Disability Insurance
By William D. Brownlie, CLU, ChFC, CIP, LIA
If you become sick or injured, you will not be able to continue to live in the fashion to which you have become accustomed unless you have enough present-value money (in your checking or savings account) to provide the required yearly stream of income. If your current assets are not sufficient to provide the required yearly stream of income, you need disability insurance. Please keep in mind that because of medical technology illnesses and injuries that previously resulted in our deaths are today, disabling us.
Disability Insurance: How Much and What Kind?
How much and what kind of disability insurance should you have? You should have enough so that when it is combined with your other liquid (conversion to principal without a decline in value) assets it will provide you with the required yearly stream of income you need. The kind you need may depend in great part on your current occupation and on how you are employed - i.e., on whether you are a self-employed professional, the owner of a business, or an employee of a company or other employer. If you work for someone else, ideally you are being provided with long-term (benefit period to age 65) disability coverage by your employer, on either a group or an individual basis. The unfortunate aspect of working for someone else, in regard to disability coverage, is that most likely you have no say in the design of the disability plan provided by your employer.
Premiums and Taxes
A premium paid by your employer for either an individual or a group disability
income policy is tax-deductible by your employer and non-reportable to you
as income, pursuant to Section 106 of the Internal Revenue Code. A premium
that you yourself pay is not tax-deductible.
Benefits Received and Taxes
When benefits are received from a disability income insurance policy fully
(100 percent) paid for by your employer; the benefits are fully taxable.
When benefits are received from a policy, which you paid for, and the premium
was not tax-deductible, the benefits are not subject to tax.
In the short run, when the disability insurance premium is either paid by someone else or is deductible the negative emotional issues involved in buying disability insurance are either reduced or eliminated. This is a fact of life because the present-value cost payment is at a discount or removed. However, these extracted feelings are soon forgotten at the time of claim when the monthly check is subject to the federal income tax as reportable income. I personally prefer tax-exempt income having been disabled.
Consumer Alert!
Before purchasing a disability income insurance policy make sure that you understand the claim process of the insurance company. Becoming disabled is not the same as "hitting the lottery" when it comes to receiving money from the insurance company. Equally as important, if you can, make sure the policy contains all of the criteria listed below. It is possible that a group policy being provided by your employer or a plan endorsed by your professional association does not employ these criteria. However the trend has been for group policies to become similar to an individual policy. In addition many professional associations now endorse the utilization of individual disability policies.
Criterion
(Contractual and Non-Contractual Guarantees)
· Premium discounts if certain conditions are met - non-contractual
· Non-cancellable and guaranteed renewable - contractual
· Long term benefit period coverage - contractual
· Coverage for both total and residual disability - contractual
· Definition of total disability "the inability to engage in your specific
occupation at the time of claim" - contractual
· Dual occupation determination in writing prior to purchase - contractual
· Total disability not required for residual disability - contractual
· State or federal law which may render you disabled determination in
writing prior to purchase - non-contractual
· Recovery benefit - contractual
· Residual disability indexed for inflation - contractual
· Waiting period - contractual - individually determined
· Lifetime benefits rider - contractual - an optional benefit dependent
upon your current present-value retirement assets
· Cost of living rider - contractual - an optional benefit dependent upon
your current present-value retirement assets
· No offset for other benefits paid e.g., social security disability, group
long term disability - contractual
· No limitation for mental and nervous disorders - contractual
· Portability i.e., you own the policy it goes with you, with all contractual guarantees, non-contractual statements and premium discount, if any
Subjective Comments
Please remember: The peculiarity of any insurance contract (life, disability, long-term health care, etc.) is such that a knowledgeable professional must clarify it. It is a one-sided legal document in favor of the policy-owner. It is an unequal legal document because only the policy-owner can change the contractual stipulations. The insurance company cannot make any alterations (although consumer friendly companies usually make new improvements retroactive to an existing policy-owner). It is essential that the policy-owner understands all of the contractual clauses-failure to do so may result in frustration and economic disappointment.
