Catastrophic Disability Coverage: What And Who Is It For?

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Today, individual disability policies offer a host of specialty features that add value for the customer, including a rider, sometimes as a separate contract, that pays an extra benefit if the insureds disability is considered catastrophic.

What is a catastrophic disability? It refers to a disability that causes the insured an irrecoverable and irreparable loss of certain functions. An example would be leaving an individual with an irrecoverable and irreparable loss of sight, speech, hearing or the use of both hands or both feet.

A catastrophic disability could also refer to a disability that leaves an individual totally disabled due to an irreversible form of senility or dementia, paraplegia or quadriplegia. This level of disability may be the result of an accident or an illness. While not all spinal cord or head injuries and serious diseases, such as a stroke, will lead to catastrophic disability, they are common causes of it. (See chart.)

Although the chances of suffering a catastrophic disability may be relatively low when compared to more common disabilities, such as a back injury or carpal tunnel surgery, the related costs can be great.

People who suffer catastrophic disabilities incur many additional expenses that substantially impact their quality of life and increase their cost of living. This may make a disability policy that only provides income replacement insufficient. Among many examples of added expenses are special medical equipment and on-going in-home health care.

Producers can help their customers protect themselves from the financial obligations that can result from a catastrophic disability by discussing the need for, and availability of, the coverage.

Following are some tips for approaching clients about disability insurance, as well as for introducing the concept of catastrophic coverage:

Make disability insurance a part of the overall financial planning process. Need for this coverage should be addressed along with life insurance and retirement savings.

When assessing a clients current monthly income and expenses, ask the person to consider how income and expenses would be affected by a long-term disability.

Compare the costs of other types of insurance with the potential benefit (i.e., $150 per month to protect a $30,000 car; $200 per month to protect a $250,000 home). Next, determine the value of the persons future earnings based on current age and number of years to retirement and compare the cost of individual disability insurance (i.e., $150 to $250 per month to protect future earnings). Clearly, the persons income is usually the greatest asset–and, most times, its what pays for all of the clients other insurance premiums.

Share statistics. Its important that your customers know that the probability of a working person becoming disabled for a period of 90 days or more during his or her working years is three times greater than the risk of death. (Source: Commissioners Individual Disability Table A.)

Ask your customers about their plans for continuing their income if they become disabled. They will likely indicate that they havent planned for a disability or perhaps that they have some coverage through their employer. This is an opportunity to introduce the basics of disability insurance and the availability of catastrophic disability coverage.

Explain that a catastrophic disability rider is an inexpensive way to increase the maximum potential benefit under the disability policy. Depending on a number of variables, including the clients age and the type of coverage purchased, some catastrophic riders can cost as little as $35 per year.

Who are your prospects for catastrophic coverage? Due to the minimal cost, almost anyone who is not already catastrophically disabled is a good candidate. Younger customers are excellent candidates because they generally dont imagine themselves becoming unable to work due to a serious illness.

Some insurers offer catastrophic disability contracts, while others offer a rider that can be added to a basic disability insurance policy.

When offering this coverage, producers should be sure to explain and clarify the exact terms and conditions under which the insured would receive a catastrophic benefit as well as the benefit amount. Specifically:

Note the definition of catastrophic disability. Definitions can vary broadly. In fact, some require that the insured lose the ability to perform at least two activities of daily living or become cognitively impaired.

Discuss how the catastrophic benefit amount is determined and if a higher catastrophic benefit is paid at the start of the disability. Some insurers pay 120% of the catastrophic disability benefit for the first 12 months that benefits are payable. This additional benefit during the first 12 months can be used to help take care of the unknown, additional costs of a catastrophic disability.

Catastrophic disability coverage offers significant opportunities for producers to add extra value when helping customers select the right disability insurance coverage.

is vice president, individual disability insurance sales in the White Plains, N.Y., office of MetLife. His e-mail address is jjacobsen@metlife.com.


Reproduced from National Underwriter Edition, June 16, 2003. Copyright 2003 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.