Disability Insurance Claim Advice
If I Were King……An open letter to disability marketing, underwriting and claim vice presidents
Health Insurnce Underwriter (N.A.H.U.), October 2004
By Art Fries
By Arthur L. Fries
Tom Petty, a singer who seems to have been around forever, has a beautiful track on a CD titled Tom Petty Wildflowers. The first verse:
It’s good to be king
Just for a while
To be there in velvet
Yeah, to give them a smile
It’s good to get high
And never come down
It’s good to be king
Of your own little town
If I were king, I would change the way individual disability insurance is written, marketed, underwritten – and the way claims are managed. Here is how I would do it.
The Ideal Product
For starters, if I were king I would provide a basic monthly benefit with an opportunity to add additional coverage, on an annual basis, under an insurability option that provides no more than double the base benefit. The insurability option should end at age 50 and the cost of the same should be built into the base premium. A credit could be superimposed over the group LTD. No reductions in FIO (Future insurability option) benefit at age 46—and certainly no FIO available while you are on claim and collecting benefits.
I’d put in waiting periods of 30, 60 and 90 days in the “blue collar” class and nothing less than 90 days in the professional/executive classes. Benefits payable to age 65 in ALL classes, with an appropriate premium charge in the blue-collar class to cover the exposure (a five-year payout might be offered to provide some premium flexibility).
I’d insist on a two-year-occupation in the blue-collar class and a five-year your-occupation definition in the professional classes. Thereafter they would be “any occupation related to education, training or experience” –a better definition in the policy indicating what this means so policyholders understand it.
The purpose of a disability contract should be to give the claimant time to make economic adjustments. After a two- or five-year period, the disabled individual can make lifestyle changes, such as a smaller house or less-expensive cars, and still survive economically.
Another thought might be to provide a to-age-65 your-occ definition in the professional/executive classes but reduce the monthly benefit by 50% after five years. Residual (partial) disability should also be included, as should loss of time, one or more duties and 100% of monthly benefit paid if there is an 80% loss of earnings. Only a war clause exclusion and incarceration should be included. The premium can be guaranteed, and the renewability guaranteed as well, to age 65. Coverage should not be continued past age 65.
If I were king, I would keep the products simple. We don’t need presumptive disability, fracture schedules, non-disabling injury and all these frosting-on-the-cake benefits that are rarely paid or the insured forgets they have, such as NDI (non-disabling injury). Personally, I’m getting tired of explaining the cosmetic and transplant donor benefit again, another set of benefits that are rarely utilized but thrown in because of a couple of court cases. Why not just pay these claims as a matter of policy? I would.
Go to jail, do not pass go, do not collect $200 or any DI benefits! You betcha. An incarceration clause excluding coverage is a must. I’d be psyched out, too, if I was stuck in jail. Getting close to losing my license and my patients/clients AND jail time on the horizon would sure depress me and make me want to see my shrink. How policies were ever issued without an incarceration clause is beyond my comprehension. That would change.
I also think the practice of sending out letters to all policyholders offering them another $500 or $1,000 per month just by signing a form is like a dealer offering drugs to an addict. The offer was scooped up by many policyholders because it was a no-brainer that involved no underwriting. Adding automatic increases such as 8% (with interest) over a five-year period (with the opportunity for more) made a $10,000 monthly benefit increase to $14,000 during the first five years-with no questions asked!
Add to that an 8% COLA option (minimum) not related to The CPI at compound interest and you really have my attention. If I’m making more money, that insurability option lets me buy up to double the base amount or more. A your-occ definition with benefits payable for life is just too much to provide in the way of promises.
There have been lots of bad decisions made by home-office executives as a result of pressures to create more cash flow without taking into consideration the future potential consequences. All these “add on” benefits created policies that were really too good to be true.
And how did management at the companies solve this problem? They tried to make up for their mistakes on the back end by looking for ways not pay claims rather than the other way around.
One last thing: The pre-existing condition/prudent person cause should apply from the date the applicant was born, not two years or five years prior to the application. The incontestability clause should mean something and, if I were king, it would.
After a policy has been in force for two years, the policyholder should be home free and the insurance company is stuck with potential claims. A “fraud clause” should not apply since that just defeats the intent of the incontestability clause and creates ill will and legal complications at claim time.
