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Disability Products

The following information covers the various types of products and services that Foundation Insurance Solutions offers, the important features and optional benefits that define a Disability plan, and how it can be designed to meet your client's particular needs and situation.

Exploring our product portfolio will assist you in identifying demographics of the insurance market and will reveal various marketing opportunities. You should come away with a clearer understanding of how beneficial Disability insurance can be in many different situations, and how you can approach both prospective and current clients with information that will be of value.

This is the core Disability Insurance product: it is designed to replace a portion of your earned income if you become too sick or hurt to work and should be positioned as the foundation of any sound financial plan. There are two basic types of individual coverage: Guaranteed Renewable and Non Cancelable.

Guaranteed Renewable Products state that the insurer guarantees continual coverage without cancellation as long as premiums are paid. However, they reserve the right to increase premiums should they have unfavorable claims experience for an entire occupational class.

This means the insurer cannot raise premiums for just one person—they must increase premiums across the board for each contract issued at that class. Guaranteed Renewable products are usually offered to all of the occupational classes that a carrier covers. In Guaranteed Renewable products the contract language, the benefit amount (or issue limits), the benefit period, and available options are generally more restrictive, but the premiums are also generally the most affordable.
The definition of disability is generally more basic with the Guaranteed Renewable products. Many of these plans offer a true or modified own occupation definition (see below for explanation) for the first two years. However, after the first two years it can change to what is known as Any Occupation. Any Occupation means that the insurer will pay a benefit if you become ill or injured and cannot perform the main duties of your occupation or any other occupation, by reason of your education, training or experience. Some carriers reduce the definition further to mean not engaged in any occupation for wage or profit. Even some of the non cancelable policies can revert to these definitions after the true or modified own occupation period. Guaranteed Renewable plans also offer shorter benefit periods and fewer, or less liberal, options or riders. These are “No Frills” policies that offer protection for more severe situations and may be the only type of protection your client is concerned about or can afford, as they are typically the most affordable types of plans. Guaranteed Renewable may be the coverage available to clients in occupations that are exposed to great amount of risk.

Non Cancelable Products state that the insurer will guarantee continual coverage and will not cancel the policy as long as premiums are paid. In addition, they guarantee not to increase premiums for the life of the contract, regardless of claims experience. These plans generally have the most liberal contract language, the highest issue limits and the widest range of options. Non Cancelable products’ guarantee of premium level, attractive features and options generally make this type of policy a more expensive product that is only available to certain occupational classes.

The definition of disability offered on most Non Cancelable products is the Modified Own Occupation definition. This defines totally disabled as:

1) Being unable to perform the material and substantial duties of your occupation
2) You are not working
3) You are under a doctor’s care

It can be modified even further by adding the optional Residual or Extended Partial Benefits Rider, which does allows you to work and still receive benefits provided you have at least a 20% loss of income due to changing jobs and are only able to work part time, as determined by your doctor.

Some carriers will pay these residual or partial benefits all the way to age 65; others may limit this. Limitations vary from five years to only six months. Depending upon the occupational class, the modified own occupation definition itself can also be limited to two or five years.

A current trend with the major carriers is to offer most occupational classes a choice of definitions, products, and optional features to select from. This allows you, as the financial professional, to design a plan expressly for your client’s needs.

The most liberal definition of disability is the True Own Occupation definition. This is defined as being totally disabled or unable to perform the material and substantial duties of your occupation at the time of sickness or injury. Under this definition you would still be entitled to benefits if you are able to work in a different field. This definition became incredibly popular in the late 1960’s, especially amongst white collar professionals such as doctors and attorneys.

For example, let’s say that you have a 35 year old client who is a surgeon. A severe finger injury prevents the surgeon from holding a scalpel, but the surgeon is otherwise completely healthy. If the client has a True Own Occupation definition on the Disability contract, he or she would be eligible to receive full benefit— even if he or she begins doing something else and the new occupation ends up paying even more money than the client’s previous career.

Sound like a pretty good plan? Well, it’s been almost too good. When there is such a liberal definition on non cancelable contracts issued to a large number of very high income earners, the frequency of claims filed and the amounts of benefit being paid can cripple an insurance company—especially because premiums are waived while benefits are being received. Therefore, many carriers ceased to offer this definition. Some carriers were affected so adversely by these types of claims that they pulled out of the disability market completely, or aligned themselves with other carriers.

The good news is that True Own Occupation is still available. Several of our carriers do offer this definition on their non cancelable products. However, this definition is limited to select occupations within the top two or three classes and can further be restricted by industry, age, income, state of residence, benefit period or all of the above. True Own Occupation is offered only as an extra cost option to this group. The most restricted industry is the medical field. Very few carriers offer True Own Occupation to surgeons up to age 65. Only one carrier offers it to Dentists. However, you can still let your qualified clients or prospects know that True Own Occupation coverage to age 65 is a possibility.

Somewhat more readily available are contracts that offer a True Own Occupation definition for two or five years—once again, depending on age, occupation, and state. Even with these limitations, the premiums for this type of coverage are usually among the highest on the market. In some cases, it has become so expensive that many highly compensated professionals are willing to forgo this definition for more affordable premiums

One of the areas of disability underwriting is medical underwriting. This is where the process of underwriting the individual disability product can differ dramatically from Life and Long Term Care insurance. With life insurance, medical underwriting has to determine that the applicant is not exposed to or predisposed to something that could possibly end their life prematurely. Long Term Care underwriters need to determine if the applicant is going to need assistance with the ADL's any time soon. Disability underwriters need to make sure that the applicant is going to be well enough to work, full time, for the foreseeable future.

It is important to know, ailments or injuries, or a predisposition to either, that would not affect life or long term care underwriting, could decline someone for disability coverage. Yet there are products available that will provide coverage to those that have been declined elsewhere because they have been deemed an Impaired Risk. These products are not necessarily the most comprehensive plans but they will provide coverage to those who cannot obtain it from the traditional market.

Another area of disability underwriting is financial. Insurers have what are called issue and participation limits, which are charts that indicate the amount of benefit they will issue based on income and other coverage in force. These charts reflect the minimum and maximum benefit amounts. Depending on how high your income is, or how much coverage you already have in force, you may be capped at an amount that represents a small percentage of your income. Disability coverage replaces only a portion of your income, not all of it. Generally, that percentage is less than 70% from all sources, capping, at the high end, around $20,000 per month for select occupational classes, regardless of income level. What if you have a very high-income earner, such as a celebrity or high profile CEO who is looking for more coverage? There are a few carriers that specialize in these High Limit products, and all of them are in some way affiliated with the main one, Lloyd’s of London.
This is not a product, but an IRS code requirement. If the insured is a business owner who wants to provide individual disability benefits to some employees and deduct the premiums as a business expense, he or she has to file a Qualified Sick Pay Plan (QSPP) document with the IRS before they can do so. This document is prepared by an attorney or Third Party Adminstrator (just like a 401K plan document). Many business owners are unaware of this until they file a tax return and include a deduction for the premiums, only to be told that they cannot make such a deduction. Many carriers can provide sample documents and instructions on how to implement this process.
One of our carriers, MassMutual, offers a 10% discount to a husband and wife who apply concurrently. Both must be working 30 hours a week or more in an eligible occupation to get this Spousal Discount.