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©2015, College for Financial Planning, all rights reserved. Session 12 Disability Income Insurance CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL.

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Presentation on theme: "©2015, College for Financial Planning, all rights reserved. Session 12 Disability Income Insurance CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL."— Presentation transcript:

1 ©2015, College for Financial Planning, all rights reserved. Session 12 Disability Income Insurance CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Planning Process & Insurance

2 Session Details Module8 Chapter(s)2 & 3 LOs8-1 8-2 8-3 8-4 Identify the risk exposures a client faces related to the loss of earning capacity. Identify disability underwriting issues. Describe characteristics and essential terms found in disability income policies. Describe operation of disability insurance riders. 12-2

3 Disability Income Exposures Personal Loss of income: partial/full Long-term Short-term Retirement & Social Security impact Business Key employee/owner/partner How to keep a disabled employee employed Business overhead expense 12-3

4 If a Disability Occurs Mike is 36 and married to Ann; they have an 8 month old baby and Mike’s two children from a previous marriage live with him and Ann. Anne quit her job to raise the baby for the first year. Four months ago, the family moved to a new town when he took a new job. His disability benefits begin after he works for six months and he has no personal disability coverage. He’ll receive 10 sick days, five vacation days and 30 days of short-term disability benefits. Previously, he was self-employed; he didn’t contribute to Social Security for the two years he was trying to get a business off the ground three years earlier. In a nutshell, the family has: His annual income of $70,000 $15,000 in reserves $25,000 in an IRA rollover $25,000 from the recently sold house (they are waiting to purchase a new one) Living expenses of $50,000 after taxes Think through what will happen if he becomes disabled – for six months, six years, or permanently! 12-4

5 It’s a Real Story Mike contracted a serious infection somewhere and was in the hospital for four months, and ended up with several strokes and open heart surgery. After the 45 days using sick pay, vacation, and short-term benefits with no income, the family lived on their reserves. When Mike’s group medical coverage was terminated, they turned to COBRA, paying more than $1,000 per month for coverage with a high deductible. The medical bills beyond the current coverage totaled to $25,000 (with 21% interest). Since Social Security requires a five-month waiting period and Mike had not made consistent contributions for the five prior years, no benefits were available. The family’s previous living expenses of $50,000 increased to cover day care, medical bills, and COBRA. All assets were gone within a few months. Mike was permanently disabled due to the strokes and there were no benefits. Coping with a medical and financial crisis at the same time is tough! (Carol Craigie) 12-5

6 The Planner’s Role Paint the picture Assess the consequences, including retirement o Social security retirement benefits reduced o No employer contribution o No employee benefits Draft a budget with and without additional coverage Explore various insurance company offers Put the premium in perspective (bigger asset than residence - % cost of covering?) 12-6

7 Features of Disability Coverages Onset of disability Benefits become payable* Benefits no longer payable Elimination period Maximum benefit period * From the “benefits become payable” point, insurers are given as much as 30 days to process disability income payments. 12-7

8 Taxation of Benefits Employee pays premium benefits are not taxable to the recipient Employer pays premium benefits received are taxable to employee Employee pays premiums with pretax dollar benefits are taxable to employee 12-8

9 Disability Income Insurance Considerations Underwriting Occupational classes: o blue collar o white collar o professional Can replace (purchase coverage) about 2/3 of earned income Benefit amount/term available can vary by class Earned income, taxation of income, other sources of income considered 12-9

10 Definitions of Disability 12-10 “Any Occupation” (most restrictive) Considered disabled if unable to engage in any occupation most similar to Social Security definition “Modified Own Occupation” Considered disabled only if unable to engage in any occupation for which the insured is reasonably fitted by education, training, and experience will frequently incorporate “prior economic status” as well “Own Occupation” (most liberal) Considered disabled if unable to engage in own occupation, (can be specialty occupation, e.g., brain surgeon)

11 Definitions of Disability continued “Split Definition” (mainly found in group policies) For a specified period, the insured is considered disabled if he or she is unable to engage in his or her own occupation, then is considered disabled only if he or she cannot engage in any occupation (any-occ or modified own-occ). Often a retraining program may be stipulated during the first part of the disability period. Benefits beginMaximum benefit Own occupation Any occupation or modified own occupation 12-11

12 Definitions of Disability continued “Loss of Income” Benefits are payable following the elimination period when there is a loss of income due to reduced capacity to work caused by illness or injury. Neither time nor duties are considered. Income loss must generally exceed 20% to 25%. Recognized income may be either income received or income earned. This type of policy completely avoids having to define disability. 12-12

13 Disability Income Policy Continuance Provisions Continuous policy guaranteeing the insured the right to renew for a stated number of years or to a stated age, with the premium guaranteed at each renewal Noncancellable (“noncan”) Similar to noncancellable (no premium increase for individuals), but a company can adjust the premium rates for an entire policyholder class Guaranteed Renewable Total disability benefits paid when the insured suffers loss of use of two bodily members (both hands, arm and a leg, etc.), or loss of sight, hearing, or speech, regardless of whether or not the insured can do work for pay (specifics vary) Presumptive Disability Benefits Benefits paid when the insured is partially disabled; the amount paid is generally based on the percentage of income lost (or may be a fixed benefit such as 50% of the fully disabled amount) Partial & Residual Disability Benefits 12-13

14 Disability Riders Waiver of Premium Cost of Living Residual or Partial Other o compassion benefits o waiver of COBRA o LTC 12-14

15 Question 1 Marcus is single and is helping to support his widowed mother. The out-of-pocket expenses to cover a basic lifestyle for both of them requires after-tax income of $4,000 per month. His average tax rate is 20%. His group coverage is 60% of his base salary paid by the employer. Marcus earns $100,000 of which $10,000 is bonus. What will Marcus have to live on if he becomes permanently disabled? a.$5,000; he will be able to meet the income and save. b.$4,500; he will be able to meet the income, save some initially but inflation will make meeting the income in the future difficult. c.$4,000; he will be able to meet the income but will be unable to save for retirement and inflation will make it impossible to meet the goal in the future d.$3,600; he will not be able to meet current needs and inflation will create a larger gap, let alone save for retirement. 12-15

16 Question 2 All of the following are differences between typical blue collar disability coverage and white collar disability coverage, except a.the definition of disability becomes progressively more liberal when approaching the white collar level. b.the duration of how long benefits are payable becomes progressively longer when approaching the white collar level. c.benefit payments become progressively lower when approaching the white collar level. d.the availability of other policy riders increases when approaching the white collar level. 12-16

17 Question 3 Which one of the following is true regarding group disability insurance? a.Group policies are usually offered with riders. b.Most policies provide an own occupation definition of disability to age 65. c.A group policy often has a more stringent long-term definition of disability than an own occupation individual policy. d.Group policies are usually issued after asking the individuals in the group health-related questions. 12-17

18 Question 4 Which of the following is true regarding business (disability) overhead expense insurance? a.It is most often purchased by large businesses with public ownership. b.Benefits normally extend for 10–15 years. c.It most often is purchased to cover costs such as office rent, utility expenses, staff salaries, and so forth. d.It is usually purchased by blue collar individuals. 12-18

19 ©2015, College for Financial Planning, all rights reserved. Session 12 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Planning Process & Insurance

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