Relation of earnings to insurance provision
Also known as: average earnings clause, relation of earnings to insurance clause
The relation of earnings to insurance provision is an optional health policy provision that limits total disability benefits to the insured's actual earnings. If benefits from all policies exceed that income, the insurer reduces the payment proportionally and refunds the excess premium.
The relation of earnings to insurance provision — often called the average earnings clause — is one of the NAIC uniform optional provisions an insurer may include in a disability income or health policy. Its purpose is to prevent overinsurance: a situation in which an insured would collect more while disabled than they earned while working.
The clause works by comparing total monthly benefits from all disability coverage against the insured's monthly earned income, measured either at the time disability began or as an average over a defined prior period, whichever is greater. If the combined benefits exceed that figure, the insurer pays a proportionate share rather than the full contractual amount, and it refunds the premium attributable to the excess coverage. Policies typically guarantee a small minimum monthly benefit so the reduction cannot wipe out the payment entirely.
The reasoning is a core insurance principle. If disability benefits paid more than a paycheck, an insured would have a financial incentive to stay disabled, which raises claim costs for everyone. Because this provision is optional rather than mandatory, it appears only if the insurer chooses to include it — and, like all optional provisions, it may not be worded less favorably to the insured than the model language. A related optional provision, change of occupation, reduces benefits to the amount the premium paid would have purchased at the rate for a more hazardous job when an insured switches occupations.
State life and health insurance licensing exams test this material within the policy provisions section. Know that relation of earnings to insurance is optional rather than mandatory, that it addresses overinsurance, and that it results in both a reduced benefit and a refund of the excess premium.
Key takeaways
- The provision caps total disability benefits at the insured's actual earned income to prevent overinsurance.
- When benefits from all sources exceed earnings, the insurer pays a proportionate reduced benefit and refunds the excess premium.
- It is an optional provision, so it applies only when the insurer includes it in the policy.
- A minimum monthly benefit is normally guaranteed regardless of the reduction.
- The related change of occupation provision adjusts benefits when an insured moves to a more or less hazardous job.