Chapter 2 — Disability Policy Definitions & Provisions

A disability income policy’s renewability provision is important because it defines if, and under what conditions, the insurance company can change or cancel the policy or increase its premium. There are four types:

The policy’s definition of disability determines whether benefits are payable in any specific instance. Importantly, most definitions of total disability do not require income loss for benefits to be payable — only income replacement policies do.

There are three primary definitions of total disability:

The broadest protection for the insured. The insured is considered totally disabled when:

Under a pure own occupation definition, the insured is considered totally disabled if he or she cannot perform the substantial and material duties of their regular occupation — even if employed in another field. For example: a surgeon who develops a hand tremor may receive disability benefits while also earning income as an anesthesiologist. This definition is generally restricted to the lowest-risk occupation classes.

A modified own occupation definition adds the qualifier that the insured is not engaged in any other occupation. Under this variation, entering another occupation that is reasonable given the insured’s education and experience would reduce or eliminate the benefit. This results in somewhat lower premiums.

The definition of disability changes with the duration of disability:

This definition typically appears on policies for higher-risk occupation classes. It provides own occupation protection initially, then becomes more restrictive over time. Most competitive individual disability policies today use this or a variation of it.

The least favorable definition for the insured. As refined by courts, it now typically reads:

This definition is generally reserved for the highest-risk occupation classes. Benefits cease if the insured can perform any occupation suitable to their background — not just their prior occupation.

Income replacement policies contain no definition of disability. They pay a monthly benefit based solely on income loss resulting from sickness or accident.

The minimum income loss required to trigger a benefit is typically 20%. In some policies, a loss greater than 80% is considered total and the maximum monthly benefit is paid. Benefits are recalculated monthly based on the previous month’s income.

Most disabilities are not total. Two approaches exist for non-total disability:

Usually found in policies for higher-risk occupations. Requires inability to perform one or more duties of the regular occupation, but no income loss is required. The benefit is a fixed percentage (typically 50%) of the total disability benefit for a maximum period (typically 6 months). Simple but limited.

More comprehensive, typically found in professional and managerial occupation policies. Pays a monthly benefit proportional to income lost:

Key features of modern residual disability benefits:

• Benefit trigger: Income loss of at least 20% as a result of accident or sickness.
• Minimum benefit (first 6 months): 50% of the total disability benefit, even if only a 20% income loss occurred.
• Deemed total: An income loss greater than 75% is often treated as total disability, triggering the full monthly benefit.
• CPI sensitivity: Pre-disability earnings are indexed to the CPI in year 2 and beyond, increasing the residual benefit without any additional income loss.
• Prior total disability generally not required in modern policies, though some older forms required it.

A subsequent disability occurring within a specified period (usually 6 months) following a prior disability from the same or a related cause is treated as a recurrence of the earlier disability. Recurrent disabilities:

• Do not require the insured to satisfy a new elimination period.
• Continue — and may therefore shorten — the earlier benefit period.

If a disability is not recurrent (i.e., a new disability), the full benefit period begins again.

A pre-existing condition is generally defined as a sickness or physical condition for which medical advice or treatment was recommended by or received from a physician, or for which symptoms existed that would cause a prudent person to seek diagnosis or treatment, within the two-year period preceding the effective date of the policy.

Disability income policies generally do not pay benefits for disabilities from pre-existing conditions during the first two years in force unless: (1) the condition was disclosed in the application, and (2) the insurer did not specifically exclude it. After two years, undisclosed pre-existing conditions are covered like any other condition.

The elimination period is the time between onset of disability and when benefits begin to accrue — functioning like a time-based deductible.

Common elimination periods: 30, 60, 90, 180, and 365 days. Insurers generally prefer 60 or 90 days to avoid frequent small claims. Longer elimination periods lower premiums significantly.

A split elimination period addresses specific underwriting risks. For example, an applicant with a history of lower back problems might receive a 180-day elimination period for lower back disabilities but a 30-day period for all other causes — giving needed coverage while protecting the insurer from likely claims.

The maximum period for which disability benefits will be paid during a continuous disability. Common benefit periods: 2 years, 5 years, to age 65, or lifetime.

Split benefit periods provide different benefit periods for accident versus sickness disabilities. For example: lifetime benefit for accident, 2-year benefit for sickness. Lifetime sickness benefits typically are limited to disabilities commencing before age 50 or 55.

The two most common exclusions in disability income policies are:

• Disabilities arising out of war or act of war.
• Disabilities caused by sickness or injury while the insured is on active duty in the Armed Forces.

Earlier policies also commonly excluded self-inflicted injuries and aircraft crew disabilities; these are less common in modern policies.

After a period of disability (usually 90 days), the insurer waives all future premiums during the continuation of disability and refunds premiums paid during the initial 90-day period. The disability triggering the waiver may be either total or residual disability. In more liberal versions, the waiting period for waiver equals the lesser of the elimination period and 90 days — so a 30-day elimination period policy waives premiums after just 30 days of disability.

Pays for medical treatment prescribed by a physician within 90 days of an accident that does not cause a qualifying disability. The benefit is generally limited to 50% of the monthly total disability benefit. This benefit is paid instead of — not in addition to — monthly disability benefits.

Two components: (1) guarantees that participation in a rehabilitation program will not be considered recovery from total disability, and (2) pays some or all of the cost of the rehabilitation program not covered by other means. Under an own occupation definition, the insured may still receive disability benefits even while participating in rehabilitation if he or she remains unable to perform their own occupation.

Disability insurance policy renewability provisions govern the insurer’s ability to cancel coverage or increase its premium. The most protection is provided by noncancellable and guaranteed renewable coverage. Disability definitions vary greatly and may consider the insured totally disabled when unable to do his or her own job, or may require inability to perform the duties of any job.

The principal disability insurance exclusions and limitations refer to pre-existing conditions, acts of war, and armed forces service. Elimination periods function as time-based deductibles that lower premiums in exchange for delayed benefits. Benefit periods define the maximum duration of coverage during any single period of continuous disability.