There are three types of health insurance: Disability income, Accidental Death and Dismemberment, and Medical Expense Insurance.
DISABILITY INCOME INSURANCE
Disability income insurance provides periodic payments when the insured is unable to work because of injury or sickness. These policies provide a weekly or monthly income benefit to replace a portion of the salary or wages lost due to the insured's inability to work. An individual policy covers only the wage earner and does not cover family members. If another family member produces income, then that person must obtain his/her own Disability insurance.
Disability income insurance policies vary as to:
1. the definition of disability,
2. the amount of the payment,
3. the Elimination Period (time before benefits are payable),
4. the Maximum Benefit Period,
5. and the relationship to workers compensation benefits.
Disability Definitions
Total Disability
The definition of disability varies from policy to policy, but the traditional definition specifies that total disability is the "inability to work at any gainful occupation” (referred to as “Any Occ”). Under this definition, if the insured can do any job - for even a portion of his former income - the insured is not considered totally disabled. Some older policies require that the insured must also be confined to the house and under the treatment of a doctor. This tightly constructed definition may not be allowed in several states. A more liberal and current definition defines total disability is the "inability to perform the duties of any occupation for which he is reasonably suited by education, training, or experience.” Another definition is "inability to perform all of the substantial and material duties of his regular occupation.” (Referred to generally as “His Occ”)
A typical disability definition states that for a specified time after the beginning of the disability, the insured is totally disabled if he is completely unable to engage in his occupation (His Occ). After the specific time period, commonly one, two or five years, the insured is considered totally disabled only if he is unable to perform the duties of any occupation for which he is reasonably suited by education, training or experience (“Any Occ”).
Partial Disability
Contracts may provide partial disability benefits, particularly in the case of disability caused by accident. Partial disability is often defined as the "inability of the insured to perform one or more of the important duties of his occupation.” Some policies provide that benefits are only payable for a partial disability immediately following a period of total disability for which benefits were payable. The partial disability benefit usually pays a percentage (usually 50%) of the weekly or monthly indemnity payable for total disability for a limited period (usually three to six months).
Policies may provide benefits for residual disabilities. A residual disability benefit provides benefits for loss of earnings after a return to work from total disability, if the insured cannot earn as much as he did prior to the disability. The residual benefit is expressed as a percentage of the amount payable for total disability.
Amount of Benefits
The amount of the weekly or monthly payment applied for is usually based on the insured's earnings and is usually limited to a percentage of the insured's earned income. The benefits may be capped (such as: 75% of stated annual income, with a maximum monthly benefit of $5,000).
Special care should always be taken in computing the benefit amount. There can be wide variances in qualifications, and all sources of income must be stated. It should be emphasized that overstating income so that the benefit maximum can be increased, can, at the very least, create an anti-selection element; and can even be grounds for denying benefits at time of disability. Reporting of income vary by company and policy, and the reporting requirements must be stringently followed.
Probation Period
The probationary period provision applies to sickness and disabilities, and states that no benefits will be paid for sickness contracted during the first few days of the policy period. In effect, it protects the company from an illness that existed before the policy inception date, and said illness was unknown. This probationary period is commonly fifteen days. The Probationary Period does not apply to disabilities caused by accident, as, obviously, accidents are not predictable.
Elimination Period
The Elimination Period is the period of time immediately after the onset of the disability measured in time (usually days) during which benefits are not payable. The Elimination Period is similar to a deductible, however deductibles are usually expressed in dollar amounts. The purpose is to eliminate small claims, as the insured is expected to be able to provide for short disability periods. Many employers have a salary continuance plan, either formal or informal, before the Disability Insurance begins.
Elimination periods can range from three days to one year but usually are 7, 14, 30, 60, 90, and 180 days, (30 days being the most popular). Usually, the accident coverage either has no Elimination Period or, infrequently, the Elimination Period is the same as for the sickness coverage. Policies may provide that if the insured is disabled beyond the Elimination Period, benefits will be paid retroactively back to the first day of the disability.
