Terms & Definitions

Common Terms You Should Know

Health Insurance


The amount of annual medical expenses that that the insured is required to pay before the company begins payment. For example, if your plan has a $500 deductible, you will pay the first $500 of your medical expenses before your policy begins paying the expenses. Only expenses for covered services apply towards the deductible. So if you paid $100 for a visit to a chiropractor but the plan does not consider chiropractic care a covered expense, then the $100 will not apply toward your annual deductible. The higher the deductible the lower the premium.


An agreement in health insurance where costs are shared between the insurer and the insured. Usually stated as a percentage, such as 80% -20%. (Insurance company /insured)

Stop-Loss Limit

In health policies, this provision states that the insurer will pay expenses beyond a stated amount for any one accident or illness.

Out of Pocket (OOP)

The maximum amount of money that you can be exposed to in a given year for covered expenses. Generally it is the amount of ones deductible plus the amount of co-insurance limit. For instance if you have a $500 deductible with an 80% / 20% coinsurance on the next $5000, your OOP is $1500


When money is set aside by an individual or organization to pay possible losses without buying insurance. Usually found in large organizations with the resources to self fund.


A health policy that lists the exact amounts the company will pay for a specific operation, procedure, or loss. This is perhaps the most important part to look for in a policy, because it will affect your ability to continue treatment in case of an accident or illness.

Rated Policy

When an extra premium is charged because the person to be insured is in substandard health.

Pure Risk

When the insured has no potential for gain, only a loss or no loss. Since insurance is not designed for a gain, only restoration of loss, it is considered a pure-risk purchase.


The “valuable consideration” for insurance.

Preferred Provider Organization (PPO)

A selected group of hospitals, doctors, and other medical providers who are contracted to perform services at a discount


Exceptions stated in a policy that limit the company’s obligation to pay.

Free Look Provision

A provision that allows a policy owner to examine a policy for a certain number of days and return it for a full refund before the end of that period. Also called Free Examination or Right of Refusal.

Guaranteed Renewable

A contract that gives the insured the right to renew regardless of health. Premiums may be raised but only by class, not individually.

Medical Information Bureau (MIB)

An organization located in Boston, MA, owned by insurance companies to collect and share information on the health history of individuals who have applied for insurance. The information comes from applications for insurance and is usually provided to member companies by code.


When an applicant gives false information on an application for insurance. Or, when an insurance company or their agent falsely presents any benefits, terms, or coverage of the policy or the strengths of the company

Term Insurance

Insurance that is issued for a specific period of time and will terminate if not renewed. This type of plan is not guaranteed.

Usual and Customary

Usual and Customary is defined in the policy as either the average charge in a particular geographical area or the average charge of a specific surgeon.


Reasonable is often used either in the place of Usual and Customary or in union with Usual and Customary. Medicare, for example, states that their “Approved” amount is what is “Reasonable.” They base Reasonable on a national fee schedule.

Disability Income

Several key terms are critical to the understanding of Disability Income Policies.


“Any Occupation” Some policies require that the insured be disabled to the point where they cannot work at any occupation for which they are reasonably prepared by “education, training or experience.” This is a very restrictive definition that allows insurer broad latitude to deny benefits. Many leaders in the insurance industry believe that these policies should not be sold.

“Own Occupation” A less restrictive definition that serves insureds much better is the “Own Occupation” definition. The insured would receive benefits if they were unable to work at their own occupation they have reasonably been prepared to perform by “education, training or experience.” A surgeon who loses the use of the hand she uses in operating on patients would be denied payments under the “Any Occupation” definition, but would receive benefits under the “Own Occupation” policy.

Total Disability

Most policies require the disability to be “total and permanent” before the benefits would be paid.

Residual Disability

Most insurance companies for their insureds who have a disability less than total and permanent currently use this definition. The policy connects the benefit payments to the proportion of earnings lost without regard to the insured’s occupation. If the insured loses 60% of their income, the policy would pay 60% of the benefits throughout the Benefit Period selected in the policy. If loss of income were below 25%, the Residual definition would pay no benefits. This Residual Disability definition has almost completely replaced an earlier “Partial” disability definition.

