Protecting your income, financial planners say, is the cornerstone of all financial planning. A 40-year-old has a 45% probability of becoming disabled for a substantial time during his or her lifetime (Society of Actuaries, 1995).Your income and ability to work are your most valuable assets. Protecting your earnings (which could be more than $1 million for a 45-year-old earning $50,000 a year projected to age 65) should be high on your list of priorities. The following article will help you sift through the maze of different disability contracts that are offered.
What to look for in an ideal disability policy
If every company offering a disability insurance policy had the same wording, terms, and conditions, then the consumer’s or agent’s job would be easy; all he or she would have to think about would be simple things, like whether or not they liked the company’s logo, and the like.
Unfortunately, evaluating, selecting, or recommending the right contract is not so easy. There could be 30 or more considerations, terms, definitions, etc. that make up a contract (analogous to the thousands of parts that make up an automobile), each affecting benefits, how much, how long, and under what conditions and circumstances a claim will be paid. Most companies offer enough similarities in about 15 or 20 of these components, however, there are differences in many others, which have been described below.
Let’s look at 9 of the most important differences, roughly in the same order in which they appear in most contracts:
1. GUARANTEES: One of the changes the industry has made in the past several years, is the introduction of guaranteed renewable only policies for some occupations- blue collar in particular This change enables carriers to raise rates on certain occupation classess and thus remain profitable. The agent should try, however, to get his prospect a non-cancelable (non-can) and guaranteed renewable policy. Enough companies still offer non-can policies, which guarantee the insured’s rates to the age of 65.
SICKNESS: The definition for sickness should say “when first manifested itself” rather than “when first contracted.” The difference between the two is significant, especially if the disability is caused by cancer, for example. Under the first definition, if cancer existed when the policy was issued, but it had not yet produced symptoms nor caused a prudent person to seek medical attention, it would be covered. Under the second definition, itwould not be covered if it could be proven to have existed prior to the policy’s effective date.
TOTAL DISABILITY: The best definition for total disability is an “own occupation” or “own occ” definition. Although this definition is available for many occupations (but not all), it is not always necessary, nor is it always available for the full benefit period.
This definition might be necessary for someone whose skill could be transferred to another occupation, for example, a surgeon. Without this kind of definition, he or she could be expected to teach or become involved in a related field of medicine. As a result, the surgeon might not be considered totally disabled and instead might be paid under the residual benefits provision. The other reason is that own-occ is easier to prove vs. loss of income and by comparison is relatively “hassle-free” at claim time.
There are basically three “own-occ” definitions and one other disability definition. These definitions reflect a particular carrier’s claims experience for a particular occupation. They are as follows and listed from the most liberal to the least liberal.
3. BENEFIT PERIOD: This represents how long the policy holder will be paid in the event of a covered disability (when there isn’t an exclusion due to a pre-existing condition). The longer the benefit period is, the higher the premium. Lifetime benefit periods are available, but they are graded, meaning when the onset age is past a certain age, then rather than the full amount being paid, a percentage will be paid instead. Note: In any event, when part of the benefit amount is a social security rider/option, that amount drops off the coverage usually at age 65.
I might add at this point that the true lifetime benefits have disappeared from the landscape, and these which included in older policies, paid the full amount for lifetime, assuming that the onset age for sickness was before 60 and for accident before age 65.
4. RESIDUAL/PROPORTIONATE DISABILITY OPTIONAL BENEFIT: Most contracts read almost alike for this benefit except for some of the following terms and conditions, which can make a difference in so far as how much of the claim will be paid:
5. RECOVERY/EXTENDED TRANSITION OPTIONAL BENEFIT (usually part of residual):Basically, this recovery benefit means when a person who no longer is under claim (under a physician’s care) will be paid as if he/she still were (even though they have returned to work full time and is in the process of rebuilding their practice). An example would be a Certified Public Accountant (CPA) who broke a wrist during tax season (when he/she earns 80% of his/her annual income) and recovered perfectly after April 15 for the remainder of the year. Benefits under this provision would continue to be paid even though the accountant was fully recovered until their income reached 80% of pre-disability earnings. Again, some companies offer this benefit, but for different time periods: for either 12 or 24 months, or for the full benefit period.
6. FUTURE PURCHASE INCREASE OPTIONAL BENEFIT: Most companies offer this option; however, once again there are these differences to watch out for:
7. COST OF LIVING ADJUSTMENT (COLA) OPTIONAL BENEFIT: Some differences that exist between companies fall into the following categories:
8. ELIMINATION PERIOD: The better contacts, allow the elimination period to be satisfied by non-consecutive (stop/go) days of disability.
9. MISCELLANEOUS: There are a couple of other related contract components that should be considered when analyzing a contract, but because they are less significant, I will not elaborate. These are:
CONCLUSION: The insured should have their policy reviewed by a specialist in view of the fact that the disability insurance industry has experienced some major changes. Recently issued policies, or even some older ones might contain provisions that will make it more difficult to have a claim paid, especially employer group LTD plans.
Females in particular have been hard hit with the introduction of sex distinct rates which have replaced unisex rates, resulting in premiums that are approximately 30% higher than males. However, in some instances it is possible to still get unisex rates.