NC and WV CE course for Disability Insurance

1. Part I The History of Disability Insurance 1 Insurance Specialties, Inc.

2. Ancient History Farmers in China sent their crops to market on boats. Inevitably, some boats sank. Began spreading risk by placing crops onto numerous boats so if one sank would only loose small portion. Avoided total financial devastation. Spread loss among many families thus more manageable for each one. Ancient Greek benevolent Societies The Collegia of the Romans Sickness insurance Netherlands for soldiers in 1683 In England for Stewards in 1757 Disability did not come into existence until the transition occurred from being an agrarian society to an urban culture. As agrarians families worked together & helped through hard times; income came from working the land As workers moved to cities to get salaries, any loss would be harder felt and the DI need grew 2 Insurance Specialties, Inc.

3. Two types of risk Speculative risk Gambling Stock market Pure risk Has the possibility of loss Is insurable Purpose to restore the insured to their original financial position Purpose not to make a profit In order to avoid profits, there must be an insurable interest for Example Life insurance Property insurance Casualty insurance Disability insurance 3 Insurance Specialties, Inc.

4. History of Disability Insurance Two sources of income People at work Money (property) at work First insurers in US Mass. Health Insurance company 1847 -- Franklin Health Insurance Company 1850 Other insures followed including Spring Garden Health Insurance Co., Health Insurance Company of Philadelphia, Eagle Life & Health Insurance Company of Jersey City First successful, underwriter was Railway Passenger Assurance Company in 1849 in England 1863 – Travelers Insurance Company established By 1866 – 60 companies writing this type of business 1871 – Travelers only remaining company 1885 – First non-can DI policy issued by Century Indemnity Company of Edinburgh 1890 – St. Lawrence Life Association issued first combined accident & sickness policy 1885-1890 policies broadened --1896 – Fidelity Mutual Life issued first disability rider January 1907 – first American company to issue DI was National Masonic Protective Association of Mansfield, OH 1915 Massachusetts Accident Insurance Company wrote guaranteed renewable contracts 1918 -- Pacific Mutual issued non-can policy -- 1921 – 9 carriers offering DI 1920’s over 200 companies offered disability with life contracts More competition meant looser underwriting & contracts 1918-1919 & 1920 influenza -- 1921 recession Automobiles’ speed increased -- Depression caused severe losses 4 Insurance Specialties, Inc.

5. History (con’t) After WWI DI industry grew rapidly Most issued as a rider to life policy Definition quite liberal compared to many Three types of Riders Rider available to waive premiums with option to also received 1/20th of face amount plus any P.U.A.’s as income over 20 years Around same time (ca. 1913), another waiver/disability rider existed with waiver available after age 60. Premiums waived before age-60 and after 60-days of disability (more liberal waiting period) All riders paid waiver or income after policy was inforce for 1 year Approximately 1920 another rider emerged – also added cost to policy After 1921, same definitions applied to disability but no coverage for military service during time of war 1929, disability clauses introduced that began defining disability in relation to earned income. Disability benefits were available under group life policies. 1935 – OASDI (Old age, survivors and disability income) approved under Roosevelt’s New Deal 1940’s another DI revival 1950’s non-can and GI offered for first time 1960’s had various policies available 5 Insurance Specialties, Inc.

6. History (end) The mid 1960’s – 1966 54 million covered workers insured Types of Insurance Contracts defined Typical policy’s design unusual Some policies written with home confining clauses – “the insured is continuously confined within doors. If occupation change is more hazardous and disability occurs, benefit paid based on amount purchased at new occupation If occupation changes for better, no benefit increase but a refund of unused premium from date of change. Policies could be cancelled or non-renewed Hospital indemnity sold from $50 to $1,000 or more per month Non-cancellable meant: Disability definition included under the care of a physician wording Typically had a 2-year own occupation period then any occupation based on education, training, or experience Monarch, Springfield, General American, Life & Health of St. Louis, and Provident Indemnity offered benefit increases after 6 months, 1, 2, 5, or 10 years Reducing term or family income benefits were popular Partial DI only for accidents as a rule Return of premium riders became popular. FPO riders just introduced Some carriers did not have a relations to earnings clause 1970’s Lifetime own-occupation introduced Residual disability introduced Social Insurance offset rider introduced (supposedly helped with moral problems) COLA introduced in early 70’s 6 Insurance Specialties, Inc.

7. Part II The Disability Income Need The purpose of disability insurance is to provide money in the event of an injury (accident) or sickness (illness) to an individual (family) to cover living expenses and keep the insured (and family) in their “own worlds”. 7 Insurance Specialties, Inc.

8. The Need (Personal) To replace income Keep family from financial ruin or dependency Each families needs are unique and different Often entire need cannot be met Something better than nothing (used car versus new car or no car) 8 Insurance Specialties, Inc.

9. The Need (Business) Personal disability to small business owner Business owners see two pocketbooks Need is twofold Can be list billed Business Overhead Expense Used in Sole Proprietorships and up to 4 partners or active shareholders Not for use in large companies with duplication of positions Elimination periods Pays overhead of the company after an elimination period of 6, 12, 18, or 24 months. Carryover or Unused Benefit provision Tax consequences Alternative Funding Most policy provisions the same as for individual disability Most have a conversion privilege so if owner goes to a salaried position, he/she can take this along 9 Insurance Specialties, Inc.

10. The BusinessNeed (con’t) Key Employee Disability Not offered by many companies today Protects the profits of company Money can buy time to either hire a replacement or wait for recover Tax consequences Alternative Funding Benefit Calculation Elimination Period Benefit Period Disability Buyout (aka Disability Buy-Sell) Sole Proprietorships Partnership and LLC Corporate Buy-Sell Forms of buyout payments Tax consequences Insurance Specialties, Inc. 10

11. Part III The Types and Provisions of DI Policies 11 Insurance Specialties, Inc.

12. Policy Types 12 Insurance Specialties, Inc.

13. DI Markets Individual White Collar/Professional Gray Collar Blue Collar Business (will be covered in more detail later) BOE – Pays expenses of business if owner is disabled Disability Buy-Out – pays off partner(s)/shareholder(s) if one partner/shareholder is disabled Key Employee – pays company (employer) if employee is out Salary Continuation – provides benefits to a group of key employees Business Term Group Can cover all employees, or a selected class on a group chassis Certificates of insurance are issued (no policies) List Bill 13 Insurance Specialties, Inc.

14. Key Elements of DI Policies Definition Any occupation Any occupation reasonably suited Unrestricted own occupation Restricted own occupation Dual or Split definition 14 Insurance Specialties, Inc.

15. Other Key Policy Provisions/Riders 15 Insurance Specialties, Inc.