Disability income and accidental death and dismemberment policies

Disability Income and Accidental Death and Dismemberment Policies

Two kinds of accident and health coverage pay cash rather than medical bills. Disability income insurance replaces part of the paycheck a person loses when injury or sickness keeps them from working. Accidental death and dismemberment (AD&D) insurance pays a stated lump sum when an accident kills the insured or costs them a limb or their sight. Both are tied to the person, not to what a doctor charges.

Disability income: the building blocks

Elimination period. The waiting period at the start of each disability before benefits begin, commonly 30, 60, 90 or 180 days. It works like a deductible measured in time: the longer the elimination period, the lower the premium. Benefits are not paid retroactively for the elimination period.

Benefit period. How long benefits continue once they start. Short-term disability pays for a limited period, typically up to about two years and often much less. Long-term disability pays for longer: five or ten years, or to age 65 or 67. The longer the benefit period, the higher the premium.

Benefit amount. Insurers limit the monthly benefit to a percentage of earned income, commonly 60 to 70 percent of gross income, and they look at all disability coverage the person already has. Someone who would be paid more disabled than working has no reason to return to work, so insurers avoid overinsurance. An individual policy may contain the optional Relation of Earnings to Insurance provision. If total loss-of-time benefits under all valid coverage exceed the insured's monthly earnings, or the two-year average if that is greater, the insurer pays only its proportionate share and refunds the excess premium. It cannot cut total benefits below $200 a month, or below the sum of the stated benefits if that is less.

Defining total disability. This definition decides whether a claim is paid.

• Own occupation: the insured cannot perform the material duties of their own occupation. This is the most generous definition and the most expensive.
• Any occupation: the insured cannot perform any occupation for which they are reasonably suited by education, training or experience. This is stricter and cheaper.
• Split definition: own occupation for an initial period, often two years, then any occupation after that.
• Presumptive disability: the total and permanent loss of sight, speech, hearing, or the use of two limbs is treated as total disability, even if the insured goes back to work.

Many policies also pay a reduced partial or residual benefit when the insured can work but earns less. Those classifications are covered in their own lesson.

Renewability. A noncancellable disability policy cannot be cancelled, and its premium cannot be raised, as long as premiums are paid to the stated age. A guaranteed renewable policy must be renewed, but the insurer may raise premiums for an entire class of insureds.

Common exclusions. These include intentionally self-inflicted injury, war or acts of war, injury while serving in the armed forces, and injury suffered while committing a felony.

Taxation of disability income

The tax rule follows who paid the premium. Under federal law, amounts received through accident or health insurance for personal injuries or sickness are excluded from gross income. The exclusion does not apply to the extent the benefits come from employer contributions that were not included in the employee's income. So:

• An individual who buys the policy with after-tax dollars cannot deduct the premium, and benefits are received tax-free.
• When the employer pays the premium and it is not included in the employee's income, benefits are taxable income to the employee.
• When the cost is shared, the portion of the benefit attributable to the employer's contributions is taxable.

Accidental death and dismemberment

AD&D pays only for accidents, never for sickness. It can be a stand-alone policy, a rider on a life or health policy, or a group benefit.

• Principal sum: the full face amount, paid to the beneficiary if accidental injury causes death. Policies typically require death to occur within a set time after the accident, often 90 days.
• Capital sum: the amount paid for dismemberment or loss of sight, expressed as a percentage of the principal sum. Losing two limbs, or both eyes, commonly pays the full principal sum. Losing one hand, one foot or the sight of one eye commonly pays half.
• Accidental means vs. accidental bodily injury (results). An accidental means clause requires both the cause and the result to be unintended and unforeseen. An accidental bodily injury clause requires only that the injury itself be unexpected. Results wording is broader and more favorable to the insured.

Typical AD&D exclusions are illness or disease, suicide or intentionally self-inflicted injury, war, and certain hazardous activities. When a life insurance policy adds a death or dismemberment benefit by accident, often called double indemnity, the insured's beneficiary receives the extra amount only when the death is accidental.

Disability income replaces a paycheck over time. AD&D pays a fixed sum for a specific accidental loss.