Disability Insurance Terms Glossary
Is the period of time usually expressed in months, which will begin on the first day of disability and during which the Elimination Period must be satisfied.
A document used by an insurance company to collect information on the prospective insured which the underwriter uses to assist in the process of evaluating whether coverage will be offered (underwriting).
Attending Physician Statement (APS):
An APS is a medical report completed by the proposed insured’s physician, which documents his or her past and current health history. Insurance companies Underwriters use this report in the risk evaluation process (underwriting) of an application to evaluate benefit eligibility.
Automatic Increase Benefit Rider:
This rider increases the insured’s Monthly Benefit on an annual basis by either a stated percentage or the latest Consumer Price Index, without the requirement of providing evidence of medical or financial insurability. This rider also helps keep the Monthly Benefit level to keep pace with the increased cost of living.
A Beneficiary is a person or entity who is named to receive benefits from an insurance policy. There are three types of Beneficiaries:
- Primary Beneficiaries (such as a spouse): are first entitled to the proceeds.
- Secondary Beneficiaries (such as a child): are entitled to the proceeds if the Primary Beneficiary is no longer living when the insured dies.
- Tertiary Beneficiaries (such as a grandchild): receive the proceeds if both the primary and the Secondary Beneficiaries are no longer living when the insured dies.
A Benefit Period is the maximum length of time for which benefits will be payable under a policy for a continuous Disability.
A Benefit Percentage is the amount of benefit payable to the insured, based on a percentage of the insured’s income prior to disability.
Business Overhead Expense (BOE):
A BOE policy reimburses business owners for covered business-related expenses that are incurred in the day to day operations of the business during the business owner’s disability.
A Buy-Sell policy pays a lump sum or installments to the insured’s corporation or business partner to buy out the business interest of the disabled owner.
Used in Business Overhead Expense policies, the account accumulates unused benefits so they carry-over to be used by the insured later.
Cash or Accrual Method:
To collect benefits for a Partial Disability under a Residual Benefit Rider, the insured must show proof of loss of earnings. The insured is able to choose one of two accounting methods to determine monthly earnings – either cash or accrual. The same method must be used at all times for any one disability.
Catastrophic Benefit Rider:
This rider is designed to pay additional benefits upon the satisfaction of the definition of a “Catastrophic Disability”. To qualify for claim on a Catastrophic Benefit Rider, the insured must not be able to perform 2 of 6 Activities of Daily Living or Severe Cognitive Impairment, which is similar to the terms of a Long Term Care Insurance policy.
The Commencement Date is the first day a disability is covered. It immediately follows the completion of the Elimination Period.
A Concurrent Disability occurs when there is more than one injury or illness. Though there is more than one factor causing disability, the Concurrent Disability benefits are paid as if there is only one injury or illness. The insured will still be considered to have one disability. Once a period of disability begins, it remains one period, no matter how many injuries or illnesses caused the initial or continuation of a disability.
Is coverage provided under the terms of a Conditional Receipt. This coverage is provided up to stated limits and is based on certain conditions during the underwriting process. This benefit varies by insurance carrier.
A receipt provided to the prospective insured upon submission of the appropriate premium at time of application The insured will then receive interim coverage during the underwriting process, subject to the terms and conditions of the Conditional Receipt.
This provision indicates that the insurance company will renew the insurance policy if the insured complies with specified conditions.
A Continuous Disability occurs when recurrent periods of disability stem from the same cause but are separated by less than 12 months of recovery.
Consumer Price Index (CPI):
The Consumer Price Index is published by the Federal Department of Labor. This is a benefit used to adjust terms and benefits in a policy to address Cost of Living increases.
A Conversion Privilege allows employees who are leaving a job to keep some or all of their LTD coverage without having to submit evidence of insurability. All future policy premiums are at the employee’s expense.
Cosmetic or Transplant Surgery:
A disability caused by cosmetic surgery or transplant surgery is considered the same as a Total Disability due to illness.
