The following are terms that can be found in most long term disability and short term disability policies. While many of these terms apply only to group insurance, some are also applicable to individual disability insurance policies.

Active, Full-time Employee - An individual must work for the employer on a regular basis in the usual course of the employer's business to be considered an active, full-time employee and eligible for coverage. Usually, a minimum number of hours of regular work is specified.

Accumulation Period - This is the period of time the insured must accumulate during a period of time before benefits are paid. (similar to a standard Elimination Period) Example: insured must be disabled any 90 days during a seven-month period before benefit payments begin.

Attending Physicians Statement - A report, completed by the proposed insured’s (or, in a claim situation, the insured’s) physician, which documents current and prior health history. Used in the evaluation process of approving an application (or claim).

Automatic Increase Benefit - A policy provision that increases, annually, the policy monthly benefit by either a stated percentage or the latest Consumer Price Index measure, without the evidence of either medical or financial insurability.

^Top

B

Benefit Amount - Amount paid to insured at the time of claim.

Base Benefit - The Base benefit is the amount of monthly benefit you will receive from your Disability insurance policy once you have satisfied the elimination period. The Base benefit is paid regardless of any Social Security benefits you receive.

Benefit Percentage. The benefit payable is usually determined as a percentage of the insured's pre-disability income up to an overall maximum benefit amount.

Benefit Period - The longest period of time for which an insurance company will continue to pay benefits on a continuous disability. Most carriers offer benefit periods of - 2–years, 5–years, 10–years, to age 65, or to age 70.

Business Overhead Expense - A policy that reimburses the insured business owner, during a disability, for covered business expenses that are incurred in the day-to-day operation of the business. (See Business Owners for a more detailed explanation.)

Buy-Sell (or Buy-Out) - A policy that pays to a corporation or co-owner either a lump-sum or installment payments on the disability of an insured owner to provide the necessary funds to buy-out the business interest of the disabled owner. (See Business Owners for a more detailed explanation)

^Top

C

Carry-Over Account - In a Business Overhead Expense policy, this is the fund that accumulates unused benefits to be paid out to the insured at a later date.

Conditionally Renewable - Under this policy provision, an insurance company agrees to renew a disability income policy, providing the insured meets certain qualifications, such as full-time employment.

Conversion Privilege - If included, this option allows employees who are terminating employment to continue some or all of their LTD coverage at their own expense without submitting evidence of insurability.

Cost of Living Rider - An optional benefit that increases the disability benefit by a percentage (3 or 6 percent) or the latest Consumer Price Index measure after the insured has been on claim for one year. Some policies increase the percentage by simple measures and some by compound.

Covered Expenses - In a Business Overhead Expense policy, this is a listing of typical business expenses that are eligible to be reimbursed during an insured’s disability. Examples: rent or mortgage payments, electricity, employee salaries.

Cross-Purchase Agreement - In a disability buy-sell situation, this arrangement has the owners themselves as owner and beneficiary of the policy proceeds. Generally used only where two owners are involved.

^Top

D

Definition of Disability - The most important provision in a disability contract is the definition of disability that will be used to determine an employee's eligibility for benefits.

·         Own Occupation - Own Occupation - In a disability income policy, 'own occupation', usually means the insured is considered totally disabled if they cannot perform the duties of their own occupation. Under this definition, benefits can often be paid to an insured person even if they subsequently (after filing a claim) become employed in another occupation.

·         Any Occupation - Under this definition, an insured will be considered disabled only if he/she is unable to work in any occupation for which he/she is qualified by education, training, or experience. This is somewhat similar to the definition that the Social Security Administration uses in determining disability.

Definition of Partial/Residual Disability - This further definition of disability applies when an insured is able to return to work part-time or even full-time (with a loss of earnings). If the employee is working in this limited capacity and is earning less than a certain level of income, he/she will still be eligible for limited benefits under the plan. Not all disability insurance carriers use this terminology to describe a "part-time" work situation, but most provide some type of benefit to encourage return to work.

Disability Buyout - Policy that “buys out” the business partner in the event that a disability occurs.

Disability Income - A monthly benefit paid to an individual in the event of an accident or sickness to help replace earnings lost.

^Top

E

Elimination Period - The period of time which must elapse prior to benefits being paid. Most carriers offer elimination periods of - 60–days, 90–days, 180–days, 365–days, and 730–days. The 90–day option is normally the most cost effective option.

