By Lawrence Schneider
Protecting your income, according to financial planners, is the cornerstone of financial planning. Statistics suggest that at age 40 you have a 45 percent chance of becoming disabled for a substantial period of time during your lifetime.
Wouldn't you agree that protecting your income and your ability to work are your most valuable assets? Protecting your lifetime earnings, which could be more than $1 million (age 45 at $50K/year to age 65), should be high on your list. The following article will help you sift through the wording maze of different contracts (policies) offered by the marketplace and, if coverage is applied for, will correct the problem of being without adequate protection.
What to look for in an ideal disability insurance policy
If every company offering a disability insurance policy (contract) were to offer the same wording, terms, and conditions, then your job as a consumer would be easy. All you would have to think about would be something simple, such as whether or not you liked a company's logo. Unfortunately, evaluating and selecting the right contract is not so easy.
There could be as many as 30 or more wording considerations, all of which make up a contract, and each affect policy benefits: how much, how long, and under what terms, conditions and circumstances a claim will be paid. It is analogous to the thousands of parts that make up an automobile.
However, in view of what might otherwise be a formidable task, most companies offer enough similarities in most of the 30 or so components. The remaining differences, relatively speaking, are not as important as the following nine, which will be elaborated on in detail.
I have attempted to list these major differences in the same order as they may appear in most contracts. They are as follows:
1. Renewability Under what conditions your policy will be renewed.
2. Definition of Sickness When illness first appears (manifests) vs. when you got the disease (contracted).
3. Definition of Total Disability Will you be able to work in another occupation and still be paid?
4. Definition of Benefit Period How long will you be paid?
5. Residual/Proportionate Disability Benefit Will you be paid while working in your occupation, but suffer a loss of income while under a doctor's care?
6. Recovery/Extended/Transition Benefit Same as above, but with full recovery and still a loss of income.
7. Future Increase Option Benefit Will you be able to get an additional benefit amount, if you are now uninsurable?
8. Cost of Living Adjustment (COLA) Benefit Helps to replace what inflation has eroded from the benefit's buying power.
9. Miscellaneous
Renewability
One of the most dramatic changes the industry has made in the last couple of years is the introduction of guaranteed renewable only policies. This change now allows the carriers to raise their rates, if claims and other negative factors increase and, as a result, still remain profitable.
Try, however, to get yourself a non-can policy. The non-can feature allows the insured to have a policy that guarantees rates up to age 65. There are companies who still offer this feature. Those who do offer it usually charge about 20 percent more than those who do not!
Definition of sickness
Wording should say, "when it first manifests," rather than "when first contracted." The difference between the two is significant, especially if the disability, for example, is caused by cancer. Under the first definition, even if cancer existed when the policy was issued — but it had not yet appeared, nor caused a prudent person to seek medical attention — it would be covered. Under the second definition, it would not if it could be proven to have existed prior to the effective date of the policy.
Definition of total disability
This is the guts of the policy and sets the guidelines as to whether or not you will be considered disabled and, as a result, be paid. The policy should have an Own-Occ definition for total disability. Basically there are three different Own-Occ definitions and one other type that are offered by the industry. These are based on occupations that for the most part reflect the claims experience of a particular carrier. These definitions are listed in the sequence of the one being the most liberal first:
a) Own Occupation. This definition allows the insured to be paid the monthly benefit amount even if working elsewhere, so long as it is another occupation. Some carriers offer an own-occ specialty definition. This definition might be necessary for someone who has a skill that could be transferred to another — a surgeon, for example. Without this type of a definition, he/she could be expected to teach, or became involved in some related discipline within the medical field. As a result, you might not be considered totally disabled. Be careful when there is a dual occupation!
b) Own Occupation - Not working elsewhere. This definition allows the insured to be paid if they can't do the duties of their occupation and cannot be gainfully employed elsewhere. Working or not then becomes the choice of the claimant. This can also be a split definition.
c) Own Occupation - Unable to work elsewhere. This definition will allow the insured to be paid only if they can't do the material duties of their occupation and are unable to work elsewhere, by reason of education, training and experience. Some carriers include prior economic statutes, giving the carrier more control of the claim.
d) There can also be a variation of b) and c) whereby it becomes a split definition which gives definition "a" for a period of a few years, usually five, then changes to either "b" or "c." This is the least desirable to the insured and protects the company from those who wish to malinger. If one does return to work and there was a loss of income and they had a residual benefit, they would be paid under the loss of earnings definition as described below.
e) Loss of Earnings. This definition has been around for a long time, but recently many more carriers have chosen to stipulate this definition in lieu of the above own-occ. A loss of earnings policy is really a policy that doesn't have a total disability benefit, only a residual (proportionate) benefit. For example, if during a disability there is a 30 percent loss of income, it pays 30 percent of the monthly benefit proportionately. While it does pay proportionately, it is important to note that the insured also starts off with a 40 percent shortfall due to the carrier's participation tables, only covering approximately 60 percent of income. (Benefits are usually paid on a tax-free basis if the insured pays the premium.)
Definition of benefit period
This obviously represents how long someone will be paid in the event of a covered disability; but once again, with a slight of hand not all benefit periods will be the same with all else being equal. For example, with regard to benefits being paid for a lifetime, there are different configurations that are either available or imposed, based on occupation and onset age of disability. Some of the onset ages, which incidentally are only found on older policies, are as follows:
• Lifetime benefits will be paid only if disabled before age 55.