It is absolutely essential that you have a knowledgeable advocate representing your best interests at the time of a disability claim. This very strong feeling is based upon my own disability claim and those of my clients. I will not leave it up to the claims department of an insurance company to define the contract. Nor will I allow the insurance company to act in a capricious manner.
Applying for a disability claim is a very subjective issue-the direct opposite of a life insurance claim-which has only one impartial topic: is the insured alive or dead. It is my opinion that because of the biased environment, (some insurance companies do not want to pay what the insured feels is his/her just entitlement) much care and thought is required by the insured when filling out the claim forms. A carefree attitude, (the insured is ill advised to think that the insurance company has his/her best interests at heart) must be avoided. A professional should guide the insured and his/her attending physician through the procedure. The insured should always see the attending physician's statement before it is mailed to the insurance company-if possible-and providing that the attending physician does not feel that it comprises his/her integrity.
Answer all questions in an honest brief concise manner. Do not volunteer any information not asked for-and all communication with the insurance company should be in writing. Avoid any interaction over the telephone and if necessary, ask if the conversation is being recorded. Should the insurance company send a representative to visit (face-to-face) do not allow the conversation to deviate from the main issue, your disability. In other words do not babble. If your claim is denied read very carefully what the insurance company has to say. Then study the contract with your professional adviser.
Ask yourself, does the denial language make sense after taking into consideration the contractual language? I quote from Elements of Life and Health Litigation by Leon Wasserman: "The courts have, for the most part, liberally construed the contractual provisions in favor of the insured. Upon the stated grounds that there were thereby giving to the contractual language a practical and fair result consistent with what the policyholder reasonably had in mind when he/she purchased the policy. In fact, in many instances the courts have simply discarded policy language in order toarrive at a just result." However, litigation with a deep-pocket insurance company is not only very expensive but, and equally as important, extremely stressful.
It has been my personal experience that a meticulous study of the contract and a word for word reading of the denial language are usually sufficient to determine if you have a just and proper claim.
When you are convinced that you have a just and fair claim and the insurance company realizes that you are not going to "fold your hand-in the claim paying game" you should prevail without having to go to court-I did. _______________________________________________________
William D. Brownlie is a Massachusetts Licensed Life Insurance Adviser, a
Chartered Life Underwriter, a Chartered Financial Consultant, and earned
a certificate in Investment Planning from the Boston University Program for
Financial Planners. He is the author of Life Insurance Boot Camp Buyer's
Guide - Second Edition 2000 ISBN 0-9662791-3-1 now in print. This article
is based upon condensed material from Chapter 18 Life Insurance Boot Camp
Buyer's Guide - Second Edition 2000 (c) 2000 William D. Brownlie all rights
reserved.
Disability Insurance (Conning Research 2002) Consumers are generally less aware of their need for disability insurance as they are for life and medical insurance, a perception that poses one of the biggest hurdles to the disability insurance industry's long-term growth. Thirty-year-old women have a 57% chance of becoming disabled and only a 16% chance of dying before age 65. Yet female employees often overlook the need for disability income benefits, asking instead for improved medical and life insurance benefits.
Disability Insurance: (Dr. Solomon Huebner, Professor of Economics and Finance at Wharton 2002) .... the primary function of life insurance is to be the replacement of income. In this regard, he states, "disability income clearly falls with the life group of coverages. .... A person disabled is just as dead economically as he who is actually dead; and, if anything, the living death is worst economically because the victim is still here as a total consumer without being a producer".
Tops for disability: Top 5 Lists For Long-Term Disability and Short-Term Disability Before Age 65, Compiled by UnumProvident - Based on Frequency of Claims. CHATTANOOGA, Tenn. (July 25, 2002) – The leading cause of long-term disability (more than 90 days) for working-age Americans was cancer, according to claims submitted during 2001 to UnumProvident (NYSE: UNM), the leader in income protection insurance. Rounding out the Top 5 List for long-term disability (LTD) causes are pregnancy complications, back and cardiovascular conditions, and depression.