Cost of Living Rider:
A Cost of Living rider increases the Monthly Benefit each year by a set percentage or by the latest Consumer Price Index while the insured is on claim. The increases are based on either simple or compound interest rates subject to the terms of the rider.
A list of expenses that are reimbursable from a BOE policy during an insured’s period of disability.
Cross Purchase Agreement:
Is a type of Buy/Sell Agreement where business owners purchase insurance on each partner and they become both the owners and beneficiaries of policy benefits.
Definition of Partial/Residual Benefit Rider:
To encourage policyholders to return to the workforce after a disabling event, some Disability Insurance carriers offer limited benefits to those who return to work part time or full time with a loss of earnings. If the insured can work in a limited capacity and is earning less than a set level of income, they would be eligible for limited benefits.
Definition of Total Disability:
This imperative provision in a Disability contract defines the parameters used to determine if a policyholder is eligible for benefits. There are substantial differences between insurance carriers with this definition. A good definition would be:
- Own Occupation: Disability is initially determined by whether or not a policyholder can perform the material duties of his or her own occupation. If a policyholder cannot do their usual work, they would be eligible to qualify for benefits. Insurance companies may use generalized or specific job descriptions when evaluating the physical and mental demands of an occupation. This provision can last anywhere from: one, two, five years or To Age 65.
- Any Occupation: At this level of Disability definition, the insured will be considered disabled if they cannot work in any occupation they are qualified for based on education, training or experience. This definition is the most restrictive and is subjective because it is based on all past education and ability to work in any occupation, not just a current occupation.
Disability Benefits are any proceeds the insured receives from a disabling event covered in the policy provisions.
The Monthly Benefit received by the insured to help replace lost earnings during his or her Benefit Period.
Disability insurance is a type of Health Insurance that pays the insured a Monthly Benefit for a predetermined amount of time by replacing income lost from either an accident or sickness.
The portion of an applicant’s income used during the underwriting process to determine the amount of Monthly Benefit an applicant may qualify for. It is typically defined as gross (after tax) salary, wages, commissions, bonus income, etc. which is derived from active employment. Calculation does not include investment income, rent, royalties, etc.
Education, Training and Experience:
State laws and insurance policies communicate that an insured’s education, training and experience must be taken into consideration when determining if there is a disability from “any occupation.” Continuation of benefits can be denied if it is determined the insured can work in a different occupation that is comparable to the job held prior to injury or illness.
To make the analysis, two criteria are considered.
- Comparable Earnings: The alternative occupation should pay comparably to the former occupation.
- Age Limitations: For those over age 55, the insured must be able to physically and mentally perform an alternative position. By using local market reviews, it can be determined if a particular job is suitable for the insured.
The Effective Date is the day in which the policy begins and the insured is eligible to make a claim for benefits.
Also referred to as a Waiting Period, the Elimination Period is the amount of time, from the onset of a disability during which a policyholder must be disabled prior to any benefits getting paid. These days may either be accumulated during a “Period of Disability” or may be required to be consecutive based on the terms of the policy provision.
Entity Purchase Agreement:
Similar to a Cross-Sell Agreement, this type of Buy/Sell Agreement designates the corporation as both the owner and the beneficiary of insurance policy proceeds.
Disability policies include specific conditions in which a disability will not be covered. For example, most policies will not provide benefits for disabilities caused by war, participating in a riot, committing a felony, or a self-inflicted injury.
Is contractually attached to a Disability Policy and outlines the specific conditions that will not be covered under the policy. Ridered conditions that are excluded often include preexisting conditions identified either by medical history or physical exam.
A payment arrangement under Section 162 of the Internal Revenue Code (IRC) that allows the insured to pay their Disability Insurance premium using a salary bonus that can be deducted from taxes.
A method of evaluating data relevant to earned income, unearned income, net worth, fringe benefits and other components of compensation to determine an insured’s eligible Monthly Benefit.
Future Purchase Option Rider:
The Future Purchase Option rider will allow the insured to purchase additional monthly benefits on specific option dates, regardless of the insured’s health, as long as the Earned Income at the time justifies the increase of benefits.
