Disability income and accidental death and dismemberment policies

Two policies that pay cash, not medical bills

Medical expense insurance reimburses doctors and hospitals. Disability income and accidental death and dismemberment (AD&D) policies do something different: they pay the insured a stated cash amount when a covered event happens, regardless of what any medical care cost. Because they are income-replacement and accident-only products, they are not comprehensive health coverage; Florida's small-group law expressly leaves accident-only and disability income insurance out of the definition of a "health benefit plan."

Disability income: replacing a paycheck

A disability income policy pays a monthly benefit while the insured cannot work because of sickness or injury. Its most important terms:

• Definition of total disability. Under own occupation, the insured is disabled if

unable to perform the duties of his or her own job. Under any occupation, the insured must be unable to perform any job reasonably suited to education, training and experience, a stricter test. Many policies use a split definition: own occupation for an initial period, often two years, then any occupation.

• Elimination period. A waiting period, measured from the start of disability, during

which no benefits are paid. It works like a deductible expressed in time: a longer elimination period means a lower premium.

• Benefit period. How long benefits last once they begin. Short-term disability

generally pays for a few months up to about two years; long-term disability pays for years, often to age 65.

• Benefit amount. Insurers cap the benefit at a percentage of earned income, commonly

around 60 to 70 percent, so the insured always has a reason to return to work. Overinsurance invites malingering.

Other provisions you must recognise:

• Partial disability pays a reduced benefit when the insured can do some but not all

duties; residual disability pays in proportion to the income actually lost after returning to work.

• Presumptive disability treats certain severe losses, such as total loss of sight,

hearing, speech or the use of two limbs, as total disability automatically.

• Recurrent disability: a relapse from the same cause within a stated period, often six

months, is treated as a continuation of the first claim, so no new elimination period applies.

• Waiver of premium: premiums stop after the insured has been totally disabled for a

set period, commonly 90 days.

• Riders can add a cost-of-living adjustment, a guaranteed insurability or future

increase option, and a Social Security (social insurance) substitute benefit.

Loss of income is the point. A policy may require an actual loss of income before it pays, and Florida's rule that a practitioner's HIV-related licensing restriction counts as sickness disability still does not require payment without such a loss where the policy requires it.

Taxation follows who paid. An individual who buys a policy with after-tax money gets tax-free benefits. When an employer pays the premium and deducts it, the benefits are taxable income to the employee.

Businesses use the same product: business overhead expense insurance pays a disabled owner's rent, utilities and staff salaries; disability buy-sell insurance funds a partner's buyout; key person disability protects the firm against the loss of a vital employee.

Accidental death and dismemberment

AD&D pays only for accidents, never sickness. It pays the principal sum (the face amount) for accidental death, or for loss of two hands, two feet or the sight of both eyes. It pays a capital sum, usually half the principal sum, for loss of one hand, one foot or the sight of one eye. The death or loss generally must occur within a set time after the accident, commonly 90 days.

Wording matters. Accidental means coverage requires that both the cause and the result were unintended, which is narrower. Accidental bodily injury (accidental results) coverage requires only that the result was unintended, which is broader and is the modern standard.

AD&D is sold as a stand-alone policy, a rider on life insurance (which is why it acts as "double indemnity"), or as limited-risk coverage for a specific hazard such as travel. Florida's blanket health law, for example, permits accident or disability income coverage for groups such as newspaper delivery persons.

Disability income replaces a paycheck while you cannot work; AD&D pays a fixed sum for an accidental death or loss of limb or sight.