Disability Insurance Claim Advice
Five Mistakes That Agents, Brokers & Financial Planners Make When Selling Disability
California Broker, December, 2016
By Art Fries
If you take the sale of disability insurance seriously, the most important thing you can do is to read completely any contract you plan to sell or are currently selling. Because of the many changes made over the years, it's important to be up-to-date on what carriers are offering and make sure that you don't take contractual language for granted. Know what the market is offering and offer products that fit the profile of your typical client.
Today, there is no perfectly worded contract. There are differences among companies. Some have restrictions and limitations that others do not have. In a selling interview, you can't possibly review every restriction/ limitation, but there are major areas that you must discuss with your prospective client so they have a proper understanding of what they are purchasing. This article will point out some areas that require a clear understanding from you and your prospective client.
1) THE DEFINITION OF TOTAL DISABILITY
If you are dealing with professionals, secure the longest "your occupation" definition that is available since it's one of the most important definitions in a disability policy. If the policy has a modified "your occupation" definition, it must be clearly explained to the prospective client.
There are several modified definitions, such as "your occupation " and "not working in any other gainful occupation." In this case, it's the client's choice to work at another job. If they have a partial (residual) benefit, the claim will become a partial claim with the applicable formula applied. If the client makes too much money, it can blow them out of the claim or reduce their monthly benefit.
Also, benefits will cease if "partial disability" is not included in the contract and they are working in another occupation. Some older policies that provide lifetime benefits have this kind of modified wording, which changes at age 65. If you have sold these policies, it's important to make your client aware that they must stop working at their job before age 65 if they are on disability claim under a "your occupation" definition and they are now working at another job. Otherwise, their benefits will terminate at age 65 . Also if "partial disability" wasn't included in the contract and they are working in another occupation, benefits will cease at age 65 since almost all disability contracts do not continue partial benefits on a lifetime basis.
The definition of disability changes after two years from "your occupation" to "any occupation" related to education, training, or experience. For many policyholders, this can end their claim after two years unless they have applied for Social Security disability and are collecting under a more restrictive definition. Also, be careful how you discuss the "your occupation" definition, which pays for the length of the contract. Don't just say, "Doc, if you can' t work as an orthopedic surgeon you will be covered in "your occupation" and can work in any other occupation you choose. That's an over simplification since you must add in the comment that any other job they are working in must not be in conflict with their medical symptoms. In addition, you should be aware of the definition demanded by the California State Insurance commissioner for any disability contract written in California; it broadens the definition of "total disability" in the contract.
A contract that states "total disability" as being unable to perform the substantial and material duties of "your occupation" is expanded to say "unable to perform with reasonable continuity the substantial and material acts necessary to pursue your usual occupation in the usual and customary way." Here's an example: You are a trial attorney with a bad low back. You have a five-day trial approaching; you ask judge to only have the courtroom open for you in the morning. By 1:00 PM, your low back will really be hurting and you' ll be taking prescription drugs that will affect your focus. The judge would tell you to stick it in your ear. You' ll be in the courtroom for the entire day or you'll get another attorney to handle the trial. The same could apply to a deposition that might run the entire day. Based on the California definition, not being able to work in the afternoon might smell like a "partial disability" claim, but could be considered a "total disability" claim since this attorney is not able to work with reasonable continuity in the usual and customary way.
2) PARTIAL (RESIDUAL) (PROPORTIONATE) DISABILITY
This will pay a percentage of your monthly benefit related to "your occupation" or "any occupation ." Usually, you must have a 15% loss of earnings, but 20 % is more typical for most companies. Many companies pay a minimum of 50% of the monthly benefit for six months after the waiting period. Most companies also pay 100% of the monthly benefit if you suffer a loss of earnings of 75% or 80%. The insurance company will discuss how many months or years (or calendar years) they will go backward to determine your pre-disability monthly earnings figure and compare that to your post disability monthly earnings figure based on the contractual wording of the policy. A very restrictive wording, which I sometimes come across, indicates that "partial disability" must follow a certain number of days of "total disability " and "total disability" is approved. This kind of wording should be avoided, but when that's not possible, you must at least explain this to the client so that they understand the restriction. Most of my clients whom I provide disability claim advice to rarely go from "total disability" to "partial disability." It's not a big issue, but could be for your client. In addition, there is usually additional wording, which says that you must also have a loss of time or one or more duties. Sometimes, it says at least a 20% loss of time or 20 % loss of a duty. Or it may say that you can't work as effectively, which means that you have to spend more time doing the job/profession. Sometimes, there is no mention of time/duties other than the loss of earnings. These must be pointed out to the prospective client in the initial interview.