A Grace Period is the 31 days immediately following the premium due date. The coverage will continue during the 31 days, but if the premium is not paid by the end of the Grace Period, all coverage will be terminated and proof of insurance will be required in order to continue coverage after the Grace Period.
Group Long Term Disability:
An employer provided/paid Disability Insurance plan that replaces certain types of income at a specified percentage, to a stated maximum benefit amount. These plans usually cover around 60% of base salary (not including bonuses, overtime, etc) and benefits are commonly taxable due to the Employer deducting premiums on their taxes.
Guarantee of Insurability
A provision in a Disability Income Policy that gives the insured the ability to increase the Monthly Benefit on specified dates, based on income qualification only. This provision normally expires at a certain age which will be detailed in the policy language.
A policy provision guaranteeing that as long as premiums are paid by the end of each grace period, no changes can be made to any provision in the policy, except the premiums may be increased. The premiums can change, but only if the change applies to all policies within the same risk class.
Indexed Cost of Living Indemnity Benefit Rider:
This rider is designed to provide the policyholder with protection against inflation. It pays an additional Monthly Benefit, which is tied to a formula based on the Consumer Price Index. After the first year of disability, the insured’s pre-disability earnings are increased (or indexed) by a percentage. This benefit rider is used primarily with the Residual Benefit calculation, and is an important feature which will assist in minimizing the erosion of the buying power of the Residual Benefit. This additional benefit is recalculated on an annual basis.
An injury is typically defined as any accidental bodily injury sustained by the insured and is covered after the policy’s Effective Date, while the policy is in force.
Insurance Company Ratings:
Insurance company ratings can provide important information on the companies’ financial performance, stability, claims paying ability and more. There are five major insurance industry ratings services: A.M. Best, Standard and Poor's, Moody's, Duff and Phelps, and Weiss. Their top ratings are:
- Standard and Poor's - AAA
A phone interview ordered by an underwriter that confirms an applicant’s health history, employment and living habits. This information is obtained by interviewing the applicant directly.
Is a Buy/Sell policy provision that offers the insured an alternative benefit payout option of monthly installments for a specified period of time.
Key Person Policy:
A policy designed to reimburse the business for financial loss during a key person’s period of disability.
Buy/Sell Disability Policies usually pay the disability benefit in a lump sum.
A policy provision used to encourage disabled employees to participate in rehabilitation programs. Some policies include a Mandatory Rehabilitation Provision. This provision states that if an employee refuses to cooperate or participate in a rehabilitation program, benefits will be terminated.
Maximum Benefit Period (Benefit Duration):
The Maximum Benefit Period is the longest length of time Monthly Benefits are payable as long as the insured remains continuously disabled.
Maximum Monthly Benefit
The Maximum Monthly Benefit is the most amount of replaced monthly income benefit an insured can receive on a monthly basis from their Disability Policy.
A Medical Examination (and lab report) is often part of the application process for Disability Insurance policies. The information becomes part of the contract and is attached to the policy. It usually consists of obtaining certain body measurements, health questions and blood and urine samples. On occasion, it may also include ECGs, EKGs and/or MD Exams.
A method and process used to evaluate an applicant’s health and medical history to determine whether a policy will be issued and if so, the appropriate coverage, premium and exclusions.
Mental Illness and Substance Abuse Limitations:
Policy benefits can be limited when a disability is caused by a psychological, behavioral or emotional disorder; by alcoholism; or by the non-medical use of narcotics or sedatives. Benefit Periods are usually limited to 12 to 24 months unless the insured is confined to a hospital. Individual disability policies generally do not have this limitation.
Mental and Nervous Condition:
Any disability caused by or related to a mental or nervous disorder is often limited in coverage by Group Long-Term Disability policies. It is imperative to note the definition of mental and nervous disorders on a policy and the requirements insured must meet in order to receive benefits. This is a major gray area, as there are many interpretations and opinions of the terms.
