How to Insure Your Income: Key Concepts and Definitions: A - C
ACCIDENT
The term accident usually is defined as an unintended and unforeseen event that results in bodily injury. This is referred to as an accidental bodily injury definition and is considered very liberal, since it relates the definition of an accident to a result that is caused by an unintentional event.
On the other hand, accident also can be defined as any injury caused by accidental means. This definition attempts to determine the cause of the loss and whether that cause was accidental or intentional. If the cause was accidental, then benefits would be payable. If it can be determined that the cause of the accident was intentional, then the claim would be denied.
ACCIDENTAL DEATH BENEFIT
Some disability income contracts include an accidental death benefit, should the insured person die due to an accident. In an accidental death situation, if the cause of death cannot be determined accurately, then the insurer may request an autopsy be performed, as long as such a request does not conflict with state law.
BENEFIT LIMITS
The purpose of benefit limits is to protect the insurance company (and the policyholder) from overinsurance. Generally, a person may insure a maximum of 60 percent to 70 percent of earned income. This benefit maximum is contained in the insurance company's issue and participation limits.
The purpose of insurance is to make a loss whole again -- not to make money as a result of a loss. A limitation of 70 percent of pay as a maximum disability income benefit probably comes close to your net pay after taxes.
BENEFIT PERIOD
After the elimination period has been satisfied and disability benefits begin, they will be paid for a specific period of time, provided the insured person remains totally disabled. This period of time is known as the benefit period. Typical benefit periods are one year, two years, five years and to age 65.
Example: If you have a disability income policy with a monthly benefit of $1,000, payable after a 30day elimination period, with a benefit period of five years, then you would be entitled to five full years of benefits following the elimination period for each total disability (assuming that you continue to be totally disabled throughout the benefit period).
In most cases, the longer the benefit period, the higher the policy's premium will be.
CHANGE OF BENEFICIARY
This mandatory provision says that the policyholder (usually the insured) has the right to name or change a beneficiary. Since a disability income policy may include an accidental death benefit, this provision is relevant -- whether the policy comes from a health insurance company or a life insurance company.
The only time the policyholder may not change a beneficiary is if the beneficiary was designated as an irrevocable beneficiary. An irrevocable designation cannot be changed, but the policyholder does have the right to change revocable beneficiaries.
CHANGE OF OCCUPATION
The change of occupation provision establishes a method for processing disability income claims if you change jobs. Under this provision, if you move to a more or less hazardous occupation, the insurance company should be notified. It then will adjust your premium to reflect the higher or lower occupational risk.
Failure to notify usually will result in the insurance company adjusting benefits -- downward -- if you do eventually file a claim.
CLAIM FORMS
Once you've notified the insurance company that you're making a claim, it has 15 days to provide you with the necessary claim forms. This isn't usually a problem, though, because you'll often have claim forms in advance of any claim. Many insurance companies make a practice of giving you claim forms along with the policy.
CONSIDERATION
The consideration provision applies to both you and the insurance company. By definition, the consideration is the value exchanged by the parties to the insurance contract. The consideration you provide is the information on your application and the payment of the initial (and subsequent) premiums. The consideration that the insurance company provides is the promise to pay the benefits as stated in the policy.
CONTESTABLE PERIOD
The insurance company may not contest or challenge any statement on the application or deny a claim after the policy has been in force for two years from the effective date of coverage. Two years is the standard contestable period, after which the policy becomes incontestable. However, a particular state may elect a time limit more favorable to the insurer, such as three or four years.
There are two exceptions to this concept. Any misstatement of age or sex can be corrected at any time that it is discovered. This error normally is not intentional or fraudulent. Usually, this mistake is discovered at the time a claim is made. At this point, even after the two-year contestable period, the policy can be changed to reflect the correct age or sex of the insured and, accordingly, the correct premium or policy benefit can be determined.
The second exception is fraud. Fraud may void the health insurance contract whenever it can be proven by the company. However, it should be noted that if the policy does not stipulate that fraud will void the policy at any time, then any fraudulent application or claim must be discovered and proven by the insurer within the contestable period.
