Individual Health Insurance
Disability Insurance
Many otherwise responsible people have a severe shortcoming when it comes to an important insurance safety net: disability insurance.[1] Most of us consider death and its consequences to our family but never consider what would happen if the income suddenly stopped. Statistically, one is far more likely to be disabled at some point than die. Anyone who earns an income should consider disability insurance, especially if the earnings are a primary source of income for the family.
Walter Updegrave, writer of the Long View column in MONEY magazine and Ask the Expert column on CNNMoney.com stated in the August 2007 MONEY magazine: The last thing you want to do is save religiously for retirement only to have your efforts undermined by unexpected medical bills, an injury that keeps you off the job or any of the other surprises life can throw your way. To protect your family, you need to have three things in hand: life insurance, disability insurance, and a savings stash equal to three months of living expenses.[2]
Many employers offer disability insurance to their employees. If a group rate is available the coverage is often less expensive than purchasing a private disability policy. However, the amount offered through an employer is often not sufficient, so it may still be necessary to buy an individual policy.
In any disability insurance policy, definitions of disabled are crucial. This definition should be the starting point when shopping for coverage. The best definition will pay based on own occupation, often referred to as own-occ protection. These contracts pay benefits if the insured cannot work in the occupation held at the time of disability or an occupation for which they are trained or experienced. This is a crucial distinction since the insured may be able to work at something just not the occupation they received training in. An individual who is a trained engineer may not want to take a job selling cars because an injury prevents continuing as an engineer.
When a person is unable to work he or she will especially need to keep their health care policy active. Receiving disability income may be crucial to that goal.
As more people purchased disability insurance, there has been some tightening of definitions as insurance companies paid out increasingly more claims.
For example:
Molly is a trial lawyer. She began having panic attacks any time she entered a courtroom. She carried own-occ protection and applied for benefits. The insurer denied her claim because she could still practice as an attorney in some form.
Who Needs Disability Insurance?
Most people who depend upon their income will need to consider disability insurance. If an individual works but does not particularly need the income, then such coverage would not be necessary. Most people do not have trust funds or a rich father; they work for the income earned. They work to pay their mortgage, utilities, and car payment. If the income suddenly stopped so would their ability to pay their debts and save for a secure retirement.
More people have life insurance than disability insurance. Why? The life industry has done a better job of educating the public. Most people realize the problems their family would face upon their death but may fail to realize the same problems would exist if he or she were unable to continue working, earning an income. Disability insurance could be called income replacement insurance.
Some occupations especially need disability insurance since the rate of injury is higher than average. The premium for the coverage will be based on their occupation, along with other factors.
Disability differs from health insurance in one major way: health insurance pays for medical bills associated with a health condition or to prevent a health condition. Disability insurance replaces lost income while recuperating from an illness or injury.
Income Replacement
If premium is not a consideration, a consumer might assume that he or she should purchase enough disability income protection to replace 100% of their lost income. While it is possible that some company might do this, the standard rate of replacement is typically 60 to 70 percent of gross income (before taxes). Disability income benefits will not be taxed. There will be some costs associated with going to the job each day that will not be present during recuperation, such as commuting costs and restaurant lunches.
Determining exactly how much disability income will be needed will vary from family to family. Some families are already stressed financially and may feel they need 100% income replacement while others will opt for less coverage.
For families earning over $100,000, the insurance company may reduce the percentage of gross income they will issue. Since insurers are not all the same, it is important to select a company that suits the consumers needs.
Workers Compensation covers work related injuries. This type of disability payment varies according to state law. There is a maximum of the individuals pre-disability gross wages that will be covered, up to a specified ceiling. Employers buy workers compensation for their employees; self-employed individuals must purchase their own.
Classes of Disability
There are generally five classifications of disability, although some companies may have subcategories. They can range from a severe disability to a short-term disability. They are:
1. Permanent total disability;
2. Long-term total disability;
3. Total to partial or recurrent disability.
4. Progressive partial disability; and
5. Short-term total or partial disability.
Permanent Disability
A permanent disability is one that is irreversible. It might be the loss of sight, hearing, loss of limbs, or loss of speech. Because it is irreversible, the disability is permanent.
