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Disability income and accidental death and dismemberment policies

Lesson 31 of 93 · All lessons · Up next: Basic and major medical expense insurance →

Two very different "cash" policies

Most health coverage pays providers for treatment. The two policy types in this objective pay cash to the insured, and they are triggered by very different events. Disability income insurance pays a periodic benefit while sickness or injury keeps the insured from working. Accidental death and dismemberment (AD&D) insurance pays a lump sum for specified losses caused by accident. In Texas both are accident and health contracts under Title 8 of the Insurance Code, and individual policy forms and required provisions are governed by Chapter 1201 (Tex. Ins. Code Title 8; Tex. Ins. Code ch. 1201).

Disability income: replacing a paycheck

Disability income insurance (also called loss-of-time coverage) does not reimburse medical bills. It replaces part of earned income. Four levers define almost every policy:

  • Definition of disability. Own occupation pays if the insured cannot perform the duties of his or her own job; any occupation is stricter and pays only if the insured cannot work in any gainful occupation for which he or she is reasonably suited; loss-of-income definitions measure the drop in earnings. Many contracts use own-occupation for an initial period, then switch to a stricter test.
  • Elimination (waiting) period. A stated number of days of continuous disability that must pass before benefits begin to accrue. A longer elimination period lowers premium. Benefits are typically paid at the end of each benefit interval, not in advance.
  • Benefit period. How long benefits can continue — short-term (weeks or months) or long-term (years, or to a stated age).
  • Benefit amount. A percentage of pre-disability earnings rather than the full amount, so the insured keeps a financial incentive to return to work. Insurers also apply issue and participation limits and coordinate with other income sources.
A two-panel diagram comparing disability income insurance with accidental death and dismemberment insurance. The top panel is a horizontal timeline titled: disability income, a periodic benefit while disabled. At the far left a red dot marks the injury or sickness. Immediately to its right a short grey bar labeled elimination period is marked no benefits payable. A green dot then marks the point where benefits begin, followed by a much longer green bar labeled benefit period, where a percentage of pre-disability earnings is paid periodically. The timeline ends at a grey dot labeled recovery or maximum duration reached. The bottom panel is titled: accidental death and dismemberment, a lump sum for a listed accidental loss. A box on the left states the trigger: accidental bodily injury, with the loss occurring within the time stated in the policy. An arrow leads to three stacked boxes of covered losses. The first two, accidental death and multiple severe losses, both point with arrows to a green box labeled principal sum, the full face amount. The third box, a single loss such as one hand, one foot, or sight of one eye, points to an orange box labeled capital sum, a lesser stated percentage. A footnote says amounts are set by the policy's schedule of losses and that sickness, self-inflicted injury, and war are typically excluded.
Disability income pays periodically after an elimination period; AD&D pays the principal or capital sum as a lump sum for a scheduled accidental loss.

Provisions and riders to know

  • Presumptive disability — full benefits without meeting the usual test upon severe losses such as sight, hearing, speech, or use of limbs.
  • Residual or partial disability — a reduced benefit when the insured returns to work at lower earnings.
  • Recurrent disability — a relapse within a stated period is treated as a continuation of the prior claim, so no new elimination period applies.
  • Waiver of premium — premiums are waived while the insured remains disabled.
  • Cost-of-living and future-increase options — inflation protection and the right to buy more coverage without new evidence of insurability.
  • Occupational versus nonoccupational coverage — whether on-the-job losses are covered or only off-the-job (24-hour versus non-occupational).
  • A probationary period may delay coverage for sickness at the start of the contract.

Accidental death and dismemberment

AD&D is accident-only, limited-benefit coverage. The full face amount is the principal sum, paid for accidental death. A capital sum — a stated lesser percentage of the principal sum — is paid for a single severe loss such as one hand, one foot, or sight in one eye. A schedule of losses lists each covered loss and its percentage; multiple severe losses commonly pay the full principal sum.

The loss must result from accidental bodily injury and must occur within the time period the policy states after the accident. Sickness, self-inflicted injury, and war are typically excluded. AD&D is often sold as a rider or as group coverage, and it is not a substitute for medical expense or disability income coverage.

Exam anchor: disability income pays periodically while disabled; AD&D pays a lump sum for a listed loss caused by accident.

Key terms

Sample questions

Which statement best describes what a disability income policy pays?

  • It reimburses the insured's hospital and physician charges arising from a covered injury or sickness.
  • It pays a periodic cash benefit to the insured, replacing part of earned income while sickness or injury prevents work.
  • It pays a single lump sum equal to the principal sum when the insured suffers an accidental injury.
  • It pays the insured's employer for the cost of hiring and training a replacement worker.
Reveal answer

Correct answer: It pays a periodic cash benefit to the insured, replacing part of earned income while sickness or injury prevents work.

Disability income insurance is loss-of-time coverage. It does not reimburse medical bills; it pays a periodic benefit directly to the insured to replace a portion of pre-disability earned income for as long as the disability continues and the benefit period lasts.

An insured's individual disability income policy has a 90-day elimination period and pays monthly benefits. The insured becomes totally disabled on January 1 and remains disabled. Which statement correctly describes how payment works?

  • No benefit accrues during the first 90 days; benefits begin to accrue after that period and the first check arrives at the end of the first benefit month, roughly four months after the disability began.
  • The insurer must pay the first monthly benefit in advance on January 1 and later reconcile the elimination period.
  • Once benefits begin, the insurer must pay retroactively for the 90-day elimination period.
  • Because the elimination period is 90 days, the premium for this policy is higher than it would be with a 30-day elimination period.
Reveal answer

Correct answer: No benefit accrues during the first 90 days; benefits begin to accrue after that period and the first check arrives at the end of the first benefit month, roughly four months after the disability began.

The elimination period is a stated number of days of continuous disability that must pass before benefits begin to accrue. Benefits are typically paid at the end of each benefit interval rather than in advance, so with a 90-day elimination period and monthly payments the first check arrives about four months after disability begins.

Under an accidental death and dismemberment policy, the term "capital sum" refers to:

  • The total premium the insured has paid into the policy, returned when a covered loss occurs.
  • The full face amount payable for accidental death.
  • The amount the insurer sets aside as a reserve for future dismemberment claims.
  • A stated percentage of the principal sum, less than the full amount, paid for a single severe loss such as one hand, one foot, or sight in one eye.
Reveal answer

Correct answer: A stated percentage of the principal sum, less than the full amount, paid for a single severe loss such as one hand, one foot, or sight in one eye.

In AD and D coverage the principal sum is the full face amount, paid for accidental death. The capital sum is a stated lesser percentage of the principal sum, paid under the schedule of losses for a single severe loss such as loss of one hand, one foot, or sight in one eye. Multiple severe losses commonly pay the full principal sum.

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