IIQE Paper 3 English Quiz 13

We shall consider two common riders applicable to situations where the policyowner-insured becomes subject to some form of physical disability:
I) Disability Waiver of Premium
II) Disability Income

Disability Waiver of Premium (known as a WP Benefit Rider)
A waiver is an act of voluntarily giving up a right or removing the conditions of a rule. Under a Disability Waiver of Premium Rider, which may be added to virtually all types of life insurance policies, the insurer agrees to waive his right to renewal premiums otherwise payable whilst the policyownerinsured is totally disabled. This does not mean that the policy is suspended. Instead it remains in force, so that a policy that builds a cash value will continue to do so, and a participating policy will continue to yield dividends, as if the policyowner had paid the premiums.

There are normally some limitations for Disability Waiver of Premium, as follows:
(a) Waiting period: where the policyowner-insured has been totally disabled as defined in the policy for a minimum period (usually three or six months), renewal premiums will be waived. Once started, waivers will continue throughout the life of the policy until the disability ends. The original thinking behind Waiting Period probably was that most people continue to receive salaries and wages for at least short periods of disablement and so can still afford to pay premiums. But in fact some WP benefit riders will refund premiums which have been paid during the waiting period if the disablement extends beyond the waiting period, in which case the waiting period is a kind of “time franchise”. (For illustrations of franchise, please read Chapter 3 of the Principles and Practice of Insurance Examination Study Notes.)

the cover given by this rider is similar to personal accident or medical insurance, so it normally carries some similar exclusions, such as:
(i) intentional self-inflicted injuries;
(ii) injuries sustained whilst engaging in criminal activities;
(iii) pre-existing conditions;
(iv) injuries resulting from war while the policyowner-insured is in military service.

Premium frequency: differing practices exist as to what mode of premium payment is assumed when premiums are being waived. For example, if premiums are being waived on a monthly basis, the insured person who recovers, say, 25 days after a premium has been waived would have to resume premium payments the following month. On the other hand, if premiums are being waived on an annual basis, his recovery after, say, 2 months would result in a waiver of premiums for an additional 10 months while he is no longer disabled, unless some adjustments are made. In view of such an undesirable situation, some policies provide that an annual premium-paying mode will automatically switch to a monthly mode for the purposes of premium waivers. Alternatively changes to the frequency of premium payments during disability periods are expressly disallowed.

Disability Income
Whereas a WP rider gives relief from expenditure during total disability, a Disability Income rider (as the name suggests) provides an income during periods of total disability. Again, a Disability Income rider may be added to virtually all types of life insurance.

For the purposes of a WP Benefit Rider, “total disability” may mean that, because of disease or bodily injury, the life insured cannot do any of the essential acts and duties of his or her job, or of any other job for which he or she is suited based on schooling, training or experience. Another form of “total disability” is also covered, i.e. the life insured’s total loss, starting while the rider is in effect, of the sight in both eyes or the use of both hands, both feet, or one hand and one foot.

Amount payable: two alternative methods are used to establish the amount of disability income to be paid: an income formula and a flat benefit amount. A typical group disability income policy adopts an income formula, which expresses the income amount as a percentage of the insured member’s pre-disability earnings, less the amount of any disability income benefit he receives from another source. Where a flat benefit amount is payable, no regard is to be paid to any other income benefits the insured member receives

Whereas a WP rider gives relief from expenditure during total disability, a Disability Income rider (as the name suggests) provides an income during periods of total disability. Again, a Disability Income rider may be added to virtually all types of life insurance. The usual provisions of this rider include:
(a) Definition: “Total Disability” is defined in the manner as does a WP Benefit Rider (see 3.1.1 above). (b) Amount payable: two alternative methods are used to establish the amount of disability income to be paid: an income formula and a flat benefit amount. A typical group disability income policy adopts an income formula, which expresses the income amount as a percentage of the insured member’s pre-disability earnings, less the amount of any disability income benefit he receives from another source. Where a flat benefit amount is payable, no regard is to be paid to any other income benefits the insured member receives.
(c) Waiting period: similar in concept to that applicable with the WP rider, but the period varies from one to six months.
(d) Not a loan or an advance payment: the basic policy remains in full force during total disability so that if death occurs during a period of total disability the face amount of the basic policy is payable in addition to any income benefits paid or payable.)