Long-Term Total Disability
A long-term
disability, referred to as
Total to Partial or Recurrent Disability
A total to partial disability is characterized by a physical or mental problem that comes and goes. These individuals are sometime able to work, but cannot at other times. Cancer victims often fall into this category. During times of treatment the insured may not be able to work due to the effects of the medical treatment; between treatments he or she may be able to.
Progressive Disability
Progressive disabilities are the most difficult to deal with since they can be unpredictable, and often sporadic. Attempting to collect benefits may be difficult because the condition is ongoing, but not necessarily totally debilitating. The insured may be able to work sometimes, but not others. He or she may be able to work full time during the progressive condition, but other times he or she may only be able to work part time. In the worst of times, the insured may not be able to work at all.
Short Term Disability
A short-term
disability, commonly referred to as
1. Total disability;
2. Partial disability; and
3. A combination of partial and total disability.
Some short-term disabilities do not allow work at all during the recuperation period; others may allow part time work. These short-term disabilities consist of broken bones, temporary illnesses, and any other condition that prevents work for a period of time. Of course, coming down with the flu is not going to allow disability payments. The condition must be covered under the terms of the policy.
Policies often have coordination clauses. These prevent two separate policies from paying the same benefit period. Benefits may be reduced in recognition of benefits from another program, such as Social Security or Workers Compensation. This clause is usually labeled Coordination of Benefits in the policy.
Waiting Periods
Some types of policies have waiting periods before benefits are payable. Disability policies are one of them. While the insured can select to have payment start upon proof of disability, most issued policies have a 30, 60, 90, or 120 day waiting period. It may be called an elimination period in the policy. As you would guess, the longer the waiting period, the lower the premium will be. These waiting periods are based upon the policys criteria for proof of disability.
Benefit Duration
At the time of application, the applicant will select a benefit duration period. This is the amount of time the policy will pay for a continuous disability. Policies typically never pay past the age of 65. The shorter the length of benefits, the less expensive the policy will be.
Insurers may limit the length of benefits available for some occupations, refusing to issue benefits to the age of 65 for example. Some insurers will not accept specific occupations at all. Most of these limitations involve the so-called blue-collar jobs. White-collar jobs do not have the types of disabilities that would cause these limitations.
Many professionals recommend a combination of disability policies, especially if one is available through an employer-sponsored group plan. For example:
Dave has a disability plan through his employer. It has a 90-day elimination period, so benefits begin 91 days following the first day of proven disability. He purchases an individual policy that is short-term, covering from the first day of proven disability through the 90the day of proven disability.
Most short-term plans do not provide benefits for longer than six months, but there are exceptions to everything.
Available DI Coverage
Disability coverage is available from several sources:
1. Employer sponsored disability group plans;
2. Individual contracts;
3. DI benefits provided without cost to the insured, such as union coverage;
4. Riders on existing insurance coverage;
5. Social Security disability benefits.
Most agents would probably agree that any type of coverage available at discounted rates should be considered. This is true for DI as well. While coverages provided through group plans may not be adequate, they often provide a starting point at a very reasonable cost. In all cases, some coverage is better than none at all.
There is one disadvantage maybe. It is important to read the definition of disability in the group plan. Some have been so narrowly defined that any value in the policy is compromised. If a group policy is extremely difficult to collect benefits from, it may not be worth the premium charged. If this happens to be the case, it would be better to apply that premium to an individual policy with the definition of disabled defined in a broader manner.
There are various kinds of eligible groups for disability income coverage, with the most familiar being the singular employer group: the employer offers the employees access to a group benefit plan. State law may govern the size of the group, so it can vary from state to state. Generally, expect there to be a minimum requirement of ten participating individuals, however.
Unions may offer coverage to their members as part of the union package. This may mean their members receive coverage that they are not obligated to personally pay for.
Lenders often offer their debtors disability insurance that applies benefits to payment of the loan if a proven disability occurs. It may also include life insurance benefits.