Maximum Benefit Period
The Maximum Benefit Period is the length of time disability benefits will be paid under the contract and can range from six months to lifetime (if disability caused by accident). The most common Maximum Benefit Periods are 1, 2, 3, 5, and 10 years, and to age 65. Policies may provide for a lifetime sickness benefit period for any period of disability commencing before the insured reaches 50 and is usually available only with a lifetime accident maximum. Disability income policies are classified as long or short term, based on the length of the sickness Maximum Benefit Period.
C.A.
Doctor Johnson, a Medical Doctor and a Surgeon, is leaving the staff of a hospital, and is starting his own practice. One of his prime considerations is the loss of income should he become disabled since he no longer has a large hospital to rely upon for lost income.
Obviously, he must have Total Disability coverage since surgery will be a large part of his income; he will want to obtain a policy that defines disability as “inability to perform all of the substantial and material duties of his regular occupation (referred to as “his occ"). He should try to get a policy that allows his sufficient time to establish a practice should he be unable to operate before the plan changes to partial disability (any occ).
He should also investigate a residual disability provision, as if he loses his ability to perform surgery, this would help him make up the difference in his income.
The amount of benefits available may be a problem here, as if he has no track record of being self employed, the company rules will in most cases, take a conservative approach. He may be restricted to a lower percentage of his former income until such time that a pattern of earnings can be established.
The doctor will have to determine how long he can continue financially without income, and then determine the Elimination Period. Depending upon his savings and any outside income (such as from investments), he would pick at least 30 days.
The Maximum Benefit Period will depend upon his age and the number of years before normal retirement. Also, he must weigh the cost of the policy against the benefits desired, particularly in the benefit period. If it is affordable, a period to age 65 would be attractive. However, considering that if he became disabled and was unable to perform surgery, there is a good probability that he could still practice medicine in another field.
(Continued)
Later, if the doctor takes on a partner, and a buy-sell agreement is in effect, they should consider a policy covering the buy-sell agreement whereby if one partner become disabled, then funds will be available to buy out the partner. These policies usually have a one-year Elimination Period with a monthly benefit of 1 to 2 years.
SPECIAL FORMS OF DISABILITY INCOME INSURANCE
Disability Income Insurance Under Life Policies
Disability income insurance may be offered as a rider to a life insurance policy that provides for a monthly indemnity in the event of total disability before a certain age (usually 55 or 60). The amount of the monthly benefit is a function of the face amount of the life insurance and normally has a six month Elimination Period. The Maximum Benefit Period is “to - age – 65”. Frequently there is a provision that provides that if the insured is still, and continually, disabled at the end of the benefit period, then the life insurance benefits will be paid as an endowment and the policy premium will be waived. Optional benefits, such as for partial disability, are usually not available.
Waiver of Premium in cases of disability is traditionally available on most life insurance policies (but does not pay monthly indemnity payments).
BUSINESS OVERHEAD EXPENSE BENEFITS
Business Overhead Expense insurance provides funds to pay certain expenses required for the operation of a business or professional office for a specified time period when the insured owner is totally disabled. This is an area that is very important to self-employed professionals and business owners. This is a highly specialized field of health insurance, and additional concentrated training is necessary to properly represent this product, which is beyond the scope of this text. It is closely related to Key Employee Insurance, and Buy & Sell Agreements, described below.
KEY EMPLOYEE DISABILITY INSURANCE
Key Employee coverage pays a monthly benefit to a business for the purpose of hiring and training additional help or services, when a Key Employee is disabled. Practically, it has a two-pronged effect: it covers the disabled person’s salary, and pays for a temporary replacement during the period of disability.
BUY AND SELL AGREEMENTS
Closely linked to the business uses of Disability insurance as outlined above, Buy and Sell Agreements specify the terms partner(s) or stockholder(s) by which a disabled partner’s, or stockholder’s, interest can be purchased by the other partner(s) or stockholder(s), with the insurance policy providing the necessary funds for the buy-out. Policy terms must mirror the Buy & Sell Agreement as to the Elimination Period, amount of benefit, and benefit period. These policies usually have a one-year Elimination Period with a monthly benefit period of 1 – 2 years.