The proper training of agents and brokers today is almost nonexistent. Many who sell insurance lack the confidence to recommend disability insurance because of a lack of understanding of policy language and how to sell the product effectively. If I were king, that would change. Immediately.
Further, for some professional classifications in the market, no product is available or is available but only in a very restrictive form. There are only a handful of insurance companies that are serious about selling individual disability today, compared to a much larger number of companies in the 70s and 80s.
All of this can be reversed by a change in industry thinking that it is more creative and understands the KISS method of selling. The fact is, there are many self-employed individuals and those in small firms who would purchase disability insurance if it was presented to them in a way they could understand and appreciate. The concept of insuring your ability to provide an income is not rocket science.
Current individual DI contracts are too difficult to explain and understand at the point of sale (by both the salesperson and the prospect) and too difficult to handle from a claims-management perspective. Companies should agree upon uniformity in contract design and make it easier to purchase in terms of the understandability factor. Some might refer to this as commodity marketing.
If I were king, brokers and agents would be encouraged to target various markets such as plumbers, electricians, attorneys and physicians. Renewal commissions would be increased to prior levels to encourage those who want to sell DI to become experts and make a career of it.
If I were king, the goal of the home office would be to maximize information retrieval up front. A tax return or W-2 for the prior year should be mandatory. Medical questions should be answered on all applications even if a Part II (exam) is requested.
A copy service should be sent to all providers (physicians, hospitals, etc.) to copy medical records so that the insurance company gets a better picture of the risk they are being asked to insure.
I’d come up with more innovative ways to surcharge the premium or place waivers on the policy so that more policies can be accepted. Rather than a flat decline for many mental/alcohol/drug-related prospects, many policies could be written with a waiver for those conditions that present a concern to the underwriter.
At a future date, the prospect/policyholder should be given the opportunity to have the waiver removed should they become symptom free. A letter should be provided with the policy to this effect. Further, a letter should be sent to the insured from the home office at future dates (maybe two years, five years, etc.)-requesting that an application be completed with medical information (since the date of the original application). This would give the carrier the opportunity to secure updated medical information and from a promotional standpoint, gaining some points in the process.
Urine testing should be mandatory for all applicants when the original application is completed as well as when a request is made to remove a waiver or premium surcharge.
Good agents and brokers who write big DI cases on people who make good money are not opposed to underwriting. Tell us the rules of the game and we’ll play by them. We understand what is at stake: a $10,000/month benefit payment for 20 years is a lot of money. We know that. We just want the underwriting done up front, not when a claim is submitted.
In my capacity as a disability claim consultant I have provided advice to nearly 400 claimants over the past eight years. These individuals have been primarily professionals-dentists, physicians, chiropractors, attorneys, senior executives and high producing salespeople. Benefits brought under question have ranged from low of $100,000 for a nurse to the high of $12,000,000 for an executive salesman. I’d say the average claims was in the $2 million to $3 million dollar range.
I can assure you, many of these individuals would not be collecting on their disability policies had they not sought outside, third-party advice regarding their claims. Further, there is an ongoing apprehension on both their part, as well as mine, as to how long their benefits will continue to be paid based on prevalent claims-management practices, still-evolving practices that are changing promises once made into “we really didn’t mean that” back then.
If I were king, things would change. For example, independent medical evaluation and video surveillance on “solid” disability claims are unreasonable and are not only obnoxious, but they create bad public relations for the insurance company or the claims administrator. If there is reason to suspect fraud, go after it. But leave the innocent alone.
The amount of bad publicity being circulated about the industry and many DI carriers is alarming and seemingly getting worse. Unless there are dramatic changes by carriers in the areas of product design, marketing, underwriting, claims-management techniques and sales training, I fear there will no longer be a viable individual disability marketplace and the product will continue to lose money for the companies that underwrite it. Or, worse yet, as in the health arena, the government may threaten to step into the picture. Carriers must change their attitude and realize that until there is a stronger partnership between those who create the products and those who sell them, the existing tension of “us vs. them” will only worsen.
Frankly, after many years of selling professional level DI and now in claims consulting, I’m not overly optimistic about what I see on the horizon. Then again, I am also very willing to be proven wrong.