Individual disability insurance is seriously undersold. It is a type of insurance that consumers need, whether they realize it or not. These individually issued policies tend to be guaranteed renewable, as long as premiums are paid on a timely basis.
Annually Renewable Disability Income (
Annually
renewable disability income policies work much like term insurance in that the
price starts low and increases annually. The traditional DI policy costs
more initially but the premium is fixed, usually throughout the life of the
policy.
Disability policies are not all the same. Some of the differences have to do with what is chosen at the time of application; some of the differences will have to do with state requirements; and some of the differences will be due to insurer offerings. In all cases the applicant will want to be sure he or she is actually buying the benefits he or she wants.
Applicants will want to receive and agents will want to offer the best policies available to them:
1. The policy definition of disabled is critical to receiving benefits. Most prefer the policy define disabled as unable to do the job for which they are qualified by either training or experience.
2. Know what is offered in the marketplace. All policies are not equal.
3. Use top rated companies. Offering coverage through a lesser-rated company may end up being a mistake.
The Uniform
Individual Accident and Sickness Policy Provision Law was
drafted by the National Association of Insurance Commissioners (NAIC) in
1950. It was passed by all states except
1. Change of beneficiary
2. Notice of claim
3. Claim forms
4. Entire contract and changes
5. Premium grace periods
6. Legal actions
7. Payment of claims
8. Physical exam and autopsy
9. Proof of loss
10. Policy reinstatement
11. Time limit for paying claims
12. Time limit on certain defenses.
These may be known as the uniform or standard policy provisions.
Change of Beneficiaries
The beneficiary change provision must be included in any type of policy. The provision allows the policyowner to change beneficiaries in writing as long as an irrevocable beneficiary designation has not been made. An irrevocable designation would be one where the beneficiary cannot be changed by the insured. When beneficiary changes are allowed it is called revocable. The irrevocable beneficiary has a vested right in the contract whereas the revocable beneficiary has no right to the proceeds until the death of the insured. If an irrevocable beneficiary dies before the insured, then a new beneficiary may be named.
Notice of Claim
Notice of claim sets the time parameters during which the claim must be filed. For example, the policy may state that a claim must be filed within 20 days of the occurrence or commencement of any loss covered under the policy. If the insureds state requires a specific time period, the insurers are required to comply with the states mandate.
Claim Forms
Claim forms must be sent by the insurer to the insured within the stated time period (usually 15 days) after receiving notice that a claim has occurred.
Entire Contract and Changes
The entire contract and changes provision dictates that the insurance contract between the insured and the insurer is contained in the policy, the application, endorsements, and any or all riders attached to the policy. Only these documents outline the enforceable parts of the contract. No changes can be made to the contract unless it is agreed upon in writing by both the insured and the insurer. The written agreement would be attached to the existing policy.
All contracts must specify a grace period, during which premium payments may be made. A grace period is a specified amount of days following the actual premium due date. The policy remains in force during the grace period.
Legal Actions
Legal actions taken by the insured must be 60 days after written proof of loss has been furnished to the insurer in accordance with the policy guidelines. There are time limitations regarding legal action so the insured must file any actions within a reasonable time period. The actual time will depend upon the state, but usually somewhere between two and six years are allowed to file suit.
Payment of Claims
Payment of claims states the types of covered losses that exist under the policy that the insured is entitled to. If the policy has accrued benefits that are unpaid, it will state where the funds go, normally to the estate.
Physical Examination
The insurer has the right to request a physical examination at their expense as often as may be reasonable to require during the pendency of a claim here under.
Proof of Loss
It should be no surprise that the insurance company has the right to request proof of loss from the insured. The proof of loss must be submitted within the contracts stated time period. The time period must comply with state requirements, but unless they are different, most policies require the proof of loss within 30 days. There are circumstances that prevent proof of loss within 30 days and those will be addressed within the policy. If it is not reasonable, due to the disability, to submit claims within the stated time period, it may be possible to do so within the year following the disability. In all cases it is important to refer to the contract for exact details. An absence of legal capacity may impact these time requirements.
