DI Question

[Mac1958]

Can someone explain the process for determining the amount of benefit a private insurer will pay for disability income?

Here's where I'm confused - Let's say your individual policy says it will pay 70% of your current income. What happens if you're on Worker's Compensation and/or Social Security Disability, as a result of this disability? Does the insurance company coordinate with those agencies to bring your total benefit up to 70%?

And what happens if your Worker's Compensation runs out? Does the private plan then increase its benefit?

Thanks for any input, my little brain can't figure this one out.


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[arnguy]

I believe that it depends on the policy. Usually one can have a lower premium if they agree to an offset for any Social Security Disability Income they may receive. Workers Comp covers only disability on the job while an individual DI policy usually covers both on and off the job. I don't think there is an offset for Workers Comp, but you may want to check on the website www.disabilityinsuranceforum.com for a definitive answer. Also, IDI policies usually cover 45% to 60%----I don't think there are any 70% of income policies out there IMHO.

 

[BNTRS]

Can someone explain the process for determining the amount of benefit a private insurer will pay for disability income?

Here's where I'm confused - Let's say your individual policy says it will pay 70% of your current income. What happens if you're on Worker's Compensation and/or Social Security Disability, as a result of this disability? Does the insurance company coordinate with those agencies to bring your total benefit up to 70%?

And what happens if your Worker's Compensation runs out? Does the private plan then increase its benefit?

Thanks for any input, my little brain can't figure this one out.


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The percentage is an estimated number, but no insurance company in the IDI market (at least not the good ones) use a percentage of income as the amount one can purchase.

Instead they have participation rates, which is the maximum amount one can buy for a given income (there is rounding involved and it varies by carrier, e.g. if I make $123,567 usually rounded to $124,000).

The participation rates can be presented to an agent/broker in a table, or can be calculated with an illustration.

You'll find the participation rate as a percentage of income is much higher for people with lower incomes.

There is no consideration for SSI or workers comp. when it comes to determining the max amount one can buy, i.e. max participation rate (there is a rider called a SIS rider--stands for social insurance subsitute--that allows you to lower the premium by coordinating benefits with receipt of social security benefits)

There is an offset for group LTD. However, you'll find that the participation rates are different than say someone who already has an IDI policy and wants to buy more insurance. It has mostly to do with taxability of the benefits--e.g. if they are taxable, the participation rate is higher, i.e. they can buy more individual coverage. What this means is the amount one can buy if they already have group insurance is more than if someone else had the same amount of coverage and same income only in IDI coverage.

The maximum participation can also be effected by occupation.

So if you have a policy that pay X and X equals 70% of your gross earnings and you are on claim and receiving either workers comp or SSI--and there is no SIS rider on the policy--you will receive your full benefit providing you are fully disabled, meeting the conracts definition of total disability.

 

[arnguy]

Excellent post, BNTRS. I have been out of the DI market for a number of years so the details are a bit fuzzy for me; however, with the mess in the group health market I am considering getting back into DI.

 

[BNTRS]

Excellent post, BNTRS. I have been out of the DI market for a number of years so the details are a bit fuzzy for me; however, with the mess in the group health market I am considering getting back into DI.

Thanks, very misunderstood product, which often yields very strange planning strategies.

A lot of agents really drop the ball on this as well. I had a guy once show me his disability coverage and my response was, "well, it's something, but there's more you should do."

His response was shock b/c a few other agents he had talked to glanced at it and said "Ummm, yeah your good leave that alone."

 

[Mac1958]

Thanks for your help, BNTRS. If you're willing, let's take this down to about the third grade level (this is new to me):

Gross Income: $5,000 per month
Contracted DI Benefit: $3,000 per month
Social Security DI Benefit: $1,000 per month
Worker's Comp Benefit: $1,000 per month

As I understand it, the insurance companies do not want the client to make 100% of their normal income because they want the client incentivized to get back to work. So, given the above numbers, how much would the client make? What would happen in this situation?

I've begun studying the products, but so far I have not seen this specific area covered and I'm sure it's a common situation.

Thanks again.

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[BNTRS]

Thanks for your help, BNTRS. If you're willing, let's take this down to about the third grade level (this is new to me):

Gross Income: $5,000 per month
Contracted DI Benefit: $3,000 per month
Social Security DI Benefit: $1,000 per month
Worker's Comp Benefit: $1,000 per month

As I understand it, the insurance companies do not want the client to make 100% of their normal income because they want the client incentivized to get back to work. So, given the above numbers, how much would the client make? What would happen in this situation?

I've begun studying the products, but so far I have not seen this specific area covered and I'm sure it's a common situation.

Thanks again.

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Is the social security benefit listed a rider on their current policy, or are you taking that from their last social security benefits statement they received?

Depending on the answer to your question, the resutling benefit would look like this:

1.) Rider

They become totally disabled and are denied SSI (usual occurence) they would then receive $4,000 per month from the insurance company (they would only receive workers comp if they were injured at work, and it will not effect IDI benefits). If they could qualify for SSI they would then lose the $1,000 per month from the SIS rider.

2.) Actual Social Security benefit

They would receive $4,000 per month from the insurance company (again $1,000 if they were injured at work). If they could qualify for SSI (5 month elimination period and illness or injury must either be expected to result in their death within 12 months or be irrevocable) they would then receive $1,000 per month from SSI.

Keep in mind that more than half of all applications for SSI get denied. There is an appeals process and those who are persistent sometimes get benefits. But persistency and finally getting benefits won't help you to keep your house from being foreclosed on in the months immediately following the illness or injury that takes you out of work.

 

[Mac1958]

Excellent, one more question and this will be making sense. By the way, this was just an example, not a current deal.

Are you saying that, if the client's personal DI policy is for $5,000, they may not receive that because of other income such as Social Security and Worker's Comp? Does that mean that the insurance company is monitoring Social Security and Worker's Comp? Is that how they know to reduce the contracted benefit?

Well, I guess that was three questions, not one...

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[BNTRS]

Excellent, one more question and this will be making sense. By the way, this was just an example, not a current deal.

Are you saying that, if the client's personal DI policy is for $5,000, they may not receive that because of other income such as Social Security and Worker's Comp? Does that mean that the insurance company is monitoring Social Security and Worker's Comp? Is that how they know to reduce the contracted benefit?

Well, I guess that was three questions, not one...

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No, no, and no.

The benefits would only be decreased if there was a SIS rider on the policy. Base benefit would be uneffected in most cases. Now, there are certain stipulations at different insurance companies that would start to muddy this up a bit. Some insurance companies have ant--meandering provisions that make the benefit income dependent. They will require proof of income loss in addition to whatever else they require as proof of loss of the ability to perform material and substantial duties of an occupation (either specific if own occ, or less so if any occ).

Now, we are approaching a situation where the answer to these question could be dependent in the specific contract. Not quite there yet, but not far either.

 

[Mac1958]

Great stuff BNTRS, much appreciated!


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