Employer Paid Limits - A table used by an underwriter and agent to determine the maximum amount of monthly benefit the insured can purchase when the employer is paying the premium. This limit is higher than the ordinary issue limit because of the taxation on benefits when received due to the employer’s deducting the premium paid as an ordinary business expense.

Entity Purchase Agreement - In a disability buy-sell situation, this arrangement has the corporation as owner and beneficiary of the policy proceeds. Used in situations where there are more than two owners.

Evidence of Insurability - Group disability coverage is generally sold as "guaranteed issue" which means that evidence of insurability is not required. However, under certain circumstances (e.g., late enrollment or a high benefit maximum), an employee must provide medical or financial information as proof to the insurance company that he/she is insurable.

Exclusion - A specific injury or sickness that the insurance company excludes from being covered in the contract. Exclusions are mostly used for pre-existing conditions. If an exclusion is added to your policy you will be notified and required to sign an amendment if you decide to accept the policy.

Exclusion Rider - Attached to and made a part of the policy, this document, which the insured generally must sign, indicates a condition(s) which is specifically not going to be covered under this insured’s policy. Example: any disease or disorder of the lungs. Riders like these are placed as a result of the individual evaluation of the insured’s history.

Executive Bonus - A premium paying arrangement for which a deduction is allowable under Section 162 of the Internal Revenue Code for a salary bonus to the insured and used to pay the disability policy premium.

^Top

F

Family Care Expenses - A disabled employee who has family care responsibilities may need extra help when trying to return to work. This type of benefit provides an incentive to the employee who is taking part in a rehabilitation program by allowing credit or partial reimbursement for certain expenses incurred for family care. This is generally an optional benefit under most long term disability policies.

Financial Underwriting - A method of evaluating data relevant to earned income, unearned income, net worth, fringe benefits and other components of compensation to determine the proper amount of monthly benefit for which the insured qualifies. Typical requirements are a pay stub, tax return or a copy of employment contract.

Future Increase Option - An optional benefit in a disability income policy that allows the insured future increases to the policy monthly benefit at specified dates (typically on insured’s policy anniversary), with a requirement of only financial (and not medical) insurability.

^Top

G

General Exclusions - Most companies will not pay benefits for a disability that is caused due to - an act of war; regular pregnancy or childbirth but complications are covered; any noted exclusion; you committing or attempting to commit a felony; an intentionally self inflicted injury.

Graded Premium - Premiums start out less expensive than level premiums but increase each year. If the insured starts with a graded premium, they may change to a level premium on a policy anniversary. Premiums will then be based on attained age.

Group Disability Policy - Policy through an employer.

Group Disability Replacement Rider - A rider that allows policyholder to purchase additional benefit when they leave their employer or lose their group benefits. No medical underwriting required to exercise the benefit.

Guaranteed Issue - Policy issued without any medical underwriting. Group disability policies are often “guaranteed issue.”

Guaranteed Renewable - After age 65, you have the privilege of renewing your policy with a limited benefit period, as long as you remain gainfully employed and are working at least 30 hours per week. Premium rates are subject to change.

^Top

I

Indexing - Indexing is designed to provide some protection against inflation. After the first year of disability, a disabled employee's pre-disability earnings are usually increased (or indexed) by a certain percentage on an annual basis for purposes of determining any disability benefit payable.

Inspection Report - Information, ordered by the underwriter that provides a summary description of the insured’s employment, health history, and habits as a result of a direct interview and interviews with business and personal associates.

Installment Option - In a disability Buy-Sell policy, this policy provision offers an alternative payout to a Lump-Sum settlement by having the insurance company pay out a level benefit in monthly installments for a specified period of time

^Top

K

Key Person Policy - A product designed to reimburse the business for financial loss during the key person’s disability until recovery or a suitable replacement can be found.

^Top

L

Limitations - There may be specific provisions included in group disability plans that limit coverage in certain situations. Often only limited benefits are payable for specific conditions or under specific circumstances (e.g., mental illness and pre-existing conditions). See also Mental Illness Limitations and Pre-Existing Limitations below.

Level Premiums - Premiums in the policy are locked in and will never increase until age 65.

Lifetime Extension Rider - A rider that extends the benefit period beyond the age of 65. The amount of benefit the claimant receives is based on the age when the claim started.

Lump-Sum Payment - In a disability Buy-Sell policy, benefits are usually payable in a Lump Sum at the trigger (or effective) date of the buy-sell. The trigger date is the day following expiration of the Elimination Period

^Top

M

"Mandatory" Rehabilitation - Based on the premise that most people want to work in order to lead active, productive lives, a "mandatory" rehabilitation provision encourages disabled employees to participate in rehabilitation efforts whenever appropriate. Such a provision allows for termination of benefits if the employee refuses to cooperate or participate with a rehabilitation plan.