Reinstatement of the policy
The contracts reinstatement clause provides the guidelines under which the insurer may reactivate a policy that has lapsed for nonpayment. The insurer generally has the right to ask the insured to fill out a reinstatement application before the policy will be reactivated and, of course, all back premiums must be paid.
States generally require the insurer to respond within a stated time period; if the insurer does not do so, the policy is considered reinstated.
Once the policy has been reinstated, the insurer may not cover a sickness for a specified time period but an accident would be immediately covered.
Time Limit for Paying Claims
The time limit for paying claims provision outlines when the insurer will pay the insured for a submitted claim. This will be subject to the insured fulfilling his or her responsibilities for claim submissions (providing proof of loss). Disability insurance benefits are typically paid monthly.
Time Limit on Certain Defenses
The time limit on certain defenses pertains to the representations made by the insured on his or her application. This clause specifies the time limits under which the insurer may cancel or void the policy as a result of those representations; it may be referred to as the contestability provision. There is no time limit if the insured has engaged in fraud.
Unlike the old standard provisions law of 1908, the uniform law does not require verbatim used by the insurers, nor must the provisions appear in a set order in the policy. The provisions must be followed in substance however. Most insurers use provisions more favorable to the insured than demanded by the uniform law.
There are also eleven optional provisions:
1. Occupation change
2. Age misstatement
3. Other insurance with the same insurer
4. Expense insurance with other insurers
5. Income insurance with other insurers
6. Relation of earnings to insurance
7. Unpaid premiums
8. Cancellation
9. Conformity with state statutes
10. Illegal occupations
11. Intoxicants and narcotics
Change in Occupation
The change in occupation provision allows the insurer to raise or lower premiums and benefits based on the current occupation held. If the insured changes from one occupation to another, his or her contract premium and benefits may be adjusted to reflect the change. Occupation is a major factor in the issuance of disability insurance.
Age Misstatement
Several types of insurance base the premium rate partly on the age of the applicant. Consequently, a misstated age directly affects the premium amount charged. If the insurer realizes the age was incorrect at the time of application, they will require the insured to pay whatever shortage occurred. If the applicant over-stated their age, the insurer would refund whatever amount has been overpaid.
Incorrect ages are often not discovered until proofs of death are filed. Age misstatements would not fall in the incontestability provision even if not discovered until the death of the insured. Benefits would merely be adjusted to reflect the amount of premium that should have been paid.
Other Insurance With the Same Insurer
Insurers have no intention of paying the same claim twice. Contracts address the possibility of an individual having two policies with the same insurer to alleviate the possibility of doing so. This provision is called the other insurance with this insurer provision. There are two ways an insurance company addresses this issue:
The insurer specifies a maximum dollar amount for which the insurer is liable under all combined policies currently in force. The insurer agrees to return any excess premiums paid by the insured, if applicable.
The insurer may request the insured to choose one policy that will pay benefits; the insurer then returns the premiums paid for the other unused policy.
Expense Insurance With Other Insurers
It is not unusual for an individual to own policies with several different companies. Some types of insurance specifically say they will pay without regard to any other coverage held; others address which coverage will be primary and which will be secondary, preventing duplication of benefits. Expense policies pay benefits based on expense-related services, so it is not likely to be present in disability coverages.
Income Insurance With Other Insurers
Disability insurance replaces lost income due to illness or injury so this provision applies to DI contracts. Most policies state they will share in the benefit payments in proportion to the benefit amounts each insurance company provides under their own policy. If this means the insured will have paid more premiums in than will be returned in benefits, they may refund excess premiums.
Relation of Earnings to Insurance
The relation of earnings to insurance provision prevents the insured from profiting financially from a disability. Furthermore, it prevents the insured from desiring a disabling event to bring in more money than he or she would otherwise be able to. When an individual insures more than he or she earns, it is called over-insurance.
