A common practice is to attach riders that provide certain benefits in the event of the insured’s disability. The two most common disability benefits are (1) waiver of premium and (2) disability income. The definition of disability, a critically important aspect, usually is the same for both waivers of premium and disability income benefits.
Definition of Disability
Under the disability clauses in life and health insurance policies and annuity contracts, the risk covered pertains to total and permanent disability. Although phraseology varies greatly, the customary wording of the clause declares the policy owner to be entitled to the benefits promised when the insured’s illness or injury results in his or her total and permanent disability. The word total proved difficult to interpret legally. Regardless of the exact language used, the interpretation given the clause by most insurers today contemplates all cases in which, because of illness or injury, the insured is unable to pursue his or her own occupation or any job for which he or she is reasonably suited by education, training, or experience. Similarly, some doubt revolves around the meaning of the word permanent. The problem, however, is usually settled by the companies themselves, in that the clause specifies that total disability lasting continuously for a stated waiting period shall be presumed to be permanent until recovery.
Waiver of Premium
The waiver of premium (WP), also called premium waiver, benefit provides that premiums (or mortality and expense charges under universal life and current assumption policies) otherwise due will be waived if the insured becomes totally and permanently disabled before a certain age, typically 65. The contract continues just as if the policy owner were paying the premiums. The waiver-of-premium benefit actually is a disability income payment in an amount exactly equal to the policy’s premium (or charges) and, in effect, assigned to the insurance company. It can be seen, therefore, that the benefit does not truly excuse premium payments but provides a benefit that makes the payment on behalf of the insured upon his or her disability. Thus, dividends continue to be paid on participating policies, cash values continue to increase, and loans may be secured. Sometimes the price for the benefit is included in the regular premium, but often the waiver-of-premium provision is added to the life or health insurance or annuity contract for a small extra premium.
Most companies require six months of continuous disability before the waiver-of- premium benefit takes effect. As long as disability commences during the period of coverage, all premiums (or charges) are waived while it continues or as otherwise specified in the contract. Many companies provide that premiums are waived only to age 65 if disability begins after age 60 but before age 65. A disability is covered only if it begins prior to a stated age, frequently 65. All premiums are waived during disability—not just those falling due after the waiting period. This differs from the case in disability income insurance and in most waiver- of-premium provisions in individual health insurance policies. When incorporated within a term policy, how the WP feature interacts with the conversion feature can be important. Three different provisions are available in the market. First, some contracts provide that if the insured becomes totally disabled, premiums for the term policy will be waived, but if the policy owner wishes to exercise the conversion option during this period, the company will not waive the premiums on the newly converted cash-value policy. In other words, full premiums must be paid by the policy owner for the new policy.
Second, other companies permit the conversion and will waive premiums on the new cash-value policy. Clearly this approach is more valuable to the policy owner than the former. Third, some companies provide for a waiver of premium on the term policy and on the new policy, but only if the conversion is delayed until the end of the period during which conversion are allowed. At that point, an automatic conversion takes place and premiums on the new policy are waived. This benefit provision falls between the two previously discussed provisions in terms of policy owner value. Other things being equal, the more liberal the interaction of the WP and conversion features, the higher the additional premium for the WP feature should be, although actual pricing may not reflect this. This interaction can be a significant element of product evaluation.
In the past, many North American insurers offered a disability income benefit as a rider to their life insurance policies. This benefit is less commonly offered today. These riders provide a monthly benefit upon the insured’s disability. The amount of the monthly payment often equals 1 percent of the policy’s face amount (i.e., $10 per month per $1,000). Many companies limit the maximum monthly income issued to some stated figure, such as $1,000, with a further limit set on the amount the company will participate in with all companies. Most insurers consider six months total disability as permanent and commence payments at the end of the sixth month. This is equivalent to a six- month elimination period with a one-month retroactive payment. Some companies impose a four-month waiting period. Premiums on both the base policy and the disability income rider are waived during a period of covered disability. Dividends are paid as usual, the policy’s death benefit is unaffected, and, in other respects, the basic life contract continues as though no disability had occurred. Should the insured recover, income payments cease and premiums are again due.