Maximum Benefit Period (Benefit Duration) - This is the maximum length of time for which benefits are payable under the plan as long as the employee remains continuously disabled.

Maximum Monthly Benefit - This is the highest dollar amount a disabled employee can receive on a monthly basis under the LTD plan.

Medical Underwriting - The process of evaluating a disability income application for approval by reviewing the potential insured’s individual health history.

Mental Illness and Substance Abuse Limitations - When a disability is caused by a psychological/behavioral/emotional disorder, or by alcoholism or the non-medical use of narcotics, sedatives, and so on, benefits provided under group disability policies are usually limited to a period of 12 or 24 months unless the employee is confined to a hospital. Individual disability policies generally do not contain this limitation.

Minimum Monthly Benefit - There is usually a minimum amount paid as a monthly benefit after reductions for Other Income Benefits.

Modified Own-Occupation - Definition of disability that will pay benefits if the insured cannot work in their occupation. Any earnings in another occupation will offset the benefits.

^Top

N

Net Worth - The total non-business related assets of an insured used in the financial evaluation of the disability insurance application. For disability Buy-Sell policies, net worth is that of the business and is used in the calculation of the value of the owner’s interest.

Non–Cancelable - The insurance company cannot cancel your policy, increase premiums or change
any policy provisions until you reach age 65, assuming that you continue to pay premiums on time.

^Top

O

Occupation Class - A category of insured based on specific job duties that dictate the premium and contractual grouping under which the insured would be placed.

Other Income Benefits (Benefit Integration) - While disabled, an insured may be eligible for benefits from other sources. Benefits payable under the group LTD plan may be offset (reduced) by other sources of disability income such as Social Security, workers compensation, or disability benefits received from other employer-sponsored plans.

Outline of Coverage - A simplified benefit summary of a disability policy provided by the insurance company and required by law in many states to be delivered to the individual insured either at the time of the sales presentation or policy delivery.

Overhead Maximum - The total possible benefit payout under the Business Overhead Expense policy, this amount is calculated by multiplying the monthly benefit by the number of months in the selected benefit period. Example: a $3,000 monthly benefit and 18-month benefit period would provide an Overhead Maximum of $54,000 ($3,000 x 18).

^Top

P

Partial Disability - The provision in some disability income policies allows the insured to collect some benefits under the contract if they are unable to perform one or more important functions of their regular occupation. This benefit pays the disabled insured an amount based on the percentage of income that the insured lost because they are unable to perform some of the duties of his or her former job.

Physician Care Requirement - This policy provision states that one of the eligibility requirements for disability benefits, requiring that the insured be under the regular care and attendance of a physician. Many companies waive this requirement if it can be shown that future treatment would be of no benefit to the insured.

Policy Anniversary - Date policy is initially issued and is yearly renewed.

Policy Schedule Page - Found in the early pages of a disability income policy, this sheet details all the specific individual policy data such as name, policy number, monthly benefit, and premium.

Premium Mode - The particular method of premium payment selected by the insured. The policy can be paid for annually, semi-annually, quarterly or monthly.

Pre-Disability Earnings - This is the amount of an employee's wages or salary that was in effect and covered by the plan on the day before the disability began.

Pre-Existing Condition Limitations - When an insured has a physical or mental condition that existed prior to the effective date of his or her insurance coverage, it is considered a pre-existing condition. Most plans exclude or reduce disability benefits for any illness or injury for which an employee received medical treatment or consultation within a specified time period before becoming covered under the plan.

Presumptive Disability - An insurance company will consider you totally disabled if due to injury or sickness you suffer total loss of sight in both eyes, hearing in both ears, speech or the use of both feet, both hands or one foot and one hand in their entirety. Benefits will be paid benefits for the entire benefit period and with some companies, benefits will be paid regardless of whether you are gainfully employed.

Professional Overhead Expense - Disability policy designed to pay business expenses.

^Top

R

Rating - An underwriting decision to approve disability income coverage but at a higher than normal premium due to an increased risk which is usually associated with adverse medical history. An extra premium of anywhere from 15 to 100 percent or more can be applied.

Recurrent Disability - If after returning to work from a total disability, in which benefits were paid, you become disabled again within a specific number of months, the insurance company will consider the later disability to be a continuation of the first disability, unless the later disability is caused by a completely different injury or sickness. This will prevent you from having to satisfy the elimination period again.

