Disability Insurance Claim Advice
The Real Deal On Disability Insurance
California Broker, September 2004
By Art Fries
Understanding contractual provisions can go a long way in helping you become a better disability salesperson and advisor. This involves knowing the history of the disability industry and being aware of what is happening in the courts.
I feel compelled to write this article to clear up, what I feel are, some inaccuracies in the disability article by Lawrence Schneider, which appeared in the July issue of California Broker Magazine, As one who has been involved with more than 400 disability claims in the past eight years and who has written more than 50 articles related to disability insurance (25 related to disability claims), I believe that I am competent to respond to Mr. Schneider’s remarks. Also reviewing this article was Gerry Katz, a former senior brokerage representative with Unum and, in recent years, a disability claim consultant/expert witness.
This article by Schneider says that there are policies that contain the killer word, “thereafter,” which are “own-occ” initially and then change to a less liberal definition at some point – usually after five years and for the remainder of the benefit period. However, almost all of the policies that I have reviewed have a definition change after two years, not five years, when not written under the “pure own-occ.” It is very rare that I have seen a change after five years – especially in the professional marketplace.
Schneider states, “Remember, the policy’s definition of “total disability” usually reads, “unable to do all the substantial and material duties of your occupation (occupations).” Most of the thousands of policies I have reviewed that related to “pure own-occ,” did not have the word “all” in the definition. That one word, “alll”, can be subject to a different interpretation. There are court cases discuss the difference between the above wording without the word, “all.”
The article states that, with respect to “own-occupation for the full benefit period,”…the definition looks at the occupation of occupations being performed at the time of claim, not at the time of application. As a general rule, the occupation or occupations you were in just before the disability will be the one the insurance company uses for claim purposes. However, some court cases have stated the opposite. They relied on the occupation as stated in the original application for insurance. Sometimes, a “specialty letter” was issued, which gave the courts the incentive to rely on the occupation as stated in the original application for insurance.
The article discusses the use of “specialty letters” in which surgeons and some other types of medical doctors can use a specialty letter, in which their definition of “total disability” is enhanced to cover their AMA recognized specialty. However, specialty letters were discontinued over a decade ago.
The article states that, “Most residual benefit contract language also includes benefits for partial disability, which only requires a loss of duties, as opposed to a loss of income, to trigger benefits and pays a minimum of 50% for the first six months.” However, most of the residual language that I have seen indicates a loss of earnings of 20% and some at 25% and a loss of time – usually a 20% loss of time or the loss of one or more duties. It is very rare that I’ve seen a “loss of duties” only type of wording. Some contracts only discuss a 20% loss of earnings and don’t even mention time or duties.
The article says that, “Higher-issue limits are available if the employer pays the premium with these benefits being taxable, in contrast to tax-free benefits when the employee pays the premium! There are some tricks of the trade’ to have it both ways.”
But, tricks should not be used by insurance professionals. Let’s suppose your prospect wants to purchase as much disability as he can get and he wants the benefits to be tax-free at claim time. Assume the prospect earns $300,00 per year ($25,000 per month) after business overhead expenses including any monies put into a pension/profit-sharing plan, Sepe, IRA etc. Assume there is no significant money (over $5,000) in the form of unearned income. Based on most issue and participation tables, the applicant would be eligible for a monthly benefit of about $10,000. The premium paid is not tax-deductible and the benefits are tax-free at claim time. However, the applicant is a professional corporation. You tell them to pay the premium from the corporate account, which allows them to secure an additional $2,500 of monthly benefit or $12,500 a month total.
In such case, at claim time, the benefits would be taxable since the corporation is deducting the premium as a business expense. Here is where the “trick” comes in, which also happens to be really bad advice: You have the applicant pay the premium initially through the corporation (say monthly check deduction). A month or two after the policy is issued, you change the payer of the premium to the individual. The corporation no longer pays and deducts the premium. You will now collect benefits 100% tax-free at claim time and you secured an additional $2,500 monthly benefit. If the insurance company had known you were going to do this, it would not have issued more than the $10,000 monthly amount based on the issue and participation tables. But, since you purchased a “non-can” or “GR” contract, the insurance company is stuck with the $12,500 monthly obligation.
So what’s wrong with that advice? It was a fairly common approach that sophisticated disability insurance sellers used for many years, but under court precedent, beginning about five years ago, this “trick” has become nothing but bad advice. One court case involved a San Diego attorney representing a physician who had paid just one premium through his professional corporation 17 years before the claim. After the one premium was paid, the physicians used the “trick” approach. The judge ruled that this came under the ERISA guidelines because the corporation paid a premium even though premiums were paid on a personal basis for almost 17 years. How was this bad for the claimant? Under ERISA guidelines you cannot sue an insurance company for bad faith (punitive damages) so the judge threw out the bad faith aspects of the claim, which meant that the attorney could only talk about the contractual language and not the bad prior deeds of the insurance company. In addition, ERISA guidelines say that the claimant cannot have a jury and cannot sue for the future potential value of the contract. The claimant can only sue to get the monthly benefit plus attorney expenses and fees. In essence, it gives the insurance company a legal edge. Many of the heavy hitter disability attorneys do not want to be involved in ERISA claims because they can’t sue for bad faith. They cannot secure “future benefits” or a percentage of same in the form of a settlement as it relates to ERISA claims. They usually cannot charge a 30% to 40% contingency fee on the contractual benefits (future value) and that does not make for a happy attorney!
Referring to my earlier example, if the policyholder went on claim during the first two policy years, the insurance carrier might question the “trick” under the two-year incontestable period. That makes sense. For too many years, they did not ask for tax returns, which only created problems at claim time – especially where a “fraud case” in the contract was involved. For many years, banks asked for tax returns when you secured a mortgage on a house – often for much less money than the future potential payout of a disability policy. Insurance companies finally got around to asking for tax returns when they realized how much future potential benefits were involved.
If you believe that tax returns are not required on a total disability “your-occ” type claim – you’re living in another world. Insurance companies are demanding complete copies of personal and corporate tax returns often going back five years. Two years is more than reasonable from an investigative standpoint of a total disability claim and it gives the carrier the opportunity to see if there is a “dual occupation” issue or if there are economic issues related to the claim.