|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 a 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.
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.
Let’s look at seven of the most important differences, roughly in the same order in which they appear in most contracts:
1. GUARANTEES: One of the most dramatic changes the industry has made in the past several months is the emphasis on guaranteed renewable only policies. This change enables carriers to raise rates 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. Other carriers have removed their non-can policies from the market or use this feature only with a loss of earnings policy (see residual/proportionate).
2. DEFINITIONS: The contract 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 cause 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, it would not if it could be proven to have existed prior to the policy’s effective date.
The best definition for total disability is “own occupation” or “own occ.” 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, and in many cases it should be.
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 it is easier to prove loss of duties vs. loss of income and by comparison is “hassle-free” at claim time.
There are three “own-occ” definitions and one other disability definition. These definitions reflect a particular carrier’s claims experience for a particular occupation. They are from most to least liberal, are as follows:
3. BENEFIT PERIOD: This represents how long someone will be paid in the event of a covered disability (be aware there may be exclusions due to pre-existing conditions), but once again, not all benefit periods will be the same, all else being equal. For example, with regard to benefits to be paid for a lifetime, different configurations are available or are imposed based on occupation and age at the time of disability. Some of these onset ages are as follows:
If a company makes any or all of the above available as an option (and some do have more than one), the longer the “window of opportunity” stays open, the higher the premium will cost.
I might add at this point that this option rapidly is disappearing from the landscape, and I for one contend it shouldn’t. Some carriers offer a graded lifetime benefit instead, which simply states the insured might get some percentage of the base benefit paid for lifetime, depending on the disability onset age.
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 terms of how much of the claim will be paid:
5. RECOVERY/EXTENDED TRANSITION OPTIONAL BENEFIT (usually part of residual): Basically, this recovery benefit means a person who no longer is under claim (under a physician’s care) will be paid as if he/she still were (even though he has returned to work full time). This enables an attorney or other professional to return to work and be paid while the practice is being rebuilt. 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. Some offer it 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. 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. The window of opportunity is beginning to close for the better contracts.
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 get unisex rates.