There is no question that, over the years since its introduction, many of the features and benefits of disability income coverage have changed. One of those features that has undergone change is the elimination period. Before we examine those changes, however, let's offer a working definition of an elimination period.
The elimination period is that period of time beginning with the onset of disability and ending when benefits for that disability begin to accrue. Notice that the word used is "accrue." Although benefits begin to accrue immediately following an elimination period, they are not paid to the policyowner until about 30 days after they begin to accrue. So, benefits under a disability income policy with a 30-day elimination period would usually be paid about 60 days after the onset of the insured's disability.
We noted that elimination periods had changed. Not too long ago, the typical disability income insurance policy had elimination periods of 0 days for accident and 7 days for sickness. This has changed dramatically.
Today's disability income insurance policies usually offer a minimum elimination period of 30 days. In fact, however, insurers prefer elimination periods of 60 or 90 days in order to avoid all but the most serious claim situations. The common elimination periods are 30 days, 60 days, 90 days, 180 days and 365 days.
Why have elimination periods at all? Like the answer to so many questions, the answer to that question is related to costs.
The function of elimination periods when used generally in a disability income policy is to avoid administratively costly but relatively insignificant claims. Not unexpectedly, the benefit that is derived by insurance companies is lowered administrative costs. What that means to insureds is lower premiums.
Elimination periods are also handy for use in attempting to resolve knotty underwriting issues. A disability income policy may be structured in a way that provides the needed coverage to the insured while protecting the insurer from increased risks resulting from semi-chronic conditions through the use of special elimination periods.
Consider, for example, the proposed insured with a history of lower back problems who applies for a disability income insurance policy with a 30-day elimination period. Even though the underwriter may be satisfied with the applicant's general medical history, the short elimination period doesn't adequately protect the company from exposure to a likely claim arising from lower back problems. The solution to that underwriting problem may be to offer a split elimination period.
A split elimination period will give the proposed insured the coverage he or she needs for most disabilities, but it will adequately protect the company against the likelihood of frequent claims for disabilities involving the lower back. For example, the insurer could offer an elimination period of 180 days for lower back problems but only 30 days for everything else.
Elimination periods on disability insurance policies designed to replace income are usually 30 days to 180 days. Much longer elimination periods, however, are found in a specialty disability policy called a disability buyout policy, a product that we will discuss at some length later in this course. These policies are used to fund the buyout of a disabled partner or stockholder and typically have an elimination period of 1 1/2 to 2 years.