ACCIDENTAL DEATH AND DISMEMBERMENT
Accidental Death policies provide a death benefit which is payable in the event of death resulting from accidental bodily injury. An Accidental Death and Dismemberment policy also provides benefits for loss of limbs or sight (dismemberment coverage).
Accidental Death and Dismemberment (AD&D) is usually presented as a schedule listing various dismemberment’s and losses of sight covered by the policy, and for which a specified sum will be paid to the insured. The amounts may be expressed as a multiple of the weekly indemnity amount, or if the policy does not have weekly disability income benefits, it is expressed as a percentage of the death benefit limit, or as a percentage of the Capital Sum (policy limit).
SAMPLE SCHEDULE
Loss of: Sum equal to
Weekly indemnity for:
Both hands, or feet, or sight of both eyes 200 weeks
One hand and one foot 200 weeks
Either hand or foot and sight of one eye 200 weeks
Either hand or foot 100 weeks
Sight of one eye 65 weeks
Thumb and index finger of either hand 50 weeks
The dismemberment feature provides a lump sum payment that can be used during the rehabilitation period and job training. If the policy also provides disability income, in most situations when the dismemberment amount has been paid, the disability income payments also stop. If during a disability period, a dismemberment loss is suffered, the insured will be paid disability income up to the maximum dismemberment period.
Most AD&D policies provide that if a loss of limb or sight occurs within 90 days of an accident, the sums in the schedule will be paid.
CA
Jim Brown works in warehouse and travels 15 miles each way to work, in very heavy traffic. His employer furnishes health insurance in case of sickness, but Brown is concerned about being injured in an accident.
The employer recently provided an Accidental Death and Dismemberment policy that pays for 90 days of weekly indemnity for disability and a schedule for dismemberment. His death benefit is $20,000 and weekly indemnity is $200.
Brown loses an arm at work when a crate in the warehouse is dislodged and falls on him. His medical costs are covered by the group health plan and by Workers Compensation. Workers Compensation provides a small income after Brown is released from medical care. However, his dismemberment proceeds of $20,000 can be used for job training and rehabilitation not otherwise covered.
NOTE: Many policies offer a set amount of Accidental Death benefits, and Dismemberment is a factor of the death amount. In that case, with a death benefit of $20,000, the policy would usually offer 50% of the death amount, or $10.000 in this case.
MEDICAL EXPENSE INSURANCE
Medical expense insurance provides benefit payments for medical care. The providing of benefits may be by:
1. reimbursement to the policyholders for medical expenses incurred,
2. paying those who provide the services directly,
3. paying a set amount regardless of the amount charged for medical expenses. (This is referred to as an “Indemnity policy”).
A policy may cover an individual, his or her spouse and children.
The categories generally accepted, for Medical Expense Insurance, are
1. basic medical expense insurance,
2. major medical insurance,
3. comprehensive medical insurance and
4. special policies.
BASIC MEDICAL EXPENSE POLICIES
Basic coverages provided by an individual medical expense policy include basic hospital expense, basic surgical expense, and basic medical expense. (The term basic medical expense is used in a more narrow sense to mean the non-surgical services of a physician). These three basic coverages may be sold together, or each coverage can be offered on a stand-alone basis.
Basic hospital expense coverage provides benefits for daily hospital room and board and miscellaneous hospital expenses while the insured person is confined to the hospital. The policy may provide for a certain dollar amount for the daily hospital room and board benefit, (such as $100 a day units, with a maximum of a multiple, i.e. $500 maximum) although paying the semi-private room rate (as a maximum) is gaining in popularity.
Policies usually provide for additional benefits while the insured is in an intensive care unit, either as an included benefit, or as an additional (“add-on”) benefit. The amount paid for Intensive Care is frequently a multiple of the daily benefit amount.
