Confusion guaranteed: The complicated language of disability insurance

By Frank N. Darras

DarrasLaw


Agents across America who sell disability insurance are often saddled with the burden of clarifying the complicated language in disability insurance policies. But, you have worked hard to get where you are in your business, and understand that it is important to protect your clients -- and yourself -- by being informed. Here are some tips that can help keep you on track.

Identify who needs disability insurance.

Every working American should have disability insurance. It doesn't matter whether that person is young and single, middle-aged and married, or married at any age with children. Disability coverage insures our most important asset -- our earning potential.

A serious injury or illness can prevent people from meeting their basic living expenses and it can wipe out any plans for their financial future. Today, 5.1 million people between the ages of 18 and 64 are currently disabled, and that risk is increasing.

Here are some sobering statistics to consider:
  • A two-decade study reported in Health Society revealed a 55 percent increase in disability over the last 20 years.

  • Three out of 10 of working people between the ages of 35 and 65 will be disabled for 90 days or longer.

  • One in five people will become disabled for five years or more prior to reaching age 65.

  • The risk of disability is greater than the risk of death at all ages between 20 and 65.

  • New causes of disability are increasingly complex and more difficult to manage, including chronic fatigue, fibromyalgia and a rise in mental/nervous-related disabilities.
Since disabilities affect one in five Americans, that means literally 49.7 million people suffer an average of 2,329 disabling injuries every hour during the year. With a disabling injury occurring every eight seconds in the workplace, it is important coverage for your clients to purchase.

Understand what disability insurance covers and the related timelines.

Disability insurance provides coverage if a policyholder is sick or injured and cannot perform the substantial and material duties of his occupation at the time the claim is filed. Most disability insurance companies will insure 60 percent to 70 percent of the salary or earnings on a monthly basis. Some policies offer a smaller benefit if the policyholder is residually (or partially) disabled. This means he is sick or injured, yet still able to perform one or more of his substantial and material duties and have a loss in income of at least 20 percent as a result of the disability.

Most policies have a waiting period of 30, 60 or 90 days before benefits begin. Benefits are paid retroactively on a monthly basis, so if there is a 90-day waiting period, the first check won't arrive until the 135th day (90-day wait + first 30-day period of disability + 15 days to process the check). Advise your clients to save accordingly. While a longer waiting period (e.g., 180 days) will reduce their annual premium, it may pose too much of a financial hardship because the first check won't arrive for seven and a half months.

Who is going to put food on the table, gas in the car or pay the mortgage while your client is exhausting the six-month waiting period?

Understand what disability costs and what your client gets in exchange for his hard-earned premiums

A 30-year-old man working as white-collar professional and earning $30,000 a year would pay an annual premium of $620 ($52 per month) for "own occupation" noncancellable and guaranteed renewable coverage that includes residual benefits. The policy would provide $1,850 per month in benefits ($22,200 a year), replacing 74 percent of earnings after a 90-day waiting period up to age 65.

A 40-year-old man working as white-collar professional and earning $50,000 a year would pay an annual premium of $960 ($80 per month) for "own occupation" noncancellable and guaranteed renewable coverage that includes residual benefits. The policy would provide $2,910 a month in benefits ($34,920 a year), replacing 70 percent of earnings after a 90-day waiting period up to age 65.

A 50-year-old man working as white-collar professional and earning $70,000 a year would pay an annual premium of $1,230 ($102 a month) for "own occupation" noncancellable and guaranteed renewable coverage that includes residual benefits. The policy would provide $3,750 per month in benefits ($45,000 a year), replacing 64 percent of earnings after a 90-day waiting period up to age 65.

Determine what kind of disability coverage is really needed.

Make sure your client buys as much individual disability insurance as her income will support. Explain the difference between purchasing an individual disability policy versus buying group coverage provided by an employer. Employer-sponsored plans eliminate your clients' right to a trial by jury, prevent discovery, and their case must be filed in federal court after exhausting a mandatory administrative appeal. Remind them in order to win with their ERISA preempted group policy in a court of law, they must prove the carrier was wrong beyond a reasonable doubt.

Individual policyholders have tremendous consumer rights and remedies in the event their claim is wrongfully denied, including the right to sue for back and future disability benefits, and in some states, the additional opportunity to ask for emotional distress, extra contractual damages (e.g., if their car was repossessed or the home went into foreclosure), punitive damages and attorneys' fees.

Offer at least three quotes to your client and make sure you have shopped carefully for the lowest rates and provided the most generous coverage available. You should also let your client know that you are available should the need to upgrade coverage or file a claim arise.

Memorize the three most important clauses in disability insurance policy language.
    1) Advise your client to always purchase noncancellable, guaranteed renewable coverage. These features mean the insurance company cannot cancel the policy, increase premiums or change the contract language as long as premiums are paid on time.

    2) Strongly suggest your client purchase "own-occupation" coverage. Own-occupation coverage protects the work the policyholder does for a minimum of five years, but preferably for the life of the contract. This feature pays monthly benefits if a disability leaves a client unable to perform his occupation, even if he can still work in another occupation.

    3) Obtain the longest benefit period possible -- lifetime, if available, but at least until he reaches age 65. Suggest he consider a five-year benefit period to reduce premiums; but remember, this is a risky gamble as a disability might last much longer.
In addition, if your policyholder is young and expects to earn a lot in her lifetime, paying extra for COLA (a cost-of-living-adjustment rider) is money well spent. If she becomes disabled, it will keep her monthly benefit ahead of inflation. Consider offering future increase options, which allow her to increase her monthly benefit as she earns more money -- regardless of her health.

Always take a close look at the fine print, which details the exclusions and restrictions, particularly if the premium sounds too good to be true. Some policies have a two-year limit on mental illness or self-reported disabling conditions such as chronic pain, fibromyalgia or chronic fatigue syndrome. Many policies contain a fraud provision that allows the carrier to rescind (cancel) the policy at the time of claim if they find a material misstatement on your client's application. Be careful to accurately record all the health, occupational and financial information the potential client reveals and make sure the carrier is aware of it. The last thing you need is the client suggesting you knew or should have known information you failed to provide to the carrier.

If your client has had medical issues or has been out of work for awhile, submit a "trial application" to avoid rejection.

Disability insurance is underwritten both medically and financially. If the client has had a health problem or a recent year in which he did not do well financially, before submitting the application for disability insurance sit down and express the importance of being truthful, and consider submitting a "trial application" to the carrier. If you are a big producer, the underwriter at the insurance company will let you know if the policy can be issued. If the answer is yes, then submit a formal application. If the answer is no, then at least you helped your client avoid a formal rejection, which will have to be disclosed on any future applications for the next 10 years. After all, we want happy clients and renewal commissions -- not rejects.

Conclusion

Help your clients be smart shoppers. Empower them by debunking the complicated language in the carriers' outline of coverage and disability policies. This makes you a trusted and reliable choice for all their insurance needs, and that is good business.

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