Reduced Term Disability Insurance - Policy designed to pay back a loan.

Regular Occupation - Not to be confused with “own occupation,” regular occupation will pay benefits if the insured cannot work in their occupation, but benefits will be offset if insured earns money in another occupation or job.

Rehabilitation - Rehabilitation means the restoration of or improvement in an employee's health and functionality. It usually involves a program of clinical and vocational services with the goal of returning a disabled employee to an active, productive life, and a meaningful occupation if possible.

Reinstatement - The process whereby the insured must go through the underwriting process to place the policy back in force after the policy has lapsed

Renewability - The policy provision that details the conditions upon which the insurance company agrees to continue to insure the disability income policy. Examples: Non-cancelable, Guaranteed Renewable, Conditionally Renewable.

Residual Disability Benefit - A policy provision or an optional benefit that promises to pay the insured a portion of the total disability benefit based on a loss of earnings. Usually requires at least 20 percent or more loss of earnings and the policyholder will receive a proportionate benefit. Typically if the insured has at least 75 percent or more loss of earnings they will receive the entire benefit amount.

Residual Rider - A Rider that pays a proportional benefit to the loss of earnings.

Rider - An added benefit to the policy.

Return to Work Provision - To encourage employees to return to work as soon as they become physically able, an additional incentive is usually provided for a certain period of time, and is called a return to work provision. Under this provision, the employee can receive up to 100 percent of pre-disability earnings based on a combination of disability benefits and return-to-work earnings.

^Top

S

Salary Continuation Plan - A program, also called a Section 105 plan, under which the employer makes deductible wage payments, in part or in full, to an individual who is unable to work due to illness or injury.

Short Term Disability - Usually associated with group insurance, this program pays a monthly benefit for total disability after a minimum Elimination Period for up to 13, 26, 39, or 52 weeks.

Sickness - A policy provision defined as illness or disease, which first makes itself known to the insured following the policy effective date. Sickness covers both physical and mental illness unless otherwise specified.

Significant Earnings Loss - A provision under the Residual Disability Benefit that promises the full total disability benefit if the insured is back to work and suffers a substantial loss of income, usually 75 percent.

Social Security - A federal program, which provides benefits to all working Americans in the form of disability, retirement or survivor benefits. Disability is strictly and narrowly defined and benefits begin in the sixth month of a disability that has an expectation of lasting at least 12 months or will result in the individual’s death.

Social Insurance Offset Benefit - This is an additional benefit amount you can add to your Disability insurance policy at a lower cost than the “Base” benefit. This benefit will be paid in addition to the Base benefit your policy provides. However, this benefit will offset with any Social Security or Worker’s Compensation benefits you receive.

Social Security Offset Rider - An optional benefit that coordinates benefits with any benefits received through Social Security disability (and, often, other public programs) to avoid either underinsurance or over insurance.

Supplemental Health Statement - A form that is a direct communication from the underwriter to the proposed insured that asks for more details about a specified medical condition(s).

Survivor Benefit - The survivor benefit is a lump sum payment that will provide benefits to the insured's eligible survivors in the event the insured dies while receiving disability payments. This is an optional benefit in most policies.

^Top

T

Total Disability - Often the key policy provision in the disability income policy, this feature defines the eligibility requirements necessary for an individual to qualify for full monthly benefits.

Transplant Donor/Cosmetic Surgery Benefit - A policy provision that considers an insured to be disabled under the sickness provision if donating a body organ or as a result from plastic surgery.

^Top

U

Unearned Income - Money that will be available to an individual whether or not he is disabled. It affects the amount of disability coverage that may be purchased based on earned income. Example: real estate property income.

^Top

W

Waiting Period - In order to become eligible for coverage under the policy, an individual must satisfy a certain number of continuous days of service as an active, full-time employee. This is known as the waiting period. (In addition, a waiting period can also be the time period between when a disability occurs and when payments from the disability insurance policy begin — what we have discussed as an "elimination period.")

Waiver of Premium - Insurance companies will waive any premiums due while you are disabled and receiving benefits, and will refund premiums paid during the elimination period. Some companies will also waive premiums for a few months after you recover.

Workers Compensation - A system administered by each individual state that provides benefits, if a worker is hurt or contracts an illness on the job.

Workplace Modification or Accommodation - This benefit is designed to provide assistance to an employer when a disabled employee requires modification of the workplace or special adaptive equipment in order to return to work. The employer will usually be reimbursed up to a set amount for the cost of such modifications.