Disability Insurance Claim Advice
PURCHASING DISABILITY INSURANCE - THE BEST POLICY TO BUY?
BY ARTHUR L .FRIES
In my capacity of a disability claim consultant I have performed audits on thousands of disability policies for almost 20 years. Seeing how insurance companies handle claims from interpretation of contractual language to their attitude has given me great insight into the nuances involved in the disability claim process. My experience has also taught me what aspects of the disability contract are the most important and where the emphasis should be when including the various options available at the time of purchase.
There are many questions to consider when purchasing a disability policy, many of which include the following:
- Is the premium guaranteed and is that important?
- Is the policy guaranteed renewable?
- Is the wording guaranteed?
- What's the definition of both partial and total disability?
- Does partial disability have to follow total disability?
- Does it have a "Your Occupation" definition (substantial and material duties or important duties)? And does this definition apply to both total and partial disability?
- Does it have a "modified" Your Occupation definition with additional wording that states you are NOT working in Your occupation or ANY occupation? And if partial disability is NOT included in the policy, does the insurance company interpret it differently than if you DID have a partial disability benefit?
- Does the definition of total disability change after a period of 2 years or 5 years, etc., and then indicate that you are NOT working at ANY occupation related to education, training or experience?
- Are there any mental limitations or substance abuse (alcohol, drugs, etc.) limitations. If so, you could be limited to a one year or two year maximum benefit?
- Will the insurance company apply any waivers and not pay for a particular medical , condition after the underwriting on the application has been completed? And can the waiver be removed at a future date?
- Is there a fraud clause?
- Is there an incontestability clause and what does that mean?
- How are pre-existing conditions defined in terms of years? Less than one year, two years, five years or no years indicated?
- Any territorial restrictions while you are on claim?
- Any optional benefits available such as: Automatic Increases, Future Insurability or Cola. And what benefit do they provide and which ones are cost effective?
- What's the earnings percentage (loss of earnings you must incur) as it relates to a partial, residual or proportionate disability claim?
- Is the policy a "pure earnings" definition for ALL disability (including total disability) or does it relate to Your Occupation for both total and partial disability?
- Does partial disability only relate to Your Occupation or does it also include any occupation?
- Are there insurance companies that have the best wording or are best for paying disability claims?
- Does the policy put restrictions on back pain, chronic fatigue; fibromyalgia or any other medical symptoms whereby you are limited to payment for only one or two years. Or NOT cover conditions in which there are no "objective findings"?
Although not a consideration at the time of purchasing a disability policy, there will be future questions that will arise if a disability claim is submitted that include but are not limited to:
- What is considered appropriate care by a physician or what is an appropriate physician?
- At claim time do you understand the "tools" used by insurance companies related to a field investigation, l.M.E. (Independent Medical Evaluation), F.C.E. (Functional Capacity Evaluation), audits by forensic C.P.A's, etc.?
- How to complete claim forms properly and how to have your attending physician complete the forms properly?
- How to communicate with your attending physician or medical examiner?
- How to appeal a claim denial?
- When to use an attorney?
Having sold disability insurance for many years previously has also provided me with a great deal of insight into what to look for when purchasing a policy. Although there were over 550 insurance companies offering disability policies in prior years, there are currently ONLY approximately 25 companies offering product and this includes group as well as individual disability insurance. There is no such thing as a "standard" disability contract and 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. Trying to figure out whom to purchase a policy from (agent/broker/directly), what company or the overall makeup of the plan can be a very daunting process.
Intermittently I a receive a telephone call from professionals or higher end businesspeople asking me what kind of disability policy they should buy and what to look for in a disability policy. Since I no longer sell disability insurance, in the past I would tell them to ask around their local community and find out who is knowledgeable with respect to disability products. I suggested they call that person and secure their opinion. I still do this or refer the caller to an individual who I have known for many years who can provide a quote based upon their particular situation and who doesn't embarrass me. More recently I was approached by an individual who had two proposals provided to him by two competent insurance salespeople. He was earning approximately $300,000. per year and wanted to make the correct choice in product. He wanted to pay me a consult fee to review both the proposals with the purpose in me providing an objective "third party" opinion. He thought it might take an hour of my time or slightly more. He e-mailed me copies of the proposals and I did an audit of same, which in fact took several hours of my time to do a proper audit. Both were "major league" insurance carriers with vast amounts of monetary wealth. After reviewing both proposals with appropriate note taking, 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.
A telephone call was then had with the "client." I told him to put 3 columns on a large pad with the Annual Premium for each of the two companies and then 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 particular situation. The key items included:
|INSURANCE COMPANY #1||
INSURANCE COMPANY #2
|BENEFIT||INSURANCE COMPANY #1||
INSURANCE COMPANY #2
|Benefit Period||To age 65||To age 65 (same)|
|Waiting Period||1 year||180 days|
|Guarantees||Non-Can (Premium guarantee
and guarantee re: renewability)
|How Long Renewable Past Age 65||For Life
(Age 65 - 2 year payout
Age 75 - 1 year payout)
|To Age 75 - 2 year payout|
|Definition of Total Disability||Substantial & Material Duties||Principal Duties AND NOT gainfully employed|
|Partial Disability (Residual)|| 15% loss of earnings Loss of
Time or Duty(s)
|20% loss of earnings Loss of Time
|Additional Options||Automatic Monthly Increases 5% each year
for 5 years (Minimum and Maximum)
F.I.O. (Future Insurability Option)
$1,000. per month each year up to
$6,000. month aggregate
|Automatic Monthly Increases
6% Maximum each year for 5 years
Related to CPI (Consumer
Price Index}-Min .