- Properly Deemed: If a policy’s language is restricted, such as “disability due solely to a mental and nervous disorder,” then the limitation can be invoked when the disabling condition is due only to the mental or nervous condition. However, if a policy states that the limitation will be applied if the condition is “caused by or resulting from” or “caused or contributed by” the mental or nervous condition, the insurer may limit benefits.
- Definition: If a policy limits coverage for mental or nervous disorder disabilities, it should also contain a definition or the term “mental and nervous disorder.” The definition should include whether there is a cause of the disability, what the symptoms are, and the treatment.
Minimum Monthly Benefit:
Is the minimum amount of Monthly Benefit available to a policyholder after reductions are taken for other income replacement policies in force.
Minimum Residual Benefit:
Under the Residual Disability provision, the minimal Residual Benefit provision usually stipulates that during the first six months of disability, the insured must be paid at least 50 percent of the total disability benefit.
This figure is used in financial underwriting to determine the appropriate Monthly Benefit amount. Calculation includes the total non-business related assets of an insured.
A Non-Cancelable rider changes a Disability Policy from a Guaranteed Renewable provision to Non-Cancelable provision. This is a provision of the policy which states that the insurance company cannot change any policy provisions or increase premiums after the policy has been issued as long as the insured makes timely payments of premium.
Categories of risk assessment and pricing used by insurance companies based on a prospect’s specific, customary job duties. An occupation class will dictate the premium and contractual provisions the insured will be offered by that carrier.
Optional benefits are usually available in the form of riders. They add additional coverage to the basic policy. These optional riders provide additional flexibility in the design of a Disability Income program to meet the policyholder’s specific needs. Rider examples can include: Own Occupation Rider, Residual Rider, Cost of Living Rider, Guarantee of Insurability, Catastrophic Disability Riders, etc.
Other Income Benefits (Benefit Integration):
While an insured is disabled, they may receive benefits from other sources, such as Social Security, workers’ compensation or disability benefits received from an employer-sponsored plan. Benefits payable under a group LTD plan may be reduced by other sources of income.
Outline of Coverage:
A summary of the overall benefits provided to a policyholder in a policy by the insurance carrier.
In Business Overhead Expense policies, the Overhead indicates the maximum benefit payout and is calculated by multiplying the Monthly Benefit by the number of months in the Benefit Period.
Own Occupation is the most preferred policy definition available. It defines disability as the insured’s inability to perform the material and substantial duties of the insured’s Own Occupation. This is the occupation which is being performed at the time of disability, not at the time of application. Variations of this provision will provide additional terms such as “regular” occupation, your own specialty occupation, etc.
See Medical Exam definition.
This policy provision or rider pays a specified benefit percentage if the policyholder is unable to perform one or more duties of his own occupation and is usually defined as a shorter-term version of the Residual Disability rider benefit. This policy provision pays a specified percentage of the total disability benefit (usually 50 percent) for a short period of time (usually 6 months) if the insured is unable to perform one or more of the duties of his or her own occupation.
Personal History Interview:
See Inspection Report definition.
Physician Care Requirement:
This policy provision that requires the insured to be under the regular care of his or her attending physician as an eligibility requirement for claim benefits to get paid. There are some Insurance Carriers who will waive this requirement if it can be proven that future treatment would be of no benefit to the insured.
Policy Schedule Page/Policy Declaration Page:
This section of the policy provides the details of all the specific individual policy data such as insured’s name, policy number, Monthly Benefit, Optional Riders, Policy Provisions and the premium.
Pre-disability earnings are the employee’s salary that is covered by the plan on the day before the disability began
A policy provision that defines what constitutes prior income for purposes of calculating the Residual Disability Benefit. As an example: the average monthly earnings for the previous 24 calendar months immediately prior to the disability is what would constitute prior income so that benefit could be calculated under the Residual Disability benefit.
Pre-existing conditions are usually defined as any mental or physical condition for which:
- The insured has consulted a physician; or
- The insured has received medical treatment or services; or
- The insured has taken prescribed drugs or medications; or
- A reasonably prudent person would have sought medical advice, care or treatment during the 365-day period ending the day prior to the policy's effective date.