Leading the list of Top 5 causes of short-term disability (STD) workplace absence for 2001 was pregnancy (normal), followed by complications from pregnancy, injuries (excluding back), back conditions and digestive/intestinal conditions. The causes of claims and the percentage received for each cause were as follows:
LTD - 13 percent – Cancer, 12 percent – Complications from Pregnancy, 11 percent – Back, 9 percent – Cardiovascular, 5 percent – Depression
STD - 20 percent – Pregnancy (Normal), 9 percent – Pregnancy (Complications), 9 percent – Injuries (Excluding Back), 8 percent – Back, 8 percent – Digestive/Intestinal
Insurance: (2003) According to Eastbridge Consulting, sales for disability products exceeded life products for the first time in 2002. Disability insurance sales have been growing at a faster pace than life sales for the past few years and now have finally taken the top share of the total worksite sales. DI sales were up 35% over 2001 sales; life insurance sales were up 15% and health plans were up 33%
Disability Insurance: Facts on Disability Income Insurance: (Tony Steur)
48% of all home mortgage foreclosures in the U.S. every year are because of disability.
There are 1,200 new disabilities every hour in the U.S.
There is a 1 in 8 chance that a person starting his or her career will be disabled for at least 90 days or longer before age 65.
At age 35 your chance of experiencing a three month or longer disability before you reach age 65 is 50% and age 45 it’s 44%
The average duration of a long-term disability is 2.5 years.
Young people today will each earn several million dollars in their working lifetime, provided they do not become disabled. This is their greatest asset.
According to a USA Today poll taken in 2002, 82% of all Americans have either very little or no disability protection at all.
Every year 12% of the adult U.S. Population suffers a long term disability
Disability Insurance: In 2003, U.S. individual disability inforce premium (GR, Non-Can and Buy-Sell) grew almost 4% over 2002, reaching just over $3.7 billion. Participating companies reported a 5% increase in GR inforce premium, and close to a 4% increase in Non-Can inforce premium. According to the survey, the number of inforce GR policies decreased by less than 1% while the number of Non-Can policies increased by approximately 2%. Inforce benefit amounts for both GR and Non-Can increased by about 4% and 3% respectively, compared to 2002.
Overall, GR and Non-Can combined new sales premium fell just over 1% in 2003. The number of new GR and Non-Can policies written declined close to 7%. GR new sales premium decreased 3% while Non-Can new sales decreased less than 1%. "While overall industry sales results remained relatively flat in 2003, individual company results varied greatly. It appears that the shift from Guaranteed Renewable to Non-Can sales has continued.
DISABILITY SURVEYS - JHA's 2003 Disability Market Surveys shows group disability inforce premium (STD and LTD) grew approximately 6% over 2002, reaching just over $10 billion.
The two primary factors driving growth in 2003 were strong STD and Voluntary LTD sales. The industry continues to face challenges in their effort to increase the number of employers offering group disability coverage to their employees. Individual Guaranteed Renewable (GR), Non- Cancelable (Non-Can) and Buy-Sell disability inforce premium grew almost 4% over 2002, reaching just over $3.7 billion.
DISABILITY: (2005) UnumProvident reports 100% increase in diabetes claims. Fat people are really running up the costs of disability and long term care premiums
Disability: (2006) Purchasing disability insurance can be tricky and expensive. Policies vary greatly. While some are iron-clad and pay benefits when you need them, others have more holes than a pasta strainer. Given the hefty price tag, you want to make sure you buy the right type of policy, says Darras. These are his tips to help you make informed choices:
-- Decide how much coverage you need. Do you spring for the maximum benefit or can you afford to live on a bit less?
-- Determine how long you can go without benefits. To save money on premiums, opt for a longer waiting period. Expect to pay a substantial premium for benefits that kick in within 30 or 60 days.
-- Obtain the longest benefit period possible -- at least until you reach age 65. While you might consider a five-year benefit cap to cut premiums, this is a risky gamble as your disability might last much longer.
-- Always look for "own-occupation" coverage. This pays benefits if a disability leaves you unable to perform your job, even if you can still work in another occupation.
