How to Insure Your Income: Key Concepts and Definitions: D - M
DISABILITY INCOME INSURANCE
Disability income insurance can be defined as a contract that normally pays a monthly benefit, following the elimination period for total disability due to accident or sickness. Disability benefits also may be paid for partial or residual disability.
EARNED INCOME
Most states and insurance companies specify the amount of disability income that you may purchase. Typically, this limitation is expressed as a percentage of your earned income.
Earned income is defined as compensation received for personal services rendered. This type of income is differentiated from unearned income. You may insure earned income, but not unearned.
Unearned income, such as dividends and interest, is paid to you regardless of health and the ability to work or not work. There is no compensatory personal service involved when an individual receives interest payments, dividend checks from stock investments, royalties from having written books, income from rental properties, etc.
ELIMINATION PERIOD
Elimination period (EP) is the period of time that you must be totally disabled before benefits are payable. The elimination period is also known as the waiting period (WP). The elimination period is measured in days or months, such as 30, 60 or 90 days; or one month, three months, six months, etc.
The elimination period can be thought of as a deductible based on time, in much the same way an automobile policy or a major medical policy is subject to a dollar or monetary deductible. For example, if you are involved in an auto accident, you must first satisfy the policy's deductible, and then the insurance company will pay your claim. With a disability income policy, you must first satisfy the deductible in terms of time (the elimination period), and then the insurance company begins to pay you a monthly benefit.
ENTIRE CONTRACT
The entire contract consists of the insurance policy, riders, any amendments, and a signed and witnessed copy of the insurance application. All attached papers constitute the entire contract of insurance between you and the insurer. There are no verbal agreements or other documents that the insurer could use to change or alter the contract. The agent cannot change or alter any policy provision or benefit.
EXCLUSIONS
Strictly speaking, exclusions and policy limitations are not considered policy provisions; but they are certainly important elements of the contract.
To a degree, the number or types of exclusions will be determined by the marketplace. If the majority of insurers were to exclude all disabilities associated with automobile accidents, that exclusion would soon be common in all policies.
Common policy exclusions include:
- War and act of war. Losses due to war, declared or undeclared, are excluded.
- Self-inflicted injury. A self-inflicted injury, such as an attempted suicide, would be contrary to the policy's definition of accident.
- Aviation. This exclusion normally pertains to commercial airline pilots and those who fly private aircraft. This exclusion may apply to passengers in a private aircraft, as well.
Most insurers will not cover commercial pilots for disability income due to the fact that a relatively minor change in health -- a slight change in vision, a hearing problem, etc. -- could leave the pilot totally disabled. These minor impairments would not disable most other people.
FREE LOOK
The free look provision gives you the opportunity to review the policy upon receipt and return it to the insurer within 10 days for a refund of all premiums paid if you are not satisfied for any reason.
GRACE PERIOD
The grace period is the period of time that the policyholder has to pay the premium before the policy lapses for nonpayment. Generally, the grace period is one month. However, it also may be expressed as 30 or 31 days. The grace period allows the policyholder additional time to pay a premium after the due date. During the grace period, the coverage remains in force.
ILLEGAL OCCUPATION
The purpose of the illegal occupation provision is to protect the insurance company from losses, such as injury, that are the result of your involvement in criminal activities.
INTOXICANTS AND NARCOTICS
The intoxicants provision is similar in purpose to the illegal occupation provision. It permits the insurer to deny a claim if the cause of the sickness or injury is due to the consumption of alcohol or the use of narcotics. Thus, a drunk driver injured in an auto accident would not be covered.
INSURING CLAUSE
The insuring clause is a brief statement that generally defines the scope or extent of the policy's benefits. Specific information regarding policy coverages will be found in other sections of the policy. A typical insuring clause might read as follows:
XYZ Mutual Insurance Co. will provide disability benefits for the insured against loss beginning while the policy is in force, due to accident or sickness. Benefits will be paid in accordance with the provisions of this policy and in consideration of the insured's statements in the application and payment of the initial premium.
As you can see, the principal parts of the insuring clause are the type of policy, the parties to the contract and the responsibilities of the parties.
MISSTATEMENT OF AGE OR SEX
This optional provision permits the insurance company to adjust benefits or premiums if the policyholder's age or sex has been misstated. Age and sex are also factors that contribute to the calculation of the premium. If age or sex have been misstated, then the premium and/or the policy benefits will be adjusted accordingly to reflect the correct premium or benefit relative to the age or sex of the person insured.