If during a specified period of time prior to coverage, the insured received medical attention for the same illness or injury that caused their disability claim, after the policy’s effective date of coverage, the disability will not be covered. Some policies have more restrictions that state if the insured did not seek medical attention for the condition but still experienced the symptoms prior to coverage, the disability benefit for that condition may be excluded from claim. Conditions disclosed on the application are not automatically considered to be pre-existing but may result in a Waiver or Rating.
Preferred Risk Class:
A Preferred Risk Class are individuals who have a lower anticipated mortality or morbidity rate based on exceptional health, family medical history and low risk occupations, etc, than individuals with average health and are considered a Standard Risk Class.
A Premium is the payment required to keep an insurance policy in effect.
The premium payment frequency is selected by the insured. Most insurance companies offer annual, semi-annual, quarterly or monthly payment options. Fees are typically assessed for semi-annual and quarterly premium payment modes.
Presumptive Total Disability:
Is defined as a total and permanent loss of sight, hearing, speech or the use of two limbs, etc due to an injury or illness. This provision can allow for the full payment of the Total Disability benefit without requirement of physician care and without offset for any work earnings.
Examples of which could be one of the following:
- Loss of hearing in both ears (not restorable by hearing aids)
- Loss of sight in both eyes (this means that both eyes must measure at or below 20/200 after efforts have been made to correct vision)
- Loss of use of both hands;
- Loss of use of both feet; or
- Loss of use of one hand and one foot.
Qualified Sick Pay Plan:
A formal plan designed to continue the income of certain employees at disability. Terms of these type plans are outlined by Section 105 of the Internal Revenue Code.
An underwriting decision that assesses additional premium to a policy in order to cover a certain condition(s) or to allow the issuance of a policy in recognition of perceived additional risk.
This policy provision or Optional Rider refers to the continuation of Residual Disability benefits should the claimant “recover” from the disability but still suffer an income loss due to the disability. Benefits in this scenario can continue for 12 months or to the end of the Benefit Period.
This policy provision protects policyholders who have returned to work, but become disabled again from the same or a related cause. Should the situation occur within a certain time frame, the insured will still be considered disabled from the original disability and will not be subject to a new Elimination Period. The Recurrent Disability provision encourages policyholders to return to work without the fear of losing benefits should the disability continue.
Is a program of clinical and vocational services that aids in the restoration or improvement of the insured’s health and functionality. The goal of this program is the return of a disabled insured to work and good health.
This term refers to the insured’s specific occupation at the time a disability begins. This language can be interchangeable with Own Occupation definitions.
The Rehabilitation Benefit can be a policy provision or an Optional Rider for insureds who join a physical or occupational rehabilitation program approved by the insurer to assist the claimant in the payment of expenses associated with a rehabilitation program the insured may enter following a disability.
Relation of Earnings to Insurance:
A policy provision that establishes a maximum overall benefit level which considers income received while disabled from all sources, including insurance. The benefits cannot exceed a specified percentage of the insured’s prior earnings.
The policy provision detailing the conditions upon which the insurance company agrees to continue to insure the owner of the policy. Typically individual disability policies are either Non-Cancelable or Guaranteed Renewable.
Residual Disability Rider:
An important policy provision usually offered as an Optional Rider. This rider provides benefits when the insured is not Totally Disabled under the terms of the contract but is working with a loss of income. Residual Disability benefits are based on minimum and maximum earnings losses, usually requiring at least a 20% loss of income to qualify for benefits and paying a full benefit up to 75% - 80% loss of income.
Return of Premium:
An optional benefit providing a refund of a specified percentage of the policy premium on specified dates. Typically this refund is paid less any benefit payment, during a specified time period.
Return to Work Provision:
See Recurrent Disability definition.
Salary Continuation Plan:
Also called a Section 105 plan, this allows an employer to make full or partial deductible wage payments to a disabled employee.
