Disability Quote Question

[roger_lockless]

I've not written Disability before and was tinkering with a quote generator on my machine, and I entered some info along the lines of salary, employment type, and occupation class. In running the quote/illustration, the company's software set a maximum monthly benefit that could be purchased of about $4,000.00/mo.

Why is there a maximum? I assume it's tied to the factors I entered, and if so, is it imposed by regulations, or by the preferences of the company I was quoting with? Just wondering. If someone who sells this regularly could help me understand, I'd be appreciative.

 

[VolAgent]

It is based on the carrier's I&P limits. Issuing and Participating limits. Basically, it is how much coverage they are willing to directly issue, and how much coverage they will allow the person to have in addition to their new coverage.

For instance, If someone is making $25,000/mo, the carrier may only issue up to $10,000 in monthly benefit. If the person has existing coverage, they limit total coverage to $15,000 that they will participate in. So, if the new policy takes the coverage over either limit, the new policy is limited to the caps.

Every carrier has their own set of limits and it varies based on income. Generally a carrier will start at 70% of income and slide down to around 50% at the high end.

Other factors can affect the amount of coverage too, occupation, health, age, length of benefit period, etc. Also, most carriers will have a lower limit if the benefit comes tax-free versus taxed.

You really need to sit down with someone and learn DI before rushing out and selling it. There are a lot of "gotchas" in some contracts, and you could create a real nightmare for you and your client if you aren't aware of them.

 

[moonlightandmargaritas]

Why is there a maximum?

It's very simple: the reason there's a maximum is to avoid creating a moral hazard.

If I can make more money being on disability claim, there is an incentive for me to do it.

 

[scagnt83]

The maximum benefit is tied mainly to the persons salary and their occupations risk class.

Benefits are usually expressed as a percentage of salary; usually, the higher the risk class the lower the max percentage is.

Most companies will only cover a max of 80% of salary for even some of the best of risk classes. This is because for individual DI, the benefits are received tax free.

 

[moonlightandmargaritas]

This is because for individual DI, the benefits are received tax free.

Not necessarily.

If you pay the premium yourself, the benefit is received income tax free. If a company buys, and pays for, individual DI for employee(s) the benefit becomes taxable.