For example:
Joey works for an electrical company as a laborer. While the pay is good, he realizes he will not earn more than he currently does. His bills keep rising, but his pay does not. Joey buys a disability policy and requests that it be for nearly double the amount he currently earns. If the insurer granted such a policy it would be an incentive for Joey to place himself in a position to be injured, or perhaps even fake an injury. The insurer would then be paying benefits that would not have otherwise occurred.
Joey is normally an honest person, but if he could purchase high disability insurance, it might actually encourage dishonesty as his financial pressures build.
The relation of earnings to insurance does not apply just to a single policy; typically it restricts total benefits paid from all policies to no more than either the insureds monthly earnings at the time of disability, or to the average monthly earnings for the previous two years. Using the previous two years of earning would protect a person who may be temporarily working part time or for some reason working at a lower paying position. If more than one company has issued a disability policy, the payout of benefits would be proportionate to the amount of benefits available in the policy. Excess premiums would be refunded.
Cancellation
The cancellation provision requires the insurer to notify the insured at least five days in advance of canceling a policy. Some states will have a different time requirement, typically requiring more than five days notice. Not all states allow the insurer to cancel the policy since the insurer would be able to cancel whenever they wished without regard to the length of time the insured expected to be covered. Upon cancellation (if the state allows it) the insured would be refunded any unused premium. If the insurer canceled the policy upon the renewal date no premium would be refunded.
Conformity With State Statutes
The conformity with state statutes provision requires insurance policies to be amended on the renewal date to conform with any minimum state law or regulation that might exist.
Illegal Occupation
Benefits may legally be denied for an illness or injury that occurred during any illegal activity, even if the disability would have otherwise been covered.
For example:
William is a truck driver by profession and normally works for a legal company transporting medical supplies. To earn extra money, William also drives trucks transporting stolen computer equipment. William is injured while driving for the illegal company transporting stolen items. Since Williams DI policy covers injuries while working at his profession of driving trucks, he turns in a claim for disability benefits. His claim is denied on the basis of his involvement in illegal activity.
Intoxicants and Narcotics
A disability claim may be denied if the insured was under the influence of alcohol or drugs. Only if the drug was prescribed by a physician and was appropriately administered would this not be true. Even if the prescribed drug could be attributed to the accident, it would still be covered by the disability policy as long as it had been used appropriately.
There may be other provisions included in disability policies. Not all provisions will be offered by all insurers, so agents must always be aware of those contained in the products they are selling.
Waiver of Premium
Many disability income policies have what is called a waiver of premium clause. This clause allows the insured to discontinue paying premiums when certain conditions have been met. The policy remains in force even though premiums are not being paid.
When a covered disability occurs, and benefits are being paid by the insurer, the waiver of premium clause waives premiums even though the policy continues paying benefits. Although details can vary, usually the waiver begins 90 days after benefits have begun. It is important to note that any elimination or waiting period does not usually count towards the waiver qualification (benefits received determine the time period).
For example:
Leonard is injured and submits a DI claim to his insurer. Leonards policy has a 120-day waiting period, so he will not receive any benefit under his policy until the 121st day of covered disability. His 90-day waiver of premium will, therefore, begin on the 211th day of benefits for his covered disability (120 day waiting period + 90 days of covered benefits = 210 days).
If Leonard has paid an annual premium his disability policy may or may not return the premium. Some companies simply credit the payment so that his renewal is delayed; others refund premium from that point of Waiver qualification. If a credit is given, but Leonard never recovers and returns to work, the premium would eventually be refunded. If he does recover and return to work, the credit would pay the appropriate amount of his renewal premiums. It would be necessary to consult the actual policy to determine how this would be handled.
Other Provisions
Non-Occupational Benefits
The non-occupational provision prevents a disability income policy from paying if benefits are available from workers compensation or similar compulsory benefits are paid.
Transplant Donors
Some disability policies will pay DI benefits to an individual donating an organ to another. Benefits are typically paid as a total disability for the time it takes to recuperate and return to work.