3) MENTAL/DRUG/ ALCOHOL LIMITATION
Some policies will limit benefits in this area to no more than one or two years (If not "hospital confined" as described in the policy). Sometimes the time limitation is an aggregate, meaning that once the limited benefit has been paid, no more claims of this kind will be paid again even for a future new claim. For some prospective clients, the concern is more related to physical medical symptoms and they can live with the restrictive wording. Others will not want this kind of wording if a contract is available with another insurance carrier without this restriction. Sometimes there are very specific medical conditions, such as Chronic-Fatigue Syndrome or Fibromyalgia, etc. that have a limitation of one year or two-year benefit and may even have a policy aggregate. In this case, it's of utmost importance to point out these restrictions to your client.
4) TERRITORIAL RESTRICTIONS
In more recent years, I have been seeing this in more disability contracts . There are various kinds of contractual language. Some say that, if you live outside of the U.S. for more than six months or one year, they will not pay you. Some refer to living out of the U.S. and Canada and some say the U.S., Canada or Mexico. Some indicate that the amount is an aggregate, so if you come back to say the U.S. and live out of the country at future date, they won't continue the benefits again. Let's say that your prospective client is originally from the Middle East, went to medical school in the U.S., and is a practicing physician in the U.S. They now go on a disability claim. Because they still have family members living in the country where they were born, they want to move back to that country where living costs are much less. In that scenario, the territorial restriction could force the physician to remain in the U.S. and not have a choice because of economic reasons.
5) WHEN RECOMMENDING A GROUP LTD PLAN TO A PROSPECTIVE EMPLOYER IT'S IMPORTANT TO KNOW THE KIND OF FIRM YOU ARE DEALING WITH
Many group disability contracts only consider base salary as earnings and bonuses or exclude other kinds of compensation. Suppose you are dealing with a law firm and the attorneys are paid salary and a bonus, or a partner is also entitled to profits from the firm. It would be important to cover these kinds of earnings. Otherwise, there could be a considerable shortfall in the amount of monthly benefit the attorney would receive at claim time. For other employees of the firm, a different class could be set up with the more restrictive definition of earnings (salary only) applying. A lower premium for the firm might be your goal, but you must always point out this earnings kind of restriction. The insurance carrier that you are recommending might not allow you to provide coverage past the base salary. In that case, you must seek out a carrier that will provide the broader earnings definition even if the premiums are higher. Any omission on your part or failure to explain important wording in policy language or important restrictions/ limitations that could lead to a misunderstanding at claim time can be the basis of a lawsuit against you - the agent/broker who has recommended a particular kind of disability coverage. Suppose that you recommend only one kind of disability policy, as an agent, for that insurance company, but you also offer other companies as it relates to other kinds of insurance (life, annuities, etc .) You could be exposing yourself to liability by not being aware of other company disability contracts that could provide fewer restrictions/limitations and better policy definitions. As an independent broker, you have no giant insurance company to back up your mistakes/omissions. You'll have to rely on your malpractice carrier. As an agent with a company in which you recommend that insurance company's product, you will not only have the support of your malpractice carrier, but you will also have the support of the monies of the insurance company. So good advice is to secure as large of an amount of malpractice liability insurance as you can if you sell disability insurance in a broker capacity.
It takes a bit longer to be careful, but in the long run, it can save you embarrassment and money. A real pro takes the time to learn and to educate their prospective clients and that’s where you should be.