Accidental death benefit (ADB): this normally undertakes to pay a benefit equal to the face amount of the basic policy as an additional sum should death be caused by an accident. The customary provisions are:
(i) death must have been caused directly and independently of all other causes, by an accidental bodily injury, and have occurred within one year after that injury;
(ii) customary personal accident insurance exclusions apply, including: (1) intentional self-inflicted injuries (e.g. as a result of suicide); (2) war-related injuries; (3) injuries whilst engaging in illegal activities; (4) aviation injuries (except as a fare-paying passenger);
Note: 1 This benefit is often called a Double Indemnity Benefit. We know from earlier studies (see 1.2.3(b)) that the use of the term ‘Indemnity’ here is technically inaccurate, since life insurance is normally not subject to the principle of indemnity. 2 Also referring to previous studies (see 1.2.3(a)), proximate cause becomes important with this rider. By contrast, the cause of death is in most cases irrelevant in relation to claims under the basic life insurance plan.

Dismemberment:
literally “dismemberment” means losing one or more members (limbs), but the term within the AD&D rider relates to both the loss of limbs and the loss of sight. The usual provisions are:
(i) Basic cover: normally, a sum equal to the accidental death benefit is payable if the life insured loses any two limbs or the sight in both eyes as a result of an accident.
(ii) Lower benefit: often policies provide for payment equal to a stated proportion of the accidental death benefit if an accident results in the loss of one limb, the loss of sight in one eye, or another specified lesser injury.
(iii) Definition: the loss of a limb may be described as the actual loss of limb (by physical severance at or above the wrist or ankle) or the loss of the use of the limb.
(iv) Combination: normally, the policy provides that where the same accident has resulted in both dismemberment and death, it will pay either the dismemberment benefit or the death benefit, but not both.

Benefit schedule: accidental bodily injuries being covered, a schedule (or list) of specified injuries is given, with a corresponding benefit against each. The list usually includes:
(i) Death 100% of sum insured;
(ii) Loss of Two Limbs a specified percentage;
(iii) Total Loss of Sight a specified percentage;
(iv) 1 Limb & Sight in 1 Eye a specified percentage;
(v) Either 1 Limb or Sight in 1 Eye a specified percentage;
(vi) Various specified lesser injuries – see below Lesser injuries: comprise a detailed list of possible injuries, ranging from serious impairments (e.g. loss of a thumb or index finger) to relatively minor ones (e.g. loss of a single finger joint).

Other benefits: cover may include one or more of the following:
(i) Serious Burns – at least third degree burns: a specified amount $;
(ii) Weekly Benefits – during disability: a specified amount $ (for no more than 52 weeks);
(iii) Hospital Benefit – a specified daily benefit (for no more than 1,000 days);
(iv) “Double Indemnity” – all benefits (except hospital stay) doubled, if the injury arose whilst travelling on regular public transport or in the burning of certain public places (cinemas, etc.).

The meaning of this is that when a policyowner-insured in a prescribed serious situation, all or part of the death benefit under the policy may be payable to him, although death has not yet occurred. Provisions for this are contained in an accelerated death benefit rider (ADB rider), also known as a living benefit rider. Common features with the different riders concerned are the benefits are released at times of great personal stress, under grave and life-threatening circumstances.

Common features with the accelerated death benefit riders concerned are:
(a) Basic reasons: the benefits are released at times of great personal stress, under grave and life-threatening circumstances. They are to assist with related expenditure and to provide at least partial relief from the extra burden of financial worry at times which are already grief-laden.
(b) Eligible plans: the riders are only likely to be permitted with policies having a significant face amount for the sake of keeping administrative costs down.
(c) Beneficiaries: since pre-death payments to the policyowner-insured will have an impact upon the expectations of the beneficiaries, some insurers will, in the event of a claim under the rider, require the latter to sign a release (or release form), acknowledging that the death benefit stands reduced by the amount of the ADB payment.
(d) Assignees: if the policy has been assigned, the assignee must sign such a release form, before an ADB is paid.
(e) Types of benefits: we shall consider two such accelerated death benefits, namely the critical illness and the long-term care benefits.

we shall consider two such accelerated death benefits, namely the critical illness and the long-term care benefits.

a stated portion of the death benefit is paid to the policyowner-insured when: (i) he is diagnosed with a specified disease; (ii) he is diagnosed with a terminal illness and has a life expectancy of 12 months or less; or (iii) it is necessary for him to undergo a specified medical procedure.

