If A DI Prospect Has A Health History, Consider Impaired Risk DI

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The individual disability insurance underwriting process may be more rigorous than any financial product sold within the individual market.

As a result, industrywide, the percentage of applicants for DI coverage who fall into the “impaired risk” category is higher than many other products. This does not mean, however, that applicants who have impairments will be ineligible for DI coverage.

In fact, many impaired risk applicants are offered coverage on standard policy forms.

Still, other applicants can get coverage, but under special “impaired risk” DI policy forms, or IRDI for short.

When you have a client who wants DI insurance but who has an impairment, it helps to know which way the underwriting is likely to go. The following will give you the basics.

As a DI industry practice, many impaired risk applicants are issued a policy with a change to the coverage requested in the application. In these situations, applicants may be offered coverage with a change to the elimination period or the benefit period, an endorsement rider that excludes coverage for certain pre-existing conditions, and/or a change to the premium rate.

Such policy and/or rate modifications are intended to adjust the contract to cover the risk appropriately. However, when coverage is issued with one of the adjustments described above, the policies are often issued on a standard policy form.

The most significantly impaired risks, which may represent 10% to 20% of all DI applicants industry-wide, may not be eligible for coverage on a standard policy form, though. Some of these individuals may qualify for the “impaired risk” DI coverage, mentioned above. Available from a very limited number of companies, these IRDI policies differ from typical DI policy forms in several ways:

IRDI coverage may be based on a group-type policy, known as a “group trust,” with each insured receiving a “certificate” of group coverage rather than an individual policy.

The premiums for IRDI may be “conditionally renewable,” which means the coverage will end for all insureds if the group policy is cancelled.

IRDI often uses a “graded benefit” structure, which effectively phases in the maximum level of benefits payable over a number of years, e.g. 25% in year one, 50% in year two, 75% in year three, and maximum benefits payable thereafter.

The contractual language is usually much more restrictive than standard policy forms, in that “own-occ” definitions of disability or residual disability features are usually unavailable.

Notably, the underwriting process used by companies that offer IRDI coverage is usually much easier than the process the applicant may have undergone initially and which resulted in a declination. This is because companies that offer IRDI often use the medical documentation developed by the company that initially declined coverage.

From an agents perspective, informing a client that a DI policy was rated, ridered or even declined, is not likely to be an easy conversation. But there are some simple steps an agent can take to prepare themselves and their client for this possibility:

First and foremost, sell, resell, and sell again the applicants personal need for DI coverage.

Always complete in detail a non-medical Part II, whether or not a paramedical or full medical exam is required.

If the completed Part II reveals the client has a health history that is likely to lead to an adverse underwriting action, let the applicant know immediately.

If it seems likely that an applicants health history will result in a rated policy, quote the coverage with a rating if the illustration software has this capability.

If the software cant illustrate a rating, consider quoting coverage at a lower occupational class to illustrate the effect of the rating.

Bottom line: Keep in mind that impaired risk DI coverage is available. Fortunately, many impaired risks are covered on a standard policy form, which has been rated or ridered. This means the client may still benefit from many important benefits, including own-occ coverage, non-can premiums, presumptive disability benefits and other valuable policy features.

, CLU, is a life and health insurance broker in Longmeadow, Mass. You can e-mail him at mrameigh@msn.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 18, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.