-- Take a close look at the fine print on exclusions and restrictions, particularly if the premium seems too good to be true. Some policies have a two-year limit on mental illness and other conditions such as chronic pain, fibromyalgia or chronic fatigue syndrome. Many policies contain a fraud provision that allows the carrier to rescind your policy at the time of claim if they find a false statement on your application.
-- Look for noncancellable, guaranteed renewable coverage. This means your insurance company can't cancel your policy, increase your premiums, or change the contract language, as long as you pay premiums on time.
-- If you are young and expect to earn a lot, paying extra for COLA (cost-of-living adjustment) is money well spent. If you become disabled at 40, it will keep you ahead of inflation for the next 25 years. You should also consider future increase options, which allow you to increase coverage as you earn more money regardless of your health.
Disability INsurance: (2006) LIFE FOUNDATION OFFERS SIX MISCONCEPTIONS ABOUT DISABILITY INSURANCE AND THE RISK OF BECOMING DISABLED (Tony Steuer)
A survey by The Consumer Federation of America and The American Council of Life Insurers found that 82% of people do not have long-term disability insurance or believe their coverage to be inadequate. Yet according to America's Health Insurance Plans, one-third of working adults say that their families could only live for three months or less on their savings, if the primary wage earner lost his or her income due to a disability. People can't be expected to protect themselves unless they understand the risks they face. With that in mind, LIFE offers the following six misconceptions people have regarding disability insurance and the risk of becoming disabled.
1. I am in good health; I won't become disabled - The odds may surprise you. According the U.S. Census Bureau, nearly 1 in 5 Americans will become disabled for a year or more before the age of 65. An illness or accident that keeps you out of work can be very costly because medical bills, prescriptions and other unforeseen expenses must be covered on top of what it already takes to care of your family and cover everyday costs.
2. I'm not in a dangerous line of work - Whether you work in an office or a steel mill, if you are in your primary working years you need disability insurance. Many people assume disabilities are caused by freak accidents, but the National Institute on Disability and Rehabilitation Research reports only 13% of disabilities are a result of injury. The vast majority of long-term absences are actually due to illnesses.
3. Worker's compensation will cover me if I become disabled - Worker's compensation only covers you if you get injured, ill or die as a result of your job. Most employer- or government-sponsored worker's compensation programs pay only limited benefits and follow strict guidelines. Purchasing personal disability coverage will ensure that you are financially protected in the event you become disabled outside of the job.
4. The benefits I can get through Social Security will suffice - Don't bank on it. It is extremely difficult to qualify for Social Security disability benefits. According to the Social Security Administration, in 2003 roughly 70 percent of those who applied were denied. Your eligibility depends on whether or not you are incapable of working at all, not just your usual occupation, and if your condition is expected to last a year or more or to result in death. If you do qualify, it takes five months or longer for benefits to kick in and, on average, Social Security pays out just over $800 a month, slightly better than today's poverty guidelines.
5. I don't need individual coverage, because I'm covered through work - It pays to know the specifics of what type of coverage your employer provides.
So talk to your company's benefits or human resources office to find out if the policy covers short or long-term disabilities, or both, and the benefit level paid out for claims. If the basic benefit offered through your job wouldn't be enough to help you make ends meet in the event of a disability, many companies offer their employees the opportunity to increase coverage through automatic payroll deductions. Alternatively, you can supplement what is offered through your employer with an individual policy. Purchasing disability insurance on your own ensures that your coverage is tailored to your specific preferences and will stay with you even if you change jobs.
6. I'm too young to worry about disability insurance - The world may be your oyster, but your earning power is your greatest financial asset and the one you should be worrying about the most. According to the National Association of Insurance Commissioners, people in their 30's are three times more likely to suffer a disability than they are to die. You may have enough money in the bank to pay the bills for a few weeks or months, but what will cover you down the road when the bills start to pile up and you are not earning an income?
Disability: (National Underwriter 2007) The next step is to make sure disability claims are handled in good faith in accordance with insurance industry standards. Some of the standards:
--Insurance companies have a duty to treat their insureds fairly. First party claims handling is not an adversarial process.
