the inability to perform the duties of own occupation (broad, most favorable to the insured, usually limited to the first 2–5 years), any occupation (for which the insured is reasonably suited by education and experience), or a split definition combining the two.
- Partial/residual disability - pays a reduced benefit for reduced income or inability to perform some duties.
- Elimination (waiting) period - the time before benefits begin; a longer elimination period lowers the premium.
- Benefit period - how long benefits last (2 years, 5 years, to age 65, for life).
- Probationary period - the initial period when sickness is not covered.
- Recurrent disability - a relapse within a stated period (often 6 months) continues the original claim rather than starting a new elimination period.
Other features include nonoccupational coverage, Social Security offset/integration, COLA and guaranteed insurability riders, and waiver of premium. Business uses: key person disability and business overhead expense.
Medical expense plans
Basic plans cover hospital, surgical, and medical expenses on a first-dollar basis. Major medical layers a large deductible, coinsurance, and a stop-loss limit. HDHP/HSA plans pair a high deductible with a tax-advantaged savings account. Other products include critical illness (lump sum on diagnosis), accident (fixed indemnity), hospital indemnity, long-term care, and Medicare supplement.
Tax trap
Disability benefits are tax free if the insured paid the premiums with after-tax dollars; they are taxable to the extent the employer paid the premium.