Disability Insurance

Chapter 2

  This chapter will discuss the types of coverage available under disability insurance (DI). For instance, some DI coverage may be attainable from employers, car insurance, or even life insurance riders. Some avenues offer a way for families to have DI coverage that is more affordable. This chapter does not go into the SSDI or SSI benefits. Chapter five covers this avenue of benefits.

Where is DI coverage available?

  There are several different places to look for DI benefits.

·  Company Provided DI coverage

·  Group coverage

·  Individual coverage

·  Riders on already existing insurance coverage

·  Social Security Disability Benefits

  This chapter will be highlighting primarily the first three avenues available to a family. The first chapter has discussed how to determine a family's need for coverage and the amount needed to survive if the family's breadwinner is disabled. As an insurance agent, you are most interested in number three because this is how you make your commissions that support your family. However, ethically, we cannot overlook that a family may be able to qualify for coverage through a company-provided plan or group plans that may give little or no commissions. If the family has done their research and is comparing coverage on the basis of price, to be an ethical agent one must present the whole picture. An agent must be careful not to forget to divulge an important fact to help them determine their financial matters. Being trustworthy will earn a client's trust. Even if a sale is lost at this point, it may be gained later on through a referral.

Employer Provided Disability Coverage

  Employers may offer group disability plans or have an insurance company they can recommend that may give the family discounts because of their employment. The employee needs to ask about this since the company may not advertise it. Knowing what to ask is also important. If the employee does not know both the duration and quality of the plan, it will be hard to make comparisons with other coverage available. When checking into health insurance, people ask about the premiums of coverage with different deductibles. The same is true when comparing DI policies.

  An advantage of employer group disability income insurance is the lower cost. Such plans normally present a lower cost to the employees and their families. Another advantage is that the employer is working as an advocate in dealing with the insurance company. However, if the insurance company finds that providing benefits for the employer has become too high of a risk, the insurance company (insurer) may decide to cancel the employee's coverage.

Employer-Provided DI Coverage offers

the policyholder a lower premium but

lack of control is a primary disadvantage.

  This leads to the disadvantages. Lack of personal control is the primary disadvantage. Additionally, there may be restrictions regarding the amount and duration of benefits provided the definition of disability, the integration of the benefits provided by the plan with those provided by Social Security and any other sources of DI benefits. Another drawback is the probability that a person could not continue the coverage if they terminated employment with their employer. Each person will want to check with the insurer to see how long coverage would last after termination of employment. Coverage may terminate immediately or continue on for 30 to 90 days if premiums are paid. Health insurance or dental insurance is something a person checks into upon termination of employment. Adding disability insurance to that check list is important.

  One of the most important things to remember in company provided DI plans is that the employee does not have sufficient control over their benefits, state some experts. The employee lacks (1) the ability to maintain these benefits for the entire period deemed necessary, (2) the ability to know exactly what they will cost and (3) the assurance that the insurer will pay when the income is decreased or stopped due to a disability. Besides the inadequate time allotted for recovery, the benefit amount can be reduced by other benefits received. This is similar to other DI policies that reduce the benefit because of Social Security benefits. The difference here is that employer provided plans may also reduce benefits if the policyholder is receiving their employer's retirement benefit.

  The employer-provided DI plan may not cover the employee's income adequately. The employee may only receive 40 to 60 percent of their income before taxes. After taxes the employee would net much less. If an employee found himself or herself in such a situation, they would need to purchase additional coverage so the percentage goes up to 65 to 70 percent of their after-tax income coverage. This additional policy is especially a good idea when you remember that the employee would lose their DI coverage if their job ended. If the secondary policy allows the policyholder to buy more DI coverage without passing a health exam, it guarantees that the policyholder will always have coverage.

  There is no medical policy that guarantees coverage at a guaranteed price. People would flock to such a product if it existed. However, disability income policies do contain specific guarantees for individuals who want to purchase them.

Association or Group Disability Insurance

  A person may be a member of an organization or association that offers group DI benefits to their membership. These plans may be very attractive due to their low premiums. The members of group plans normally are not subject to medical examinations that could reveal an uninsurable condition. As a result, every member of the group is entitled to coverage, regardless of any health conditions. No individual person's coverage may be canceled. Only the entire group may be canceled by the insurer.