--Insurance companies must treat the interests of the policyholder with at least equal consideration to their own interests.
--Insurance companies must thoroughly and fairly investigate and evaluate each claim, making a diligent effort to collect all facts necessary for good faith judgment on the claim and to weigh facts in a fair and honest way.
--When an insurance company is evaluating a claim for benefits, the financial impact on the insurance company should not be considered.
--The insurance company must not place undue emphasis on information favorable to itself. It must give fair consideration to information favorable to its insured.
--The insurance company should pay the claim unless there is a good reason not to—denial should not be based on speculation.
And finally, if a disability insurer is going to operate according to the spirit of the recent multistate settlement agreement negotiated by state regulators, it should be sure its claims handling procedures:
--Give significant weight to Social Security disability awards.
--Give weight to objective findings, subjective findings and the treating doctors’ opinions when evaluating impairment.
--Look at co-morbid claims collectively.
--Rely on unbiased, financially disinterested, fully trained medical examiners for independent medical examinations.
--Require that in-house doctors be skilled and have all relevant medical information before making impairment findings.
--Involve senior claim management at the earliest stages of a claim.
--Require that claim personnel undergo rigorous training to ensure best claim practices.
Disability Insurance Claim Denied! Justly or Unjustly??!
Larry Schneider Disability Insurance Specialist
CLAIM DENIED EXPERT WITNESS/CONSULTANT
It's a fact that Disability Income Insurance claims have increased dramatically over the last several years, along with a disproportionate number of inappropriate denials.
Some of the reasons are: 1) elimination period not being satisfied, 2) definitions, terms, conditions not satisfied, a) total disability, b) residual disability, 3) renewability 4) exclusions.
Some Definitions of Total Disability are:
· Own occupation – Pays if the insured can't do duties of their occupation even if the insured is working elsewhere so long as it is another occupation.
· Own occupation, not gainfully employed elsewhere - Pays if the insured can't do duties of their occupation and is not working elsewhere. Working or not then becomes the choice of the claimant.
· Own occupation, unable to work elsewhere - Gives true own-occ (first definition above) for a period of time, usually two to five years, then changes to unable to work elsewhere (by reason of education, training,
experience, and sometimes prior economic status).
Another major reason, has to do with misstatements and/or omissions made on the application.
Occasionally they are unintentional, due to the poor wording of the questions. Since the claim starts with the application, who is at fault? Is it the carrier for poorly constructing the wording of the questions, or is it the fault of the applicant who intentionally withholds pertinent information that could negatively impact the underwriter's decision as to whether or not to issue a contract?
Some critical areas of the application which affect a claim and could be inadvertently answered incorrectly, have to do with 1) occupation/duties, 2) health, 3) income, 4) and other pertinent facts such as; avocations, etc... Incidentally, some of the "honest" mistakes made by the applicant, might be "overlooked" after two years, as outlined in the contract's incontestability clause.
What is not "overlooked" however, is fraudulent misstatements or omissions such as a major misstatement regarding health or income. Come on, can someone honestly say that they "forgot" that they had a back operation or a heart attack two years ago?! With this view in mind, let's not forget the agent's role in completing the application. Did the agent record all answers exactly as they were answered or was there some hidden agenda or motive for writing them down in such a way so that the policy would be issued as "applied for" (e.g. without a rating or an exclusion)?
What actually happens when a claim is submitted for payment? The file is pulled and compared with the information appearing on the claim form for any inconsistencies. To support the claim, DI Article Folder-Word Document-DI Claim Denied Abbreviated 2005
2 APS's will be ordered. Tax returns will once again be reviewed and it will be re-underwritten. If the claim is invalid due to fraudulent omissions, etc... and it is within the contestability period, the policy will usually be rescinded. If it is past the incontestability period, it will usually be paid unless the carrier strongly feels there was a strong intent to commit fraud, then rescission/denial will take place. In any event, if it is a long term claim, expect possible surveillance and or a possible buy-out of the claim.