Rehabilitation
When the insured can return to work it benefits the insurance company issuing the DI policy. The rehabilitation provisions goal is to help the insured accomplish this. Some insurers may offer this even when the provision is not included in the policy. Policies may also pay for vocational rehabilitation in an effort to return the insured to work. Where a limb has been lost, the DI policy may also pay for prosthesis in the hope that work will then be possible.
Preexisting Conditions
A disability income policy is a type of medical issue. As with most medical policies, preexisting conditions are noted in the contract and often excluded from coverage. The exclusion may disappear after a specified amount of time has passed or it may remain for the lifetime of the policy.
Free Look
Many types of policies contain a provision allowing the insured to receive an issued policy, look it over, and then decide if they wish to keep it. This is referred to as the free look provision. The amount of time involved will vary among the states, but it must be at least ten days. Many states mandate more than ten days, often up to thirty. If the insured decides not to keep the issued policy within the allotted time period he or she may return it and receive a full refund of all money paid in. It is not necessary to state why the policy was returned since the free look means it may be returned for any reason or for no reason at all.
The previous provisions are not necessarily all inclusive. There may be provisions that are specific to state requirements or provisions that develop as laws or customs change. Competition is a major reason that new provisions develop as companies compete with one another for business.
Policy Riders
Many types of policies utilize riders. A rider is a special contract clause stipulating additional coverage over and above that contained in the standard contract. Some types of riders decrease coverage, but most are used to increase it. The types of riders offered may vary widely among companies so it is the agent who must determine which company offers the best options.
Return of Premium Rider
Few people believe they will ever be disabled. We all think we will go out with our boots on, as the saying goes. In reality, statistically more people will be injured than die. The return of premium rider appeals to those who do not really believe they will personally be disabled during their work years. This rider promises to return a portion of the premium paid in (less claims) at some future date, such as five or ten years following issue. The return of premium rider requires an additional premium. Because the extra premium can be high many professionals do not recommend it.
COLA Rider
COLA stands for
Cost-of-Living Adjustment. It refers to an inflation rider that provides
an annual increase in the benefits, based on a specified percentage.
While policies will vary, it is often based on the annual Consumer Price Index
(
Social Security Rider
Social Security relates to retirement rather than a disability, unless the recipient qualifies for Social Security disability income. A Social Security rider can be added to the policy to pay the insured a certain amount above the regular benefit each month for each month that the insured does not collect Social Security benefits. There is usually a 90-day waiting period, so the insured may only collect for a short time, unless the individual never actually qualifies for Social Security disability income. Most of these riders do not pay once Social Security benefits are received, even if that happens to be age 65.
Purchase Option Rider
The purchase option rider may be called the guaranteed insurability rider. It allows an insured individual to buy more coverage as they age, or at the onset of some event, such as a birth of a child or marriage. The premise is that some of these events make the income more valuable since others, besides the insured, will be dependent upon that income. The insurance company will still look at the relation of insurance to income so it still is not possible to over insure.
Since the purchase option rider is expensive, younger people usually use it. The older the insured, the more expensive this rider is. Insureds increase their odds of becoming disabled the older they become, which does affect premium rates. The rider allows the insured to increase their benefits without proving insurability.
It is not possible to add the purchase option rider at any time; usually it must be done upon the anniversary of the policy issue date and there may be limitations as to how often this is available. If the time of offering happens to be during a benefit payout period it is possible that the insurer will still offer the rider.
Family Income Rider
If the family income rider were purchased the insured could receive a stipulated amount of additional monthly income should a covered disability occur. Like the policy, the additional benefits would probably not begin until the waiting period had been satisfied. Most family income riders are for a specified time period, such as two years or for the length of a mortgage, conditioned upon the disability continuing until that point.
Accidental Death and Dismemberment Rider
Dismemberment:
The accidental death and dismemberment rider pays a lump sum settlement for the loss of sight or limbs rather than paying a monthly income, as the basic policy would do. The disability must have been caused by an accident versus the result of an illness, such as diabetes.
It is important to read these riders carefully. In some cases, lump sum payment overrides the monthly income provision (meaning the insured would not get both the lump sum and monthly income). In some cases the insured has the option of choosing between a lump sum and monthly income; in others the insurance company gets to decide which way payment is made.