Presumptive Disability

When a person is receiving disability income payments, the company will require medical proof every six months that the disability is continuing. This is not required if the disability is Presumptive. A Presumptive disability would be the loss of two legs or total and permanent blindness.

Benefit Amounts

Disability Income Policies pay a stated dollar amount in benefits in monthly income. The amount is usually 60% of their previous income because the individual buying the policy would not have to pay federal income taxes on the disability income. Most disability income policies will provide for an Adjustment of Benefits clause that would adjust the payments in relation to the earnings of the disabled person.

Probationary Period

All Disability Income Policies will have a Probationary Period that begins on the day the policy goes into effect. It is usually thirty (30) days and the policy will not pay for any disability that arises from sickness during that period of time (Accidents are excluded). The Probationary Period has a one time only application – the first thirty (30) days of the policy’s life. It protects the insurance company from “buying a claim” where someone is already ill when the policy goes into effect. Probationary Periods are also found in Long-Term Care Policies.

Elimination Period (Deductible)

An elimination period specifies a period of time from the onset of a disability when the policy does not pay benefits. It is similar in function to a deductible in a Major Medical Policy. The period chosen can be from thirty (30) days to up to two (2) years, depending upon the applicant’s situation. The applicant might have adequate savings to pay expenses for several months following the onset of a disability. The applicant might work where there is a salary continuation benefit in the event of a disability. Elimination Periods, like deductibles, keep premiums low. The longer the Elimination Period, the lower the premium. The shorter the Elimination Period, the higher the premium.

Benefit Period

The applicant chooses the Benefit Period and it is the length of time the policy will pay disability benefits.

Short Term Disability (STD)

Short Term Disability would provide payments from one to twenty-four (24) months.

Long Term Disability (LTD)

Long Term Disability would provide payments for longer than two (2) years. Some policies pay until the insured reaches age 65.

Recurrent Disability

If a person is receiving disability payments during a Benefit Period, they might recover from their disability and go back to work. In such a case, the disability payments would end. If the disability returns, the policy would resume payments. Would the insured be charged with another Elimination Period? Not if the policy contained a Recurrent Benefit, either in the policy or as an added rider. The person is required to suffer the recurrent disability within a specified period of time, usually within the first six (6) months after returning to work. Sue has a Disability Income Policy with a thirty (30) day Elimination Period and Recurrent Benefit and she is disabled for three months, goes back to work for three months, and her disability returns for three months. Her policy would pay her five months of benefits because only one Elimination Period would be charged.

Additional Types of Disability Income Policies

Business Continuation Insurance

This policy pays the salaries of support people in case the principal is disabled and cannot keep the business going for a period of time. A nurse working in a physician’s office could have her salary continued if the physician is disabled for a period of time.

Business Overhead Expense Policy

These contracts are special policies in health insurance that are sold to professionals, business partners and small corporations. The policy provides payments for overhead expenses such as utility bills, rent or mortgage payments if the owner is disabled. Some policies pay salaries of employees but a Business Continuation Policy is usually used for this. These policies would not pay to add new stock to the store’s inventory. The premiums are deductible as a business expense, but taxes must be paid on any benefits received.

Disability Buy-Out Policy

Disability Buy-Out Policies are used to fund a buy-sell agreement between partners or stockholders when one of the owners is disabled. The premiums are not deductible, but the benefit is received tax-free.

Key-Person Disability Policy

The policy compensates the owners of a business if a Key-Person’s services are lost to the company because of a disability. The premiums are not deductible and the benefit is paid to the company tax-free.

About Optimized Benefits

Optimized Benefits is a Boutique Firm dedicated to providing smart solutions to the small and mid-sized business owners and their Employee Benefits plans
we have a focus on Retirement (401K) and Group Health plans

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Chicago IL 60601

312 263 1590 X 101


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