A time limit for coverage is also specified, with usual dates of 30 or 60 days.
Miscellaneous hospital expenses include such items as dressings, drugs, charges for operating rooms, anesthetics, services of anesthetists, lab work, and x-ray treatments. Usually coverage is limited to a certain dollar amount, such as $2,000, but may also be limited as a multiple of the daily hospital benefit charge. (For example, up to 15 times the daily hospital benefit maximum.)
Basic surgical expense coverage provides benefits for the surgical services of a physician performed in or out of the hospital. Surgical expense benefits are usually limited to a dollar amount, although they may be expressed as multiples of the hospital benefit maximum. Usually a schedule of operations is attached to the policy and the maximum amount payable for each operation is listed. A surgical expense policy may be sold as part of a hospital and medical expense policy, or on a stand-alone basis.
Higher benefits are paid for the more serious and complicated surgeries. While the surgical schedule cannot refer to all surgeries, for those that are not listed in the schedule are covered on the same basis as comparable operations that are listed. Surgical schedules may also assign a relative value (unit) to each procedure, and the amount to be paid by the insurer is derived by formula using the relative value unit.
Historically, basic medical expense policies covered the insured only while confined to a hospital and limited to a dollar amount per day, for a specific number of days. Many policies now include diagnostic x-ray and laboratory expenses on an outpatient basis, with a dollar limit. Radiotherapy on an outpatient may be available, with a maximum limit.
Emergency hospital treatment with a per-visit limitation may be included with a limit per trip.
Basic medical expense policies may also include nursing care coverage, which provides payment for private duty nursing care by order of a doctor while the insured is in the hospital. The benefit is usually limited to a maximum amount per day for a maximum number of days.
In addition, maternity expenses and or indemnity payment may be offered with some plans. Maternity expense benefits usually provide limited coverage for medical expenses due to pregnancy and are based on a multiple of the daily hospital room benefit. In some plans, a flat amount is paid and has no relation to the actual expenses incurred (indemnity coverage). In some cases, the surgical schedule may provide a specified physician's fee for delivery.
Except for the Maternity Expense benefit, other policy benefits do not cover normal childbirth. However, complications of pregnancy specifically described may be covered.
Extended care benefits may also be provided by the payment of a maximum daily benefit for confinement in a skilled nursing facility. There is usually a waiting period after hospital discharge (14 days is usual). The benefit amount payable is usually one half of what the policy would pay for hospital confinement. The benefit period varies from one month to one year.
Some basic medical expense policies have deductibles for each hospital confinement.
C.A.
John purchases a Basic Medical Policy that pays for hospital expenses and sold in $100 units. John elects a 5-unit plan, which would pay $500 per day for hospital room and board.
Intensive Care Benefit provides for 3 times the daily benefit, or $1500 while in Intensive Care.
This plan pays up to 5 times the daily benefit, for miscellaneous hospital expenses, or $2500.
This plan also offers Surgical benefits of 5 times the daily benefit for one surgeon, and 50% of that amount for a second surgeon when necessary. It would pay $2500 for a surgeon and $1250 for a second surgeon.
John may purchase an outpatient rider, which pays a maximum of 50% of the daily benefit for emergency room and other outpatient surgeries. It also provides diagnostic x-ray and laboratory expenses on an outpatient basis, with a maximum of $2,000.
There is no deductible under this plan. If John should later elect to superimpose a Major Medical plan on top of this Basic policy, then the Major Medical deductibles will not kick in until the Basic plan has paid the maximum benefits.
MAJOR MEDICAL INSURANCE
Major medical insurance provides benefits for serious or prolonged injury or illness. These policies may be written to complement basic medical expense policies, however this is becoming less attractive as a choice. Major Medical Insurance is the most popular medical insurance plan, by far, on an individual and group basis. Most employees have been covered by a Major Medical Plan, and when it become necessary to purchase their own coverage (without employer participation) they understandably want the same type of comprehensive coverage.
