Disability arising out of an illness or accident may be a great hazard for an individual and his/her family. This is because it not only causes huge medical bills, but also makes a person unemployable. Disability income insurance or disability insurance (DI); therefore, aims to compensate the insured against the income lost or not earned because of illness or accident.
Although no standard definition of disability exists, all policies define disability either according to:
- The amount to which illness or injury affects an individual’s ability or causes total disability. The term total disability denotes to an individual’s inability to perform his/her job. In other words, it is an inability to perform every obligation of their occupation.
- The extent to which illness or injury affects an individual’s earning capability or residual disability. The term residual disability denotes to the outcome of illness or injury that may lead to an individual to experience a loss of earnings. In residual disability, an individual might be able to perform some of the duties and obligation of his/her occupation but with a certain loss of earnings.
Types of Disability Income Policies
Depending on the period for which coverage is offered, DI policies can be of two types, namely short-term DI policies and long-term DI policies. Let us discuss about these in brief:
- Short-term DI policies: These policies cover a limited amount of time where the insured receives benefits after a short waiting period of up to 14 days. As discussed earlier, the waiting period de- notes to a period during which an insured is not eligible to receive insurance payments arising out of an accident.
- Long-term DI policies: These policies cover injuries and illnesses over a long period of time. Such DI claims usually have a waiting period of 90 days or more. However, once the claim is settled, the insured may receive benefits for several years (or till he/she recovers). Some long-term DI policies benefit the insured for the rest of their life although this depends on the policy and the insurer. Long-term DI policies vary according to the length of each benefit period and the amount of each monthly benefit.
Apart from the aforementioned categories, DI policies are also classified as per their renewability provisions. The two most common types are:
- Guaranteed renewable policy: In this type of policy, the insurer guarantees the insured to renew the DI contract. However there is no guarantee of a fixed premium. In other words, after the renewal, the premium may increase or decrease as per the current conditions.
- Non-cancellable and guaranteed renewable policy: This is another type of DI policy that not only guarantees about the renewability of the DI contract but also ensures the fixed premium rates. In other words, in this type of DI policy, the premium charge does not increase even after the policy renewal. However, this type of policy is not only more expensive but it is less common. In addition, insurers provide such policy only to the applicants who are at the lowest risk for disability.
There are certain injuries or illnesses that are not covered under DI policies, such as acts of war, suicide attempts and normal pregnancy. Moreover, if there is any preceding medical condition, the disability policy may eliminate that condition from coverage.
Disability Income Underwriting and Pricing
There are certain injuries or illnesses that The DI underwriting process begins once an applicant applies for a disability income. During this process, the insurer collects all necessary information about the insured and decides whether to issue a disability policy to the applicant. As a disability claim may cost an insurer a large share of money, the process of underwriting is done thoroughly.
In the underwriting process, all hazards are reflected and unusual features in the disability income field are explained. Therefore, DI underwriting consists of all possible information about the applicant and acceptable or unacceptable risks. Usually, the applicant fills out an application to give specific information about his/her personal, medical and financial conditions to the insurer.
The questions are designed to give the insurer as much information as possible about the acceptable as well as unacceptable risk for disability.
The following factors are judged while taking information from the applicant for the underwriting process:
- Age and gender
- Occupation
- Income
- Medical history
- Personal habits and lifestyle
Once the application is submitted, the underwriter reviews it. Coverage may be issued right away or the applicant may need to submit additional information or reports to help the underwriter to determine whether the applicant has an acceptable risk.
Risk Categories Based on Risk Assessment
Based on risk assessment, the following risk categories are assigned to the applicant:
Preferred risk
This is a type of risk where the applicant is less likely to claim for disability insurance. The applicants who fall under this type of risk have very low chances to get affected by an event of loss; therefore, they have the maximum chances to get insured under the DI policy.
Such applicants have few odds to claim the insurer for settlement in the future. For example, a person who is a non-smoker has a low-risk job and is medically fit has maximum chances to get insured.
Standard risk
Such type of risk is assigned to an individual who is neither more nor less likely to claim for disability insurance. Such individual does not have a history of medical emergency but can face a medical condition in the future.
Special risk or substandard risk
Such type of risk is assigned to an individual who is likely to claim for disability insurance. In other words, such applicants have greater chances to get affected by an event of loss; therefore, have minimum chances to get insured under the DI policy.
For example, a lathe worker would come under such type of risk. Such applicants are either denied for getting coverage or get coverage with special terms and conditions. They also need to pay a higher premium than other risk categories. The insurer underwriting table shows the amount of monthly disability income coverage that can be purchased by applicants.