Is a policy provision limiting coverage (often two years) for Disability Benefits due to an illness or injury that is based on Self-Reported Symptoms. These symptoms are disabilities that cannot be verified via traditional medical testing. Common examples include headaches, pain, fatigue, stiffness, soreness, ringing in the ears, dizziness and numbness. Some States have found that Fibromyalgia and Chronic Fatigue Syndrome may not be included in such provisions.
Group & Individual Short Term Disability:
These policies typically pay benefits after a short Elimination Period and with the Benefit Period lasting 13-26 weeks. The Maximum Benefit Amounts are usually much lower than long term disability plans.
This provision includes both physical and mental illness or disease that is diagnosed following the Effective Date of the policy.
Significant Earnings Loss Provision:
This provision is designed to allow the insured to collect full Disability Benefit if they return to work but suffer a significant loss of income.
A Federal program that provides potential income benefits to the majority of working Americans, in the form of disability, retirement or survivor benefits. The qualification for Social Security benefits is based on very strict and narrow definitions and benefits are limited to low monthly maximums.
Specialty Own Occupation Rider:
A specified definition of disability that contractually indicates the insured’s occupation will be a recognized specialty due to limiting their practice to a certified area of expertise. Typically this definition is limited to medical and legal professions where certified specialties are recognized by licensing boards or trade associations.
Standard Risk Class:
The Standard Risk Class are the individuals whose mortality and morbidity risks are considered average. Most people are included in this risk class.
Substitute Salary Expense:
This provision is found in BOE policies and reimburses the business to compensate for a replacement worker during insured’s period of disability.
Supplemental Health Statement:
This application form provides the underwriter with additional details about an applicant’s health.
The Survivor Benefit is payable to the insured or the insured’s beneficiary, should they die while receiving Total Disability Benefits. The Survivor Benefit is a lump sum payment amount and is an optional benefit in most policies.
Applicants who use tobacco products are subject to a higher premium rate class, usually referred to as a Tobacco Rate Class. Those applicants who do not use tobacco products are given a lower premium rate. If an applicant smoked in the past, but has quit more than a year ago, most insurers will consider that applicant as a nontobacco user. Nicotine is easily detected from the results of a urinalysis, which is commonly required by most insurance companies in the underwriting process.
Total Disability/Totally Disabled:
An insured qualifies as Totally Disabled if, due to illness or injury, they are unable to perform the material and substantial duties of their occupation; are not engaged in any other occupation; and are under the care of a physician.
Total Disability in Your Own Occupation Rider:
This cornerstone definition rider changes the definition of Total Disability by allowing the insured to work another job while still totally disabled from their regular occupation.
Transitional Own Occupation Rider:
A definition of disability which provides increased levels of coverage when the insured is unable to work in his/her own occupation but decides to work in a new occupation. Typically provides combined work and disability benefits of up to 100% of the prior income level.
An underwriter can be defined as either an insurance company that receives premiums and accepts responsibility for fulfilling policy contracts or an insurance company employee who reviews all risk categories and then decides what risks the company should assume.
Is the process of risk assessment an insurance company uses to determine the insurability of an applicant. Typically this includes assessment of current and prior medical history, blood draw, urinalysis, review of financial information, assessment of job duties, travel exposure, avocations and any other information which leads to an understanding of the risks and exposures associated with an applicant.
Unearned income continues regardless of whether an individual is working. Examples of which include interest or dividend income.
An uninsurable risk is someone who is declined coverage due to excessive risk of loss.
See Elimination Period definition.
An underwriting action which limits or excludes coverage for certain conditions or parts of the body.
Waiver of Premium:
A policy provision that states while benefits are being paid out, no further premium payments are required from individuals who become disabled and qualify for benefits. The Waiver of Premium usually begins after the insured has been continuously disabled for a specified period of time.
A State-administered insurance program that provides benefits to employees who are injured on the job.
Workplace Modification or Accommodation:
The Workplace Modification or Accommodation benefit assists an employer when a disabled employee requires special needs or equipment in order to return to work.