Death:
The accidental death benefit is generally payable in the policy if death occurs under specific circumstances, including:
1. Before the insureds 70th birthday;
2. Directly and independently of all other causes;
3. As a result of accidental bodily injuries; or
4. Within 90 days from the date of the accident.
Exclusions
All policies contain exclusions and disability policies are no exception. There are differences among the states, but these exclusions tend to be routine:
1. Suicides, while sane or insane;
2. Deaths resulting from war;
3. Deaths resulting from disease; or
4. Deaths occurring outside the Earths atmosphere. Apparently astronauts are out of luck.
Occupational Classifications
Insurance companies are allowed to discriminate as long as they discriminate equally. In other words, an insurer may refuse coverage to an unhealthy person based on specific health criteria as long as they do so equally. They may discriminate based on age as long as they do so equally. They may discriminate based on occupational classifications as long as they do so equally. All of these discriminations come under the heading of underwriting.
Occupations are classified into five groups according to the degree of hazardous duties involved in the workplace. This is considered one of the most important aspects of disability income underwriting. The underwriter must both assess the occupation and the nature of duties performed in that occupation. If more than one type of duty will be performed, the underwriter looks at the most dangerous among them.
Class 4AS
Certain professionals and corporate executives tend to fall into class 4AS. To do so, they must meet specific criteria, including:
1. Their job description must primarily consist of office duties with little or no travel;
2. The individual must be compensated by salary rather than by the hour.
3. He or she must be employed by a well-established, stable firm for at least two years and must earn more than a specified amount annually.
A professional might include certified public accountants, architects, dentists, and other medical professionals.
Class 4A
Class 4A also includes professionals, but distinctions are made by the underwriters between Classes 4AS and 4A. A Class 4A would include physicists that partake in no lab work, engineers who work in an office or as a consultant only (no field work), accountants working for an accounting firm, chemists that consult or work in an office, and civil engineers who work only from an office, not in the field.
Class 3A
Class 3A includes individuals engaged mostly in mental work such as clerical duties or other office related responsibilities. Some of the professions included in this category would be court bailiffs, clergymen, comptrollers, computer operators, anesthetists, draftsmen engaged in an office (not in the field), speech therapists, travel agents, statisticians, stockbrokers, and real estate brokers.
Class 2A
Class 2A includes individuals who are supervisors, technicians, merchants with no delivery or repairing duties, those with special skills, and others not performing what is generally described as manual labor. Some type of physical activity is usually acceptable however. This category might include taxidermists, timekeepers, bill collectors, chiropractors, apartment house managers, counter clerks, geologists in the field, but with no hazardous work involved, grocery managers, locksmiths, hotel or motel clerks, and newspaper reporters.
Class 2B
People in the Class 2B category would include occupational classifications 2A and 3A who do not meet the minimum income requirements, but who are employed by a professional organization to which disability coverage is provided.
Who Is Not Eligible?
Government employees, such as Federal civil service, are not eligible for disability insurance because of the accumulating sick leave and disability benefits they automatically receive. State, county and municipal employees, including public school teachers, are generally ineligible for the disability insurance due to the substantial benefits available in their pension plans. Individual underwriting consideration may be given, however. When an insurer will issue a DI policy to such individuals, there may be limitations applying directly to the benefits they receive from their employers. The underwriters often request full employer-related information, including retirement plan booklets, and any other pertinent information.
Insurers generally will not issue disability income policies to those who are self-employed and work from their residences. There may be an exception for those who have a Business at Residence classification. In most cases, the insurer allows for a business in the residence as long as there is a significant amount of outside activity associated with the employment. Normally a 60- or 90-day waiting period is imposed.
Professionals who have residence-based offices, but supply services elsewhere would generally not be considered a Business at Home classification. This is the status that might be applied to many agents who have an office in their home, for example, but spend most of their time at their business location servicing existing clients or in the field acquiring new clients. Doctors, dentists, or attorneys who maintain an office at home but provide their services elsewhere would not be considered a home-based business.
