Disability Insurance Claim Advice
The Questions That Help Find the Right Disability Coverage
Insurance News Net, December, 2015
By Art Fries
It’s not enough to convince your client to purchase disability insurance. You also must match the correct options to your client’s needs.
Selecting the right disability insurance policy for your client requires that you consider everything from how the carrier interprets the contract language to their overall attitude toward handling claims.
You must determine which aspects of the disability contract are the most important, and which options you should emphasize for your client. Here are some issues that must be considered.
Look at guarantees. You must consider whether the premium is guaranteed and how important that guarantee is to your client. You also must determine whether the policy is guaranteed renewable and whether the wording is guaranteed as well.
The definitions of both partial and total disability must be examined. Must partial disability follow total disability?
Your client’s occupation also must be taken into account. Does the policy have a “your occupation” definition (substantial and material duties or important duties)? Does this definition apply to both total and partial disability? You also must consider whether the policy has a modified “your occupation” definition with additional wording that states your client is not working in that occupation or any occupation. And if partial disability is not included in the policy, does the insurance company interpret it differently than if your client did have a partial disability benefit? Does partial disability relate only to “your occupation” or does it include any occupation?
Look at how the carrier defines total disability. Some policies change the definition of total disability after a period of, say, two years or five years. Then after that time, some policies indicate that your client is not working at any occupation related to their education, training or experience.
Consider whether the policy has any mental limitations or substance abuse limitations. If so, your client could be limited to a maximum benefit of one or two years.
Look at whether the insurance company may apply any waivers and refuse to pay for a particular medical condition after the underwriting on the application has been completed. And consider whether the waiver can be removed at a future date.
Discuss with your client whether the policy has a fraud clause or an incontestability clause, and make sure your client understands what they mean.
Pre-existing conditions are another issue to consider. Examine how the carrier specifies pre-existing conditions in terms of years – for example, less than one year, two years, five years or no years indicated.
Your client may need to know whether there are any territorial restrictions on them if they should be on claim.
Look at whether optional benefits - such as automatic increases, future insurability or cost of living adjustments – are available. Discuss which benefits are most cost effective.
Your client’s earnings make up another area of concern. What is the earnings percentage (loss of earnings your client must incur) as it relates to a partial, residual or proportionate disability claim? Is there a “pure earnings” definition for all disability (including total disability) or does it relate to “your occupation” for both total and partial disability?
What about restrictions? Does the policy put restrictions on back pain, chronic fatigue, fibromyalgia or any other medical symptoms whereby your client is limited to payment for only one or two years? Or are conditions in which there are no “objective findings” not covered by the policy?
At the time a disability policy is purchased, your client may not think about the questions that will arise if a claim is submitted. You need to look at which insurance companies are best for paying claims. In addition, your client should consider the issues that may arise in the event of a claim.
Your client will need to know what the carrier considers to be appropriate care by a physician and what the carrier considers to be an appropriate physician. Make sure that in the event of a claim, your client understands the “tools” used by insurance companies related to a field investigation, such as IME (Independent Medical Evaluation), FCE (Functional Capacity Evaluation) or audits by forensic accountants.
In case of a claim, your client will need to know how to complete claim forms properly, how to have their attending physician complete the forms properly, and how to communicate with the attending physician or medical examiner. You also should discuss with your client how to appeal a claim denial or when to use an attorney.
Although at one time, there were more than 550 insurance companies offering disability policies, today only about 25 companies offer this coverage. There is no such thing as a “standard” disability contract, and the wording is all over the map with add-on options and various restrictions and limitations. A lifetime benefit is no longer available from any insurance company.
I was approached recently by someone who had two proposals provided to him by two advisors. This man was earning approximately $300,000 per year and wanted to make the correct coverage choice, so he asked me for my opinion.
Both proposals were from “major league” carriers with strong reserves. After reviewing both proposals, I underlined all the good wording in green and the less favorable wording in red. I saw that one company had a lot of green underlined and the other a lot of red.
I then spoke with the prospect. I instructed him to create three columns on a large pad, write down the amount of annual premium for each of the two companies and then write the following:
Benefit, Insurance Company #1, Insurance Company #2.
I then explained the key benefits and differences for each of the two companies so that he could see which of the two provided the most competitive benefits and offered the best value for his situation. The key items included:
I conducted an audit of both policies and made the following recommendations:
1) Apply for Insurance Company No. 1’s disability policy, since overall value, contractual wording and benefits were considerably to the prospect’s advantage.
2) Lower the waiting period to either 180 days or 90 days, since a one-year waiting period was not cost effective.
180-day wait – annual premium – $3,388
90-day wait – annual premium – $4,247
Although the prospect would save about $859 per year with the 180-day wait, if he would have a claim he would lose about $26,000 in benefits (the difference between the 180-day wait and the 90-day wait). We agreed that a 90-day wait would be the “best value” since just one claim over the next 30 years would wipe out the difference.
I further recommended that he increase the monthly benefit with Insurance Company No. 1 from $8,700 monthly to $10,000 based upon his earnings, which would have enabled him to purchase the higher amount.
In helping the prospect to make a decision, I asked him the key questions to find out what was the most important for him in terms of contractual wording as well as add-on benefits. Often, a carrier will be stronger in one area but not as strong in another area. In this particular situation, the carrier I recommended was not the one I would have recommended a dozen years ago. My prior first-choice company had added more restrictive wording in recent years whereas the company I recommended in this case had broader overall wording and better add-ons that made it a simple choice. It was clear that the prospect had not understood the significance of these differences. But once I pointed them out to him and explained the meaning of the differences, he agreed wholeheartedly.
As your client’s earnings increase, the amount of personal disability insurance they can purchase decreases. A person earning $100,000 per year can purchase approximately $4,800 of monthly benefit, which is about 58 percent of their monthly earnings. Someone earning $300,000 per year can purchase approximately $10,000 monthly, which is about 40 percent of their monthly earnings.
Often there is an association policy available to members of your client’s profession in which they can purchase coverage up to 75 percent of their annual earnings. But these policies often have a “cap” on how much they will issue (for example: $6,000 per month) and a cap on how much monthly benefit your client can have from all insurance companies. So your client purchases an additional amount to bring them up to the maximum overall amount, which is often $15,000 per month.
The association plan, typically purchased by mail, gives your client the opportunity to buy more coverage but it often comes with hidden hooks such as a “relation to earnings” clause. This clause states that at claim time, the insurance company will consider not only what your client was earning prior to going on disability claim, but how much disability coverage your client has in force with other companies. As a result, your client may be paying an additional premium for a supposedly increased monthly benefit but ends up collecting a lesser amount from the association plan than they had expected.
I’ve seen plans in which a client had $5,000 per month coverage with their personal disability insurance carrier and $5,000 per month coverage through their association plan. Their personal carrier paid the full $5,000 monthly benefit and the association plan paid only $400 monthly. In that particular case, I was able to negotiate a buyout of the first policy, enabling the client to have their monthly association plan increase from $400 to $4,700.
Ideally, your client should buy disability insurance at the beginning of their career, with the monthly benefit increased as their income increases (and including an “insurability option” so that they can purchase increased coverage regardless of their health). But even if your client is in mid-career, a disability policy purchase is viable before your client’s health changes and the choice of obtaining coverage no longer is theirs. A client may not be able to obtain coverage for certain pre-existing conditions.
Sometimes a disinterested third party knowledgeable in disability contractual wording can offer security and an unbiased opinion in helping your client to decide on the best coverage for their needs.