New Types Of Policies Close The DI Coverage Gap

Most people insure their material possessions — their homes and their cars. But many people don’t recognize what is probably the most valuable asset — their ability to earn an income. If a person becomes sick or injured and can’t work, will that person be able to pay bills and maintain the same or a similar standard of living?

What are the odds of becoming disabled? That’s an odd question. It depends on what you read and what someone considers a disability. But understanding the comprehensive nature of a client’s particular occupation — what must happen in order for them to fully be able to earn a living — may diminish their interest in the odds in favor of simply recognizing the power of protecting themselves. Let’s say it’s a much larger concern for higher earners.

Young professionals, and in particular law students, were taught early in their adult lives that their most valuable asset was their ability to earn a living.

When choosing to go to school, they committed to an investment in their careers, took on significant debt, or committed to certain employment relationships to assure they would be able to fulfill their financial obligations. They became comfortable with a particular lifestyle, perhaps have families, acquire assets and commit to education obligations. Thus, they began to earn.

Most were taught to seek and purchase disability insurance as a means of protecting their incomes from disruption. That was likely true then, and it still is today. However, much has changed in the business of protecting clients through disability insurance.

Here is a brief overview of the DI scene, looking backward and forward.

Individual Disability Insurance

Years ago, professionals had many choices with respect to the purchase of a disability policy. There were many from which to choose and contracts were broad in nature, and specific in their definitions to qualify for benefits, and had a host of consumer-centric riders that enhanced the policies. Riders included such things as a cost-of-living adjustment that kept benefits growing, a return-of-premium benefit that may have refunded some or all of the premiums, and even a nondisabling injury benefit that paid cash. They almost always included either a residual or a proportionate income rider, or both.

More significantly, individual DI policies had an “Own-OCC,” or “own occupation,” definition of disability. A typical noncancelable individual DI policy defined total disability as follows: “Solely due to sickness or injury, you are unable to perform the material duties of your regular occupation — even if you are able to work in another occupation!” Your occupation meant “the occupation or occupations (if more than one) in which you are gainfully employed for the majority of your time, at the time you become sick or disabled.”

Carriers further refined the definition of your occupation to a single specialty. Contracts recognized that specialty, and they and paid benefits based on the insured person’s inability to do that specialty. Your client theoretically could be a trial lawyer, suffer an injury precluding them from going to court, and earn a comparable income doing office work and receive full benefits.

That was powerful stuff!

Even more compelling, carriers also provided residual and/or proportionate benefits — which provided that should injury or sickness disrupt your income (but not necessarily lead to a reduction in time lost at work), so long as you suffered a loss of income — you would also receive some percentage of benefits.

In the mid-1990s, insurance companies began to see a dramatic rise in claims. Some DI policies made it simply too easy to substantiate claims, and in many cases, people took advantage of the carrier’s favorable wordage. Also, when many physicians became dissatisfied with the way managed health care changed their practices, they soon recognized that their DI policies could hasten their retirement, so they began to file claims in record numbers. Carriers were unprepared for this increase in the number of claims.

This challenged insurance companies, and many recognized they had issued policies that were simply too generous and that made it too easy to substantiate a claim. Individual disability underwriting became more stringent, costs for new policies rose, underwriting tightened, and the industry was challenged with lawsuits over claim disputes.

Into the early 2000s, a class action lawsuit against one of the leading individual DI carriers resulted in uniform changes to contract language, easing the burden on claimants’ ability to collect. But policies became more difficult to acquire, there were limits on claims for back/neck and mental/nervous disorders, and individual DI carriers figured out they could no longer compete. The availability of noncancelable DI options for attorneys became limited.

The combination of a booming economy, a dramatic rise in incomes and the lack of evolution in DI products meant most professionals were left woefully underinsured.

Group Disability Coverage

Many professionals who were underinsured sought ways to increase their protection. If a professional had a staff, they could purchase employer/association group disability insurance and add a secondary layer of coverage to their individual plan.

These group contracts were significantly different from the broad individual plans. These plans integrated with government benefits and limited claims for conditions such as spinal and mental health conditions. Nonetheless, they added coverage — giving the insurer more discretion over when they would be obligated to pay a claim.

When crafted properly, this group coverage would pay in addition to what any individual coverage would pay. Further, proper design, with premiums passed through as income, would ensure that benefits would be received tax free — just like the benefits from individual DI policies. Still, the group coverage was limited to 60% of the insured’s income. Even if the additional benefit was $10,000 or $15,000 a month — many were and are still grossly underinsured as a relation to their expenses and lifestyles.

Supplemental Buy-Up DI

The limits of older individual DI plans, even when combined with a group DI plan, still left many professionals underinsured. Lifestyles and incomes had simply outpaced the disability market. Insurers were reluctant to provide anyone with enough disability benefits to give them peace of mind that they could meet their financial obligations. People were simply spending more than they could protect and were still dependent on their health to earn a living.

Insurance markets responded with supplemental buy-up coverage. These policies can offer simplified issue or, with three or more participants, even guaranteed issue. These are also own-occupation-specific contracts, allowing professionals to become insured and secure reimbursement of up to 70% of their income upon sickness or injury.

As a result of this offering, many professionals can now purchase coverage that supplements both their individual and group coverage.

Lifestyle Lump Sum

A host of newer policies are addressing areas of disability that can protect lifestyles even better. One newer evolution of disability insurance can now add an additional layer of coverage for professionals to insure their lifestyles in the form of a lump-sum benefit.

With many pressures on our incomes and so many complex matters that all depend on our incomes, it is no wonder that DI is critically important for professionals. Factoring in additional drains on incomes due to divorce situations (alimony and child support) education funding, real estate, various business promises (leases, salaries, etc.) and medical expenses, DI is a critical component of every financial plan.

Unless your client has an ultra-wealthy relative, it highly unlikely they have anyone they can turn to for help paying their bills if they become disabled.

Martin Levy, CLU, RHU, is president and founder of Corporate Strategies in Woodland Hills, Calif. He is a 30-year industry veteran and a lifetime member of Million Dollar Round Table. He may be contacted at [email protected].