Disability income coverage is not available for some occupations normally designated NE for Not Eligible. The list may differ among insurers and the classification is open to change at any time. Some of the occupations that may be in the NE classification include used car salespersons, authors, actors, singers, entertainers of any kind, air traffic controllers, acupuncturists, bartenders, barbers, bus drivers, butchers, cooks/chefs, flight attendants, detectives, policemen, janitors, and in-home teachers. This list is not inclusive and may not apply to all insurers.
Underwriting the DI Policy
Underwriting is the insurance companys process of determining whether or not they are willing to accept an applicants risk. If the risk posed is too great, the insurer will refuse the applicant and return any premium that has been collected. If the risk is acceptable, the insurer will issue the policy that was applied for. The primary point of underwriting is to maximize the possibility of profit by acquiring a profitable distribution of risk.
If everyone applied for the same type of policy it might be possible to accept everyone universally because the law of averages would stabilize the risks involved for the insurer. However, that is not how it happens. Those with the least risk of receiving benefits are less likely to apply for the coverage. Those with the highest risk factors are most likely to apply for coverage. As a result, the law of averages could not work since it would not be an evenly distributed risk.
Since disability income is so directly related to probable risk, occupation categories are considered. Some types of occupation pose higher risk than others. Therefore classifications are necessary to differentiate among exposures and to determine premiums.
The application
is the first step in underwriting. The agents preliminary questions to
appraise the risk exposure of the applicant are a primary role in underwriting.
Some agents take additional schooling by obtaining such designations as
Chartered Life Underwriter (
Although the agent is not the final authority on the risks an insurer is willing to assume, they do have the ability, based on specific questions and answers, to determine whether or not the applicant should even apply for coverage. Obviously, if the insurer specifies they will not issue coverage for a particular occupation, it makes little sense to complete an application for such an individual. When the applicant has the possibility of being accepted, the agent has a couple of choices:
1. Turn in the application with payment. The underwriters will take it from there. However, it may be prudent to let the applicant know if the agent feels their chances of receiving a policy are slim.
2. Turn in the application on a COD if the insurer allows this (not all insurance companies will process a COD application). By not taking the applicants payment, he or she has not tied up any resources. This also eliminates the need to refund premium in the event the applicant is denied.
Pre-Selection and Post-Selection
Pre-selection involves gathering necessary information concerning risks and deciding to accept or reject the applicants risk. Once this risk is accepted, the insurer must then practice post-selection. Post-selection is the process of reviewing insureds and dropping those that are no longer desirable. Post-selection is available only if the policy is cancelable rather than guaranteed renewable. The state must also allow this process; not all do.
The Underwriters Role
Once the underwriter receives the application, he or she obtains information about the prospective insured to make an equitable and profitable decision. Besides looking at the applicant as an individual risk, the underwriter will also assess how the individual affects total risk for that policy type. Underwriters are well aware of the effects of adverse selection, the possibility of receiving a higher quantity of high risks than medium or low risks. In other words, they avoid covering members who are more likely to qualify for benefits than would the general population. The underwriter must make his or her decisions based on obtainable information. Obtaining information is restricted by the cost and difficulty of gathering necessary facts. The most important types of information include:
1. The applicants past loss experience, if any;
2. The financial standing of the applicant (those with lots of debt seem to be among the most likely to have claims perhaps from stress);
3. The applicants living habits; some habits contribute to claims, such as smoking and dangerous hobbies or activities;
4. The current and past physical condition of the applicant; and
5. The character of the person requesting insurance.
The insurer will seldom insure an individual who has had excessive past insurance claims in any form, since it implies that something unusual is involved. The unusual may be a person who has dangerous personal habits, it may involve a person who sets him or herself up to receive benefits, or it may just mean the person is unlucky.
Insurers use multiple sources to obtain information including the application, medical exams, inspection reports, medical information bureaus, and any other source that may be available.
End of Chapter Four
United Insurance Educators, Inc.