3.3.1 Critical Illness Benefit
Specified diseases: the list of insured diseases is not identical with all insurers, but they all can be categorised into the following: (i) cancer; (ii) illnesses related to the heart; (iii) disability; (iv) illnesses related to a major organ; (v) illnesses related to the nervous system; (vi) illnesses related to the immune system; (vii) others.

Critical Illness Benefit The basic features of this rider are:
(a) Meaning: a stated portion of the death benefit is paid to the policyowner-insured when: (i) he is diagnosed with a specified disease; (ii) he is diagnosed with a terminal illness and has a life expectancy of 12 months or less; or (iii) it is necessary for him to undergo a specified medical procedure.
(b) Specified diseases: the list of insured diseases is not identical with all insurers, but they all can be categorised into the following: (i) cancer; (ii) illnesses related to the heart; (iii) disability; (iv) illnesses related to a major organ; (v) illnesses related to the nervous system; (vi) illnesses related to the immune system; (vii) others.
(c) Medical evidence: a statement from an attending physician is necessary, confirming the condition and, in the case of a terminal illness, the assessed life expectancy as well.
(d) Amount of benefit: this will vary between companies and depend on the type of disease contracted, payment of the full death benefit being a possibility. Critical illness benefit is invariably paid as a lump sum.
(e) Restrictions: again, these are not universal, but typically they may include:
(i) critical illness cover is only available up to a specified age, say, age 80;
(ii) critical illness cover is only available to standard risks;
(iii) payments may not be made for multiple/recurring events, perhaps subject to exceptions with a couple of diseases;
(iv) waiting period: the diagnosis mentioned in (a) above has to be one done when the rider has been in effect for a specified number of days, say, 90 days.
(f) Premium waiver: some riders offer to waive all renewal premiums due after say three months of meeting the incapacity definition.

Long-Term Care (LTC) Benefit This is not a very common product in Hong Kong at present, but the basic features of this rider are:
(a) Meaning: a stated portion of the death benefit is payable to a policyowner-insured who requires constant care for a condition.
(b) Types of care: these will be specified in the rider, e.g. to be cared for either in an approved nursing home or in the policyowner-insured’s home by a duly authorised carer.
(c) Medical evidence: often the rider specifies that the care needs to be medically necessary. Confirmation of this is not always easy. Sometimes, the approval of the policyowner-insured’s physician is acceptable, but many insurers require that the policyowner-insured be unable to perform a specified number of activities of daily living (ADLs) before the need is established. (ADLs will include basic human needs and functions, such as washing and dressing oneself, and mobility.)
(d) Amount of benefit: typically, this may be 2% of the death benefit per month for nursing home care and 1% for home health care. The maximum total payments may range between 50% and 100%.
(e) Waiting period: usually there is a 90-day waiting period before LTC benefits are payable. Also, some insurers require the policy to have been in force for one year or more before LTC benefits are payable.
(f) Premium waiver: it is common for premiums to be waived, both for the rider benefit and the basic insurance plan, during the period that LTC benefits are being paid to the policyowner-insured.

Basic plan: Intended to cover the expenses related to medical treatment and hospitalisation, the Basic Plan has a number of headings under which cover is given, typically as follows: (i) Hospital charges: these are very likely to have three different categories, according to choice and premium paid, the usual descriptions being Private Room, Semi-Private Room and Ward Bed. Cover includes Room and Board, Miscellaneous Hospital Services and an available supplement for Intensive Care treatment. (ii) Private nursing: again with three categories, this includes nursing treatment at home, in hospital by a qualified nurse or as recommended by the attending medical practitioner. (iii) Surgeon’s, anaesthetist’s and operating theatre fees: maximum benefit / cover is specified according to the three categories and the seriousness of the operation involved. (iv) In-patient physician’s fees: for non-surgical cases. (v) In-patient specialist’s fees: for treatment, consultations, etc. (vi) Out-patient follow-up care: within 6 weeks of hospital discharge. (vii) Free worldwide assistance: a number of benefits and covers to help in the event of emergency needs whilst abroad. These range from instant telephone assistance to the return of mortal remains.