Deductibles are a necessary function of the Major Medical policy, which keeps the cost of insurance down because of the elimination of small claims whose expenses to administer frequently exceed the claims payment. In addition, participation in costs by the insured presupposes a high interest of the insured in the control of benefits. Deductibles are usually defined as a specific dollar amount paid for covered medical expenses. If a Major Medical Policy is superimposed on a Basic Medical plan, then the Deductible may not be incurred until the Basic plan has paid the maximum benefits under its coverage.
The deductible may apply to each accident or illness, or to each calendar year, and to each covered person. Most policies provide that if a family is insured, a maximum of three deductibles apply per family per year: that is, if three family members have “met their deductible” during the specified deductible period (usually a calendar year), then any medical costs experienced by a fourth family member would not be subject to a deductible.
There is usually a common accident provision, which states that if members of a family are injured in a common accident, only one deductible applies. Many companies also include a carry-over provision which states, for example, that expenses incurred during the last three months of a calendar year may be used toward the deductible in the following year, provided the deductible for the prior year has not been met.
Most policies have a coinsurance provision. A coinsurance provision provides for the sharing of medical costs after the deductible has been met (satisfied), generally up to a maximum, at which point the insurer pays 100% of medical costs. Typically, coinsurance is 90/10 (the insured pays 10% of the medical costs after satisfying the deductible, the insurer paying 90%); 80/20; 75/25, or 50/50. The more that the insured has to pay, the lower the premium. As an example, a 90/10 plan would be noticeably more expensive than a 75/25 plan.
The maximum benefit payable under a Major Medical policy applies to each person, so each member of an insured family is insured for the maximum benefit. The benefit also is expressed as a “lifetime” benefit. If an insured had medical expenses after deductible and coinsurance of the policy maximum, the insurer would not pay any further claims. If the insured’s spouse had medical claims, they would be separate and distinctive from the insured’s claims when calculating the maximum benefit. Many major medical policies have a restoration of benefits provision which allow a percentage or (usually) a dollar amount that can be restored each year the policy is in force. The Restoration of Benefits provision may, or may not, be affected by claims paid.
The coverage provisions of major medical expense policies are very broad. The term covered expenses is usually defined to include doctors fees, nurses fees, hospital charges for room and board, miscellaneous hospital charges, charges in connection with pregnancies, cosmetic surgery, nervous or mental disorders, and alcoholism or drug addiction.
Coverage is usually provided on a blanket basis, without specifying individual dollar limitations on the coverage of various medical expenses. But there may be “inside” limits, which apply to specific expenses (such as hospital room and board and surgery) and may be expressed as a maximum dollar amount. If there are inside limits, they are considerably higher than the amounts allowed under basic medical policies.
C.A.
Margaret has an individual Major Medical policy with a deductible of $1,000 (3-deductibles per family maximum), 80/20 coinsurance, $1500 out-of pocket, lifetime benefits of $1,000,00, $10,000 maximum for mental and nervous disorders, 3-month deductible carryover, 2-year pre-existing condition, and a waiver of deductible for injuries as the result of an accident.
Margaret has no idea as to what she has!
At the very least, the agent should explain to her the following:
Before benefits are paid by the insurer, every calendar year she must pay the first $1,000 of every medical expense including hospital, doctors offices, surgeons, medication, etc.
After she has paid the first $1,000, the insurer will pay 80% of all medical bills, until such time that she has paid an additional $1,500 out of her pocket, for a total of $2,500 that she has to pay. After $50,000, the insurer will pay 100% of all approved medical expenses. (She has no family, but if she did, after 3 members of the family have met their deductible in any calendar year, deductibles of other family members would be waived.)
If she is injured in an accident, she does not have to pay a deductible, and the insurer will start paying 80% of the medical bill automatically.
Any medical costs that were incurred the last 3 months of the year and which have not been used to meet the deductible for that year, can be carried forward to the following year.
In case she needs medical attention for mental or nervous disorders, the plan will pay a maximum of $10,000 for any hospitalization or treatment.
