14.2 Calculating Benefits
Benefits paid under a disability income policy are distributed monthly and are in predetermined amounts. There are two methods insurers use to determine the amount of benefits payable under their disability policies.
Most group policies use the percentage method (percentage-of-earnings approach) to calculate the amount of their earnings prior to any accident. The percentage-of-earnings approach is typically used in group disability income plans.
The normal amount of income that can be replaced by a long-term disability policy is 60%.
With the percentage method: If the insured earned $1,000 a month prior to the accident and the policy stated a 70% benefit, the insured would receive $700 a month for a specified number of months while he/she was unable to work.
Using the percent-of-earnings approach, policies can vary the benefit amount to be paid according to the length of the disability. For example, the company may pay a benefit amount equal to 100% of the insured's predisability earnings for the first month and then reduce the benefit to a lesser percentage for the duration of the disability.
The second method insurers use to calculate the benefit is called the flat rate method. This method is used for most individual policies and the amount is determined upon assigning the policy.
Disability income policies are usually noncancelable policies.