  On the darker side, these plans can be inadequate because they possess weak definitions of disability. A person may not be considered disabled under the policy's definition if the disability allows the insured to do any job available, regardless of how unskilled the job may be. Another disadvantage is that many plans offer benefits only in the event of an accident and/or only for a very limited period of time. This translates into problems if the family experiences a disability and is not covered for the full term of the disability. Another disadvantage of group plans is the insured's lack of personal control over their benefits. He or she may be canceled without any control over the matter. A person may be left with no DI coverage at all, if the insurance company decides to terminate the offering of the coverage for their organization. Under a worst-case scenario, a person may be disabled or in ill health when their group plan cancels leaving them to attempt to find individual coverage.

Group DI Coverage offers the policyholder

a lower premium but may also

offer a weak definition of disability.

  There are several different kinds of eligible groups for DI coverage. The most familiar kind of group is the singular employer group. The employer offers the employees group coverage.

Since the size of a eligible group, usually ten, is governed by law, the employer may be too small to offer coverage to their employees without assistance. The smaller employers can band together to have the same DI benefits as the larger companies. When this happens it is called multiple employer trusts (METS).

  Unions, which are groups of employees in related fields such as the Carpenters Union, can offer their constituents DI coverage. Federal law mandates that a trust be formed to handle or administer the DI benefits for the unions.

  In recent years, we have seen a rise in creditor-debit group insurance which is offered by the lender to the borrower of the money. This type of insurance is not limited to just DI benefits; it may also include life insurance. The purpose of both the life insurance and the disability insurance is to protect the lender to whom the policy's benefits are paid if the borrower becomes disabled or dies before the debt is paid. Some mortgage companies have started offering policies to pay the house payment if the breadwinner becomes disabled.

  The key to all the group coverages we have discussed is their common denominator: the employer, union, association, or group borrowers to a lending institution. A person may even be eligible for group coverage because they took out a certain credit card, which may constitute a group in an insurer's eyes. When these types of plans are mass-marketed, they are more susceptible to adverse selection.

  Statistically, few people own a disability policy. This is especially true with group coverage. Two big selling points of group plans that may be overlooked are the lower individual costs and less restrictive underwriting. Many businesses, unions, and other groups offer group health and/or life coverage, but few offer DI coverage. This translates into an opportunity to market coverage to people who more than likely do not have it. The tax advantages to the employer may be enough incentive to go ahead and add a DI package for their employees.

Individual Coverage

  The individually owned DI coverage may be the most desirable. The policies issued by the insurance company state that the DI contract may not be canceled during the insured's working life, and typically stipulate that the insurer may never, during that period of time, charge more than specified in the policy on the date the policy was issued. This type of policy is referred to as non-cancelable and guaranteed renewable coverage.

  Annually renewable disability income (ARDI) policies work much like term insurance in that the price starts low and increases a little every year. The traditional DI policy costs more initially, but the premium is fixed throughout the policy's entire life. ARDI policies allow people to get coverage who may not otherwise be able to afford it during the beginning of their working years. Depending on the insured's age, premiums can be cut 25 to 50 percent off the initial cost. Hopefully, as ARDI policies become more and more expensive, the insured's income will also be rising.

  The prospective policyowner is going to want the highest quality of plan available. This includes not only the options/riders available but also an insurance company with an economically strong background. When searching the product world, reading policies and researching companies, an agent should keep several points in mind to help offer the best policies.

· The policy should define disability as the insured being unable to perform the duties required by their occupation. This definition of disability assures the insured that they will have coverage within their occupation for as long as possible.

· Insurance companies can be aggressive in seeking business. This aggressiveness can be a great advantage for an insurance agent since different insurance companies offer competitive rates, options available, and terms of the policy. The market is always changing, and products constantly change. Knowing the products sold, and keeping up to date with the latest ones, allows insurance agents to offer the best policies to their clients.

· The financial standing of an insurance company can never be overstated. A policyholder is obviously going to want the insurance company to be around when they need to collect benefits. There are several sources available providing financial ratings of insurance companies. Chapter six touches briefly on rating systems.

  The risks of incurring a disability increases daily. The killer diseases of the past are no longer killing people. AIDS related claims are up. The legislation President Bill Clinton signed into law in August of 1996 protects health insurance coverage from being dropped if a person can no longer work. The premiums must then be paid for by the insured, but coverage is still possible. If a person buys a DI policy that is guaranteed renewable for life, it will do just that.

End of Chapter 2

United Insurance Educators, Inc.

2012