Any medical condition that exists for a period not exceeding two years, will not be covered
until the policy has been in force for two years. (Note: If Margaret had been covered under a
group plan, and her COBRA benefits have expired and her previous company cannot offer her additional coverage, she may be eligible for a plan wherein the pre-existing conditions will be waived under provisions of the HIPAA of 1996 – discussed in detail later in the text).
COMPREHENSIVE MEDICAL INSURANCE
The popularity of Comprehensive Medical insurance has been replaced by Major Medical plans, as Major Medical insurance has become “comprehensive” and so competitive in price, that the original Comprehensive medical insurance concept is not often used. Comprehensive Medical Insurance in this context, is a combination of basic medical expense coverage and major medical coverage. The first dollars of expense are covered under the basic medical policy, usually with a low ($50 or $ 100) deductible. The major medical portion of the policy begins to pay when the benefits of the underlying basic medical expense policy are exhausted. In effect the basic medical expense portion of the policy provides a deductible before the major medical coverage applies.
A corridor deductible is frequently found in a comprehensive policy, which is a fixed amount the insured pays after the basic coverage is exhausted - but before the major medical coverage benefits are payable. To illustrate, the basic medical coverage pays until its limits are exhausted. At that point a deductible must be satisfied. When medical expenses exceed “A” (the amount of the basic plan) plus “B” (the deductible), the major medical coverage goes into effect. With these arrangements, the major medical benefits is equal to a percentage of the total medical expense (see coinsurance description above). An individual comprehensive medical insurance policy would have to meet the minimum standards requirements for basic hospital expense policies, basic medical-surgical expense policies and major medical expense policies.
SPECIAL MEDICAL EXPENSE INSURANCE POLICIES
There are a variety of special health insurance policies providing limited coverage, such as:
Specified Disease or Dread Disease insurance which provides a variety of benefits for only certain (specified) diseases, usually cancer or heart disease. Benefits are usually on a scheduled basis, paying an indemnity amount depending upon the procedure or type of disease. Recently, plans that pay a specified amount – usually in $10,000 increments – upon diagnosis of a particular disease (usually cancer) have become quite popular. These plans are designed to pay in addition to any medical expense insurance (coordination of benefits provisions on other health insurance policies do not apply) and are used for paying added expenses that accrue when a person contracts the particular disease or condition.
Hospital Indemnity insurance pays a specified sum on a daily, weekly or monthly basis while the insured is confined to a hospital. The amount of the benefit is not related to expenses incurred or to wages lost while the insured is hospitalized. These plans are marketed as individual or franchise-group plans. They are attractive to the industry as claims payment are simple (must be in the hospital) and amounts are modest. Usually these products are Guaranteed Issue.
Accident - only insurance provides coverage for injury from accident and excludes sickness. Benefits may be paid for all or any of the following: death, disability, dismemberment, or hospital and medical expenses. Accident - only coverage is a very inexpensive type of coverage and frequently is added to other plans.
C.A.
Felix considers purchasing a “Cancer Plan” that pays benefits to an insured when he is diagnosed as having cancer. The amount of the benefit depends upon the type and severity of the cancer. If Felix had ever been diagnosed with cancer, he could not have qualified for the policy.
Felix is approached by an agent who represents a company that offers a plans that pays a pre-determined flat amount as soon as cancer is diagnosed, and is sold in units of $10,000. Felix likes this plan because it pays the full amount regardless of the type or severity of the cancer. He purchases 5 units ($50,000).
Either plan pays in addition to his health insurance plan. Felix is later diagnosed with lung cancer, which involved removing the cancer. His insurance covered the medical costs, however he went to Sloan-Kettering which specializes in cancer research. Since this clinic was not an approved clinic under his PPO health plan, he had to pay some costs out of his own pocket, plus he had to pay for travel expenses for he and his wife, and pay lodgings and meals for his wife while he was in the hospital. The $50,000 covered most of the additional cost.