What Type of Coverage is Best for Employees?
What Type of Coverage is Best for Employees?
When a client understands how little money they would have to live on if they relied on Group LTD a supplemental disability insurance policy becomes an easy sale. Supplemental individual disability insurance policies are one of our most common sales. Agents who take the two minutes to learn this presentation can start to boost their DI sales in a big way.
|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.
By: Annelena Lobb
CNN/Money, NY (Updated March 2004) – Buying disability insurance probably ranks low on your financial to-do list. After all, if you’re young and healthy and you work at a desk job, what are the odds you’re going to need it?
Well, you might not think of a broken bone, a problem pregnancy or an anxiety condition as disabling, but all of them could keep you out of work. About 30 percent of Americans age 35 to 65 will suffer a disability lasting at least 90 days sometime during their careers, according to the Health Insurance Association of America.
Should you ever need the protection a disability policy can offer, you’ll be glad you took financial precautions. Without coverage, an unexpected disability can easily drive you into serious debt.
“Unless you’re independently wealthy, you need insurance if you stand a chance to lose your income because of a disability,” said David Woods, president of the Life and Health Insurance Foundation for Education.
Getting the right policy isn’t easy. Prices vary widely, and only a handful of the big insurers even offer disability policies, said Steve Crawford, a spokesman for Guardian Disability Brokerage.
“Most people say, I don’t need disability coverage — I’ve already got it through work,” said Crawford. But most company-issued disability insurance only provides you with 60 percent of your salary and sets a monthly maximum of $5,000 to $10,000, which can be even less than 60 percent of a highly compensated employee’s salary.
But here’s the problem: Those benefits are also fully taxable, which means you’re actually getting a lot less than 60 percent of what you’re used to.
“You could easily find yourself trying to survive on about 40 percent of your salary — or less, if you’re a high wage earner — if you don’t buy a supplemental policy,” Crawford said.
And Social Security probably won’t cover you, either — Social Security disability benefits are one of the most difficult benefits to qualify for, Crawford said. “You have to be completely disabled for at least a year, with no hope of recovery,” he said. “Even when you meet those requirements, you’re unlikely to receive more than $2,000 a month.”
Look for company strength. The first question you need to ask is whether the insurance company you’re eyeing is financially sound, said Crawford.
“There are maybe six major insurance companies left that still offer disability insurance,” he said. “There are lots of smaller companies that offer disability insurance, but you should check their financial statements. Make sure they look like they’ll be able to pay out claims as time goes by.”
Aim for a non-cancelable contract. Next on your checklist is renewability, or whether your policy’s terms are subject to change over time. There are three options: a non-cancelable and guaranteed renewable policy, a guaranteed renewable policy, and a conditionally renewable policy.
Experts say the non-cancelable contract, especially if price is not an issue, is by far the best of the three. That’s because it locks in your rates and benefits. The insurance company can’t make changes unless you request them.
A guaranteed renewable policy is less desirable. After you invest in a policy, your insurer doesn’t have the right to drop you, said Susan Baker, manager of DI sales and marketing for Berkshire Life Insurance, but they reserve the right to raise prices for specific reasons.
“All the companies that are writing guaranteed renewable contracts used to write non-cancelable contracts,” said Crawford. “They often say the two are the same, but they’re not. There’s a reason why they’re leaving themselves the back door open.”
Finally, avoid conditionally renewable policies. An insurer can put any condition on them or raise rates at any time.
Look for a broad definition of “total disability.” The most consumer-friendly definition of total disability is “own-occupation disability.” If you are disabled and cannot perform the principal duties of the job you currently have, you get paid your disability benefit even if you can do some other tasks.
“Even if they become disabled, most people want to keep working,” said Crawford. “The neat thing about own-occupation coverage is that you’re not penalized for working at the flower shop down the street, even if you can’t yet go back to your full-time job.”
The most conservative definition of total disability is “any-occupation disability.” Under this definition you do not get a benefit unless you are completely unemployed and unable to do any work.
Many companies, of course, will define “disability” in shades of gray between own-occupation and any-occupation disability. And some disability insurance products will give you own-occupation coverage for a specified period, then move you to a modified plan, increasingly contingent on whether you can produce any income.
Buy residual or partial disability coverage. A third of Northwestern Mutual’s claims are for partial disability coverage, said Meridee Maynard, vice president of disability income products at the company.
Insurers pay partial disability benefits if you can only work at your job for a reduced period of time. After an accident, for example, someone might leave work entirely for six months, then work on a reduced schedule for the next year. If working part-time meant the person lost a percentage of his income, partial disability coverage would kick in and pay a proportionate benefit.
Get the appropriate riders. If you have disability coverage, you may not use it for decades — if ever — and $3,000 a month in ten years will buy you considerably less than it does now. You might want to buy a rider that adjusts your policy for inflation, particularly if you’re in your 20s and 30s, said Baker.
Another option to consider is what Baker terms a “future purchase option” – it allows you to buy more coverage as your salary rises or your business expands. This is especially good for people just starting their careers.
Crawford tells clients that disability insurance premiums will typically cost between 1 percent and 3 percent of annual income. Prices will vary according to several main factors, including your age, gender, health history and occupation.
Another factor affecting your premiums is the policy’s elimination period. That’s a specified length of time — people usually choose 90 days — from the onset date of disability. When that time is up, the company starts paying your benefits. You can choose an elimination period as short as 30 days or as long as 720 days. Generally, the longer your elimination period is, the cheaper your premium.
You’ll also have to choose a benefit period, or the length of time the insurer will pay you benefits. Most companies let you choose between benefits lasting two years, five years, all the way to age 65, to age 67, or for the rest of your life. Most people choose the age-65 option, as Social Security kicks in thereafter. The longer your benefit period, the more expensive your policy will be.
When they price your policy, each insurer categorizes you according to its own set of occupation classes, ranking systems that sort different jobs according to their likelihood of filing a claim. The more likely your occupation is to result in disability, the more expensive your coverage will be.
And if you work at a job that requires intense manual labor, like construction work, it’s likely you’ll be unable to get coverage at one of the big disability insurers, Crawford said.
“You’ll have to go to a smaller insurer. They won’t make you necessarily pay more for coverage, but you’ll get a stripped-down contract, without any bells and whistles,” he said.
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