• Lifetime benefits will be paid only if disabled before age 60.
• Lifetime benefits will be paid only if disabled before age 65.
If a company makes any or all of the above on-set ages available as an option (and some do have more than one) and the longer the "window of opportunity" stays "open," the higher the premium. I might add at this point that this option has disappeared from the landscape. I contend that it shouldn't have. Some carriers offer a graded lifetime benefit, which simply states that you will get a reduced percentage of the basic benefit amount paid lifetime, depending on the onset age (either 45 or 55).
Residual/proportionate disability benefit (same as loss of earnings)
Most contracts read just about the same for this benefit, except for some of the following terms/conditions. These can make a difference in terms of how much of a claim will be paid.
a) Pre-disability earnings period. Typical contracts state that they will consider the previous 12 months or any two consecutive years within the last five, whichever is most favorable to the insured, to establish a baseline in order to measure the loss of earnings. There are also some other combinations.
b) Pre-disability income included or excluded for the loss/earnings calculation. This can be a significant factor if the claimant is in, for example, the service industry business (CPA, attorney, etc.) and has some accounts receivable (pre-disability earnings) paid during a period of disability. If the contract does not allow these to be excluded, then the calculation will generate a lower loss of income and as a result the payment will be smaller. Conversely, if these are excluded, the loss of earnings percentage will be higher and a larger benefit will be paid.
c) Qualification period. These are the number of days that the insured must be totally disabled before the residual benefits can start. Companies who have this type of restrictive period usually limit it to 30 days. Most companies do not impose this qualification period at all, and allow periods of residual disability to count towards the elimination periods as well.
Recovery/extended/transition benefit
This benefit allows a person who is no longer under the doctor's care to be paid as if they were still disabled (even though they have returned to work full-time) so long as there is at least a 20 percent loss of income. This allows an attorney or therapist (after watching their practice and their network disintegrate while disabled) to return to work and still be paid while their practice is being rebuilt.
Another example would be a CPA who broke his or her wrist during tax season (80 percent of annual income) and recovered perfectly "after April 15th" for the remainder of the year. Benefits under this provision would continue to be paid, even though he/she is fully recovered, until income reaches 80 percent of pre-disability earnings.
Again, some companies offer this benefit, but for different periods of time (12 or 24 months, for example); some for the full benefit period (age 65).
Future increase option benefit
This benefit allows someone who is underinsured to apply for additional coverage, even though they have health problems and thus are normally otherwise uninsurable. Most companies offer this option; however, once again there are contractual differences to watch out for, which include:
a) Cut-off age for having this option issued as part of the coverage in the contract. Typically, the age whereby one can no longer apply or it is no longer offered is age 50, although there are a few companies that will issue it up to age 55.
b) Cut-off age for exercising the option and whether or not the option can be exercised and paid during a current claim. I haven't seen any company allow it to be exercised past 55. Most, if not all, use a formula as to how much can be exercised at any given time based on age and other factors, participation tables not withstanding. As previously mentioned, a few might still allow all or part to be exercised and paid for along with an existing claim, although for the most part, this caveat is gone, except in some older contracts.
Cost of living adjustment (COLA) benefit
This allows the monthly benefit to be increased so that it keeps up with what inflation has eroded from the benefit's potential buying power. Some COLA differences that exist between companies fall into the following categories:
a) Basis for increase, for example, CPI and/or guarantees.
b) Purchase conversion of these benefits when claimant returns to work, prior to what age and what cost, if any. This is especially important if there is a relapse of the original claim, or there is a new claim and one wanted the new claim to begin with the last benefit amount paid, rather than starting the ball over again with the original benefit amount issued.
Miscellaneous
Other related contract components that should be considered when analyzing a contract are as follows:
a) Conditionally renewable after age 65. Most are renewable to 75 (after age 65) while others offer renewability for lifetime (only if gainfully employed; minimum is 30 hours a week.).
b) Loss of income percentage necessary to be deemed to be totally disabled (i.e. most say 75 percent while a few use 80 percent). Obviously, the lower the percentage, the better the contract.
c) Recurrent disability. Some say six months; others say 12 months. Which is better depends on whether or not there is a short benefit period — say, five years. If for a particular claim, the benefit period has expired, then I suggest six months if there is a relapse, then the benefit period begins again. On the other hand, if the benefit period has not yet expired and the claimant returns to work and suffers a relapse after six months, then a 12 month period is better because in this case the elimination period does not have to be satisfied again.
In view of the fact that the industry has basically come out of a major regression, now may be the time to consider making an application for coverage. Policies of tomorrow might be like the Model T Ford and will contain provisions that will make it more difficult to have a claim paid. Females, in particular, have been hard hit as a result of sex distinct rates being imposed, resulting in premiums that are 30 percent higher. Under certain conditions, a few remedies exist in order to get the lower cost unisex rates
Disability Insurance Resource Center is the nation's largest agency specializing in disability insurance. Its founder, Larry Schneider, is a disability specialist with more than 30 years experience and is the owner of Disability Insurance Resource Center. He can be reached at: [email protected]. For more information on his company and his CV, his Web site is www.di-resource-center.com. His toll-free number is (800) 551-6211. He is also an expert witness consultant for claims which have been inappropriately denied and a national resource for hard to place applicants as well as a brokerage for standard cases. He has also developed a D/I sales/marketing Turn-Key System to help agents become overnight experts.
