Disability insurance pays a monthly income when the insured meets the insurer’s definition of disability as stated in the policy. To better understand the fundamental concepts underlying disability insurance policies, it is important to be familiar with the following concepts:
- Disability may be defined in the policy as “any occupation” or “own occupation.” Under an “any occupation” definition of total disability, the insured must be unable to perform any occupation for which he or she is qualified to be considered disabled. Under an “own occupation” definition, an insured must be unable to perform the duties of his or her regular occupation to be considered disabled.
- The maximum benefit is the total monthly benefit payable under a disability policy for the insured’s total disability.
- The elimination period is the period of time that must elapse after the insured is considered disabled before benefits begin. The elimination period may be as short as 30 days or as long as 365 or more days. A typical elimination period is 30 to 60 days.
- Partial disability is any disability that prevents the insured from performing some of the duties of his or her occupation. In many cases, a disability policy may pay only 50 percent of the total disability benefit for a partial disability.
- Residual disability provisions provide disability payments to an insured if he or she suffers a reduction of income of at least 20 percent following a sickness or injury. The usual residual disability payment is equal to the percentage of income lost times the total disability maximum monthly benefit.
- A recurring disability is any disability that occurs again from the same or a related illness within six months after the insured is deemed to be no longer disabled. The new disability is considered, for claims purposes, to be a continuation of the prior disability. Accordingly, no new elimination period is required. If the insured becomes disabled from an injury or illness that is unrelated to the prior disability or after six months from the same or related illness, the insured is considered disabled from a different cause and the recurring disability provision does not apply. Accordingly, a new elimination period and maximum benefit period apply.
- Income replacement insurance is a disability-type insurance product that pays a monthly recurring benefit if the insured suffers an illness or injury and, as a result, suffers an income loss. Accordingly, the insured is not required to be totally disabled. It is designed to pay for the loss of income, similar to a residual disability benefit. The benefit is usually equal to the percentage of the income lost times the maximum monthly benefit. Benefits are refigured monthly because the insured’s income may vary.