Long-term disability benefits may be available from several sources including state workers' compensation, federal social security disability income, company or association groups and individual long-term care insurance. All of these programs provide monthly benefits to people who are sick or hurt and cannot work based on a percentage of their pre-disability earnings. Governments fund these programs from taxes and the insurance industry collects premiums that reflect their expected risk of paying future claims to members of covered groups or to individuals in particular occupations.
Premium Calculation Risk Factors
Ask the applicant's age. Morbidity, which means the incidence of sickness or accident at a particular age, increases with age. Gender also influences premiums because women of child-bearing age tend to have a greater disability risk than men of the same age. For example, assuming all other risks are equal, a 35-year-old male attorney applying for an individual disability income policy identical to that of a 32-year-old female attorney, may pay a lower rate.
Obtain applicant's verifiable income and the length of the benefit period being requested. The maximum monthly benefit cannot exceed 60 percent to 70 percent of that amount, but the benefit period could range from as little as one year to as long as until normal retirement age. The greater the benefit amount and the longer the payment period, the higher the premium will be.
Inquire how long the client could support himself and other dependents, if applicable, with no income. The elimination period is the time length after disability starts during which the claimant is not receiving any disability payments. Most long-term disability income policies are sold with a minimum 90-day elimination period. To illustrate, compare two individuals with identical policies, except one has a 180-day elimination period and the other, 90-day. The insured with the longer elimination period pays a lower rate, all other risks being the same.
Ask the applicant if she wants to be protected in her skilled job or profession, or would she be satisfied with a policy that covered her if she was unable to perform any job for which she was reasonably suited by reason of education, training or experience. Defining disability as not being able to do your job is called an "own occupation" definition and is more expensive than the "any occupation" definition.
Determine the normal duties of the prospective insured's occupation. The nature of a person's work not only influences his exposure to risk but also the length of the disability period. A building contractor who supervised several job sites poses a greater risk than a computer programmer, not only because the contractor may be exposed to greater on-the-job hazards, but also because he might need a longer recovery period to regain the level of mobility needed to do his job.
Find out what other features the applicant wants in her policy. For example, a cost-of-living adjustment rider prevents the fixed disability benefit from being eroded by inflation, by adjusting the benefits to increase up to 3 percent or 4 percent per year based on the Consumer Price Index. Finally, the most important factor that will impact the calculation of premiums is health history, cigarette smoking and the results of the required medical exam. Assuming good health, the insurance professional will create a computer-generated illustration that calculates the premium for the package of benefits included in the policy application.