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Underwriting Individual Disability Income Insurance
Underwriting disability income insurance poses unique challenges for the underwriter.
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Unique Aspects of Individual Disability Income Underwriting
Disability income (DI) insurance replaces income lost during a disability, so underwriters study the factors related to the applicant’s employment, such as the type of occupation and earnings. These factors determine the type of policy that will be issued and the benefits it will offer.
These factors also determine the policy’s coverage and premium: • Age: Age affects the likelihood of disability. Older insureds have a greater risk of disability. • Sex: The insured’s sex affects the premium. Women are more likely to suffer disability than men. • Job classification: Less hazardous occupations incur less expensive premiums. • Avocations or hobbies: Less hazardous avocations or hobbies incur less expensive premiums. • Health status: A history of good health will result in a lower premium.
Occupational Classification
DI policies define disability on one of two bases: any occupation (“any occ”) and own occupation (“own occ”).
The any occ definition is the narrowest and is comparable to the definition used by Social Security. Under the any occ definition, a person is totally disabled only if unable to perform any occupation for which he or she is reasonably suited by education or experience.
Under the own occ definition, an insured qualifies for total disability benefits if unable to perform the material duties of his or her own occupation. From the insured's point of view the own occ definition is preferable.
Policies with an own occ definition are usually sold only to those in professional and managerial occupations. Policies with the any occ definition are usually sold to insureds in blue-collar jobs.
Insurers classify occupations according to the risk they involve. This classification considers: • the likelihood of the insured becoming disabled because of the risks of the job • the likelihood of the insured returning to the job following a period of disability
Benefit Limits
The maximum benefits available under a DI policy are principally determined by the insured's wages or earnings. They never exceed the insured’s pre-disability wages. Otherwise, the insured would profit from the insurance.
Key Point
DI policy benefits are a percentage of—and always less than—the insured’s gross income. This encourages the insured to recover from the disability and return to work.
DI Policy Alternatives
Disability can impose a much greater financial burden on a household than death. This makes the protection from disability income insurance important for every employed adult, especially those with dependents. For those who cannot afford this insurance, there are alternatives.
Social Security
The Social Security program pays monthly benefits to participants who are fully insured in the program. To qualify for benefits, a participant must suffer a total disability that prevents work in any employment and is expected to last a year or more and end in the participant’s death.
Professional Starter Policy
DI insurance is important for professionals such as doctors, lawyers, architects, and engineers. Most insurers offer policies that let the insured increase coverage in the future without providing evidence of insurability. Also called a buy-up option, it is like the guaranteed insurability rider available with many types of health insurance.
For Your Review
• Occupational classifications guide underwriters when determining the benefit limits and premiums for a disability income insurance policy. • Occupational classifications consider the likelihood that an insured will be disabled from the risks of a job and the likelihood that the insured will return to work following a disability. • Under the any occ definition, a person is totally disabled only if the person cannot perform any occupation for which the person is reasonably suited by education or experience. • Because the any occ definition is broad, a person is more likely to find some occupation for which he or she is suited by education or experience. So, a person is less likely to qualify for benefits under this definition. • Under the own occ definition, a person is totally disabled if the person cannot perform the material duties of his or her own occupation. • Because the own occ definition is narrow, a person is more likely to be unable to perform the duties of his or her occupation (even if the person can perform those of another). So, a person is more likely to qualify for benefits under this definition. • DI policy benefits are less than the insured’s gross income. This encourages the insured to recover from the disability and return to work. • Alternatives to a DI policy are Social Security and a professional starter policy.
QUIZ
Question 1
Why does a disability income insurance policy limit the maximum benefit to a percentage of the insured's pre-disability wages and earnings? a) to save the insurer's expense in paying the claim
b) to encourage the insured to return to work
c) to keep the insured from profiting from insurance d) to make the premium affordable for the insured
Question 2
Which occupation would NOT qualify for a disability income policy that pays benefits on the basis of the "own occupation" definition of disability? a) mechanical engineer b) physician c) architect
d) construction worker
Question 3
Which occupation would qualify for a disability income policy that pays benefits on the basis of the "own occupation" definition of disability? a) factory worker b) construction worker c) manual laborer
d) lawyer
Question 4
Which statement is CORRECT about a guaranteed renewable disability income policy? a) The insurer can never increase the premium.
b) The insurer can increase the premium if it increases the premium for all policies in the same class.
c) The insurer can never reduce the benefits. d) The insurer can increase the premium only if the insured makes a claim.
Question 5
A handyman applies for an individual disability income insurance policy. Which definition of total disability will the insurer most likely use when issuing the policy? a) presumptive disability
b) any occupation
c) all occupation d) own occupation
Question 6
Which statement is correct about a buy-up option in a disability income insurance policy for professionals? a) It lets the insurer increase the premium over time. b) It lets the insured increase the maximum benefit to 100 percent of pre-disability earnings. c) It lets the insured buy coverage at rates for a higher occupational classification.
d) It lets the insured buy more coverage in the future without evidence of insurability.
Question 7
When underwriting individual disability income insurance, the most important factor in determining the maximum monthly benefit is the insured's: a) age and sex b) health c) occupational class
d) wages and earnings
Question 8
Debbie owns a noncancelable individual disability income policy. She receives benefits for one year and then returns to work. Which statement is correct about the policy's renewal? a) The insurer can reduce the benefits. b) The insurer can increase the premium. c) The insurer can cancel the policy.