Major exclusions: there are limits to the time during which various benefits under the Basic and Other Plans may be paid, but these are part of the description of cover. Specific exclusions are very likely to include the following:
(i) Pre-existing conditions;
(ii) Pregnancy and childbirth related expenses;
(iii) Drug or other substance abuse, self-inflicted injury and sexually transmitted diseases;
(iv) AIDS or HIV related conditions (sometimes only excluded for say the first five years of the insurance); (v) Congenital abnormalities treatment

INSURABILITY BENEFITS Insurability means that by normal underwriting and business standards a particular risk is acceptable for insurance. The usual feature that affects this is, of course, the health of the person who is to be the life insured. Checking whether a person is insurable is a basic element in underwriting (see 5.3). Sometimes the question of insurability, however, arises for an existing client (perhaps with policy reinstatement – see 4.7 or on other occasions). This question, however, may be avoided if the policy is made subject to the Guaranteed Insurability (GI) Benefit.

Guaranteed Insurability Option The GI benefit is also referred to as a Guaranteed Purchase Option. The basic features of this rider are:
(a) Meaning: the policyowner has the right to purchase additional insurance (of course for an additional premium) on specified option dates, at specified ages, or when a specified event happens, without having to supply evidence of insurability.
(b) Limitations: the amount of additional cover may be limited (to the existing policy’s face amount, or less). Also the right must be exercised before the life insured reaches a certain age (typically aged 40).
(c) Not automatic: if the policyowner does not effect the extra cover when the right is triggered, that particular right is lost. He may, however, exercise the right when the next turn comes, if any.
(d) Specified event: the rider may specify the insured events as marriage, the birth of a child, etc.
(e) Temporary cover: some insurers grant term insurance cover automatically to cover the policyowner-insured during the period allowed for exercising his purchase option, so that if he dies before completing the option he will still have extra term insurance cover.
(f) Policy with WP: if the insurance also has a Disability Waiver of Premium rider (see 3.1.1) and the policyowner-insured is disabled at the time he is entitled to exercise an option for additional cover, the additional cover will granted automatically. The WP rider also provides for all premiums to be waived, until the recovery or death of the policyowner-insured.

Inflation, which reduces the purchasing power of money, is an important element to be considered with any long-term insurance linked to a specified face amount. Bearing in mind that long-term policies may continue for many years, perhaps a few decades, before they become payable, it will be realised that what was once a significant amount may in real terms have been reduced to a small or even trivial sum, because of inflation. Clearly, this is a problem needing serious attention to the whole of one’s life insurance programme, but in the context of this Chapter on Benefit Riders, provision has been made in relation to disability income benefits being paid, as follows: 3.6.1 Cost of Living Adjustment (COLA) Benefit This rider or policy provision provides for periodic increases in the disability income benefits being paid to disabled policyowner-insured. As the name suggests, the increases are linked to increases in a recognised independent index, such as the Composite Consumer Price Index.

Waiting period: where the policyowner-insured has been totally disabled as defined in the policy for a minimum period (usually three or six months), renewal premiums will be waived.

This benefit is often called a Double Indemnity Benefit. We know from earlier studies (see 1.2.3(b)) that the use of the term ‘Indemnity’ here is technically inaccurate, since life insurance is normally not subject to the principle of indemnity

The “entire contract” provisions are therefore very important. They provide that:
(a) the entire contract consists of the policy, any attached riders and the attached copy of the application (such an insurance contract being termed a closed contract);
(b) only certain specified senior officials of the company are authorised to make changes to the contract; (c) no change to the contract will be effective unless made in writing; and
(d) no change to the contract can be made unless the policyowner agrees to it in writing.

INCONTESTABILITY PROVISION This means that within the terms of these provisions the validity of the contract cannot be contested (challenged) by the insurer. Disputes over the validity of an insurance contract may arise with an alleged breach of utmost good faith, i.e. certain material facts have been omitted or misrepresented.

Restrictions: again, these are not universal, but typically they may include: 3/8 (i) critical illness cover is only available up to a specified age, say, age 80; (ii) critical illness cover is only available to standard risks; (iii) payments may not be made for multiple/recurring events, perhaps subject to exceptions with a couple of diseases; (iv) waiting period: the diagnosis mentioned in (a) above has to be one done when the rider has been in effect for a specified number of days, say, 90 days.