Disability income insurance is a policy plan subscribed by an individual with an insurance agent to cover up for losses which might be suffered in the event of an occurrence of a calamity or a tragedy that would have a negative impact on the income and livelihood of the policy taker. Disability, therefore, is a condition that renders a person unable to pay their way due to lost income should the risk insured take place. It is further split into two major categories according to income insurance.
Total disability
In this type of disability, a person is rendered incapable of performing even the basic tasks due to illness or accident (Shu, 2015). This incapability can stretch over a length of one’s life so that chances of ever carrying out basic activities are completely lost. Career and any other income generating activity will have been forgotten altogether.
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Partial disability
Partial disability refers to a condition where a person may be injured or taken ill but can still manage to perform certain tasks within his or her area of operation. The disability may be there but for a short period or the lost income may be recovered in due course. Partial disability also encompasses a decreased output in time and compensation.
Disability insurance income provisions:
Residual disability
The beneficiary of the cover of residual disability is someone who though may be able to carry out some income generating activities; they are not in a position to unleash their full potential in production due to a disability of some kind. The compensation in the event of income loss as contained in the residual contract is a percentage of a lost income subject to a maximum limit.
Benefit period
This is the duration within which an individual is entitled to compensation for damages and losses suffered due to the occurrence of the insured risk (Tatsiramos & Ours, 2014). The contract of compensation is voided by a return of normalcy in terms of ability to earn income or an end of the agreed compensation period.
Elimination period
It is the period between the occurrences of the insured risks, for example, an accident taking place or a disease striking and the actual period when the insurance firm effects compensation. This period is otherwise referred to as waiting period. It is important to note that policies which have a short elimination period are pretty much expensive.
Part 2
1. A common method of determining the amount of life insurance life insurance to purchase is called the needs approach. Explain the following needs for a head of the household:
-Income needs
It is important for the household head to determine expenses such as mortgages, estate taxes, school expenses and medical fees. All these expenses put together will provide a base for estimation of what the family will require if the family provider is incapacitated in any way. From these variables, a marked-up figure will guide the household head on a secure value to place in life insurance policy.
Special needs
A special case requires special attention. Life policies for individuals with special needs are tailor-made to fit the person’s abnormal needs. Life insurance for special needs personalities attracts high premium charges. The extent to which an individual is rendered unable will greatly determine the policy to be subscribed. Insurance firms offering life policies have stricter and costly options for extreme disabilities.
Cash needs
Cash requirements in a household are a factor of the rate of dependency. An individual with savings will pay less to secure a life insurance policy compared to one who lives from hand to mouth. The later’ cover will be more expensive since the fund will be expensed on debt settlements throughout life (Buchardt, Møller, & Schmidt, 2015).
2. Explain the capital retention approach for determining the amount of life insurance owned.
This approach aims at ensuring that assets used to generate income are preserved. The approach seeks to establish alternative wealth creation avenues available even after the demise of the policyholder. The retention approach forecasts an estimate of the needs of beneficiaries to sustain themselves thereafter. This approach will also ascertain that assets thereof shall later devolve to the estate heirs. The capital retention approach is heavily founded on the household needs so that it may precisely forecast a future economic settlement for the beneficiaries.
3. Briefly explain the characteristics of the following types of managed care plans:
Health maintenance organization (HMO) plans
HMO plan provides cover its members for a fixed rate of pay annually. The subscribers are required to utilize the services of health practitioners registered within the health scheme. The health plan may on request cover prescribed medication and specialist services. Services within HMO are already covered upfront for the members but any treatment acquired outside the scheme is unrecognized (Tajeu, 2014). However, emergency cases may be allowed and covered outside the plan.
Preferred provider organization (PPO) plans
In this plan, benefits far outweigh those enjoyed by HMO members. This plan is more liberal in services and administration. Specialist services are not necessarily recommended by primary doctors for its members to receive services.
Point-of-service (POS) plan
This plan is more a cross breed of HMO and PPO. This means that clients are covered either way, should they use a primary doctor or not and if they do not use the primary doctor services, that Point-of-Service plan contributes to the cost of service rendered. On top of a national presence, this option carries an affordable premium rate.
References
Buchardt, K., Møller, T., & Schmidt, K. B. (2015). Cash flows and policyholder behaviour in the semi-Markov life insurance setup. Scandinavian Actuarial Journal , 2015 (8), 660-688.
Shu, P. (2015). Asset accumulation and labor force participation of disability insurance applicants. Journal of Public Economics , 129 , 26-40.
Tajeu, G. (2014). Health Maintenance Organization (HMO). The Wiley Blackwell Encyclopedia of Health, Illness, Behavior, and Society .
Tatsiramos, K., & Ours, J. C. (2014). Labor market effects of unemployment insurance design. Journal of Economic Surveys , 28 (2), 284-311.