Ex: If CPI 2%...increased 2%
|Mental Restriction||No||Yes -2 years Maximum for mental
and substance abuse
|Exclusions|| Incarcerated, intentionally self inflicted
injury, war (declared or undeclared)
|Incarcerated, attempt to commit
felony, war (declared or undeclared)
|Incontestability Clause||2 years||2 years - same|
|Fraud Clause||Yes||Yes - same|
|Pre-existing Condition Clause & Prudent Person Clause||Yes -2 years||Yes - 5 years|
|Care by a Physician||Appropriate care Appropriate physician||Appropriate care Appropriate
physician - same
|If you live outside U.S. possessions or Canada||Maximum payout - 2 years (OK to live
in U.S. possessions or Canada)
|Maximum payout -6 months
(Aggregate) if you live outside the U.S.
As a result of my audit I made the following recommendations:
• Apply for Insurance Company #1 disability policy since overall value, contractual wording and benefits were considerably to his advantage.
• 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 -$3,388.63 90-day Wait - Annual Premium -$4,247.73
Although he would save approximately $859.00 per year with the 180-day wait, should he have a claim he would lose approximately $26,000. in benefits (difference between the 180-day wait and the 90-day wait). We both 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 company #1 from $8,700. monthly to $10,000. based upon his earnings, which would have enabled him to purchase the higher amount.
In helping my "client" 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 one company will be stronger in one area but not as strong in another area. In this particular case described, the company I recommended was not the company I would have recommended a dozen years ago. My prior "first choice" company had added more restrictive wording in recent years whereas the recommended company had broader overall wording and better ADD-ONS that made this a simple choice for me. It was clear that my client had not understood the significance of these differences but once pointed out to him, as well as the meaning of the differences, he agreed wholeheartedly with my opinion. Since the amount of future potential benefits was several millions of dollars, the choice to pay me a fee for my opinion was money well spent, in his mind.
There can be other very important decisions to be made that go beyond the ones I have described in the prior example. To illustrate: You have two personal disability insurance policies in force based upon your earnings and you are "maxed out" and can no longer purchase any more policies . As your earnings increase, the amount of personal disability insurance you can purchase decreases. A person earning $100,000. per year can purchase approximately $4,800 of monthly benefit, which is approximately 58% of their monthly earnings. A person earning $300,000. per year can purchase approximately $10,000. monthly, which is approximately 40% of their monthly earnings. Often there is an association policy available to members of your profession in which you can purchase up to 75% of your annual earnings. But they often have a "cap" on how much they will issue (example: $6,000. per month) and a "cap" on how much monthly benefit you can have in ALL insurance companies ...so you purchase an additional amount to bring you up to the maximum overall amount, which is often $15,000. monthly. The association plan, typically purchased by mail, has given you the opportunity to buy more coverage but often, with "hidden hookers" such as a "Relation to Earnings" clause whereby the insurance company at claim time will take into consideration not only what you were earning prior to going on disability claim, but also how much disability coverage you have in force with other companies. As a result, you may be paying an additional premium for supposedly increased monthly benefit but collecting a lesser amount from the association plan than you had expected.
I've seen plans whereby my disability claim client had $5,000. per month with their personal disability insurance carrier and $5,000. per month with 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 and that enabled the claimant to have their monthly association plan increase from the $400. monthly to $4,700. monthly. Sometimes an association plan may be the best to have for an individual who requires a much lower initial rate structure (with premiums increasing at various intervals such as five or ten years). One should, however, recognize that association plans often do NOT guarantee the premium ...renewability or contractual wording and can be changed by the insurance company. There have been cases where the association plan was terminated by the insurance company and the new insurance company providing replacement coverage has done so with higher premiums, more restrictive contractual wording and eliminated options that were previously provided. And sometimes the replacement insurance company will no longer provide coverage to ANY association members in a particular state or states. In that situation, those members previously covered who are now uninsurable find themselves unable to provide any type of coverage under any circumstances.
Ideally, disability insurance should be purchased at the beginning of one's career ...with the monthly benefit increased as your income increases (and including an "Insurability Option" so that you can purchase increased coverage regardless of your health). However, not everyone recognizes the need to purchase this important product until they see a friend or family member who has benefited from having a policy in force. So even if you are in mid-career ...a disability policy purchase is viable BEFORE your health has changed whereby the CHOICE to purchase may no longer be in "your ball court." You may be able to purchase a policy and not be covered for certain pre-existing conditions. Some association plans will provide a limited amount of monthly benefits without any evidence of insurability but often you must be in the plan for at least two years before you can be covered for a "pre-existing" medical condition. Since there are no guarantees as previously indicated with respect to how the contract is written ...the insurance company has lots of options with respect to controlling the losses under these types of association plans. And when the claim experience is very bad for the insurance company ...even with restrictions ...they still have the opportunity to cancel the entire plan for all members.
Disability insurance should be the cornerstone of anyone's total financial picture since the effects of not being able to work and do what you do best without having "cash flow" can have devastating financial consequences. You need disability insurance which can often pay benefits on a tax free basis (if handled properly) to keep you "closer to your world" should you suffer a disability on a long-term basis.
A disinterested third party knowledgeable in disability contractual wording can offer security and an unbiased opinion in helping you to decide what insurance policy is best for YOU.