Adjust Your Assumptions For Impaired Risk DI Cases

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There is an old folk saying that implies that making assumptions is not good. However, insurance professionals know that sound assumptions are the foundation upon which the financial industry is built.

Lets see how this applies to disability income insurance, especially where impaired risk applicants are concerned.

Every insurance professional spends his or her career forming a set of assumptions about risk management and financial planning. These assumptions are based on experience, education and industry product training. We use them to help guide our clients in making hard decisions about the future.

Good agents study, take courses and keep up-to-date with industry publications in order to expand their knowledge and increase the set of assumptions upon which they base their advice to clients. The fact of our business–and veteran agents can attest to this–is that statistics and experience both often show we usually are right.

For example, we know planning works. Insurance works. And diversification of asset works. The “wise old tales” of the business are wise because they are right. As my father, a disability specialist for more than 30 years, often said, “No one receiving a claim ever says they bought too much or offers to give it back.” How do you argue with that?

But do we occasionally get so confident in the principles of the business that we forget to apply them to people as individuals, not statistics? Are we sometimes so convinced our assumptions about financial planning are “right” that we forget some clients do not fit the mold and need to take a different path?

Where many advisors fall into trouble is when they encounter clients who, due to health issues, occupations, financials, or foreign travel or residence, do not fit the norms of our business. Unfortunately, many advisors fail to adjust their set of assumptions to meet the unusual needs of these individuals.

That is understandable, given that the industry focuses on protecting the risks of not just one person, but thousands of people. Occasionally, though, what applies to the large group conflicts with what is best for one person. So you, the advisor, become the great equalizer. As such, you need to strive to see your client as an individual, set aside your assumptions when necessary and find the best tools available to serve that clients needs. This is especially important when dealing with clients in any impaired risk situation, be it life, health, disability, annuities or long term care insurance.

Let me illustrate by using the insurance model with which I am most familiar: The DI insurance sale to a less than healthy client. Every week, I see cases involving the following two assumptions that result in lack of proper protection for the client.

Assumption: “Own-occupation to 65 is the only definition to have.”

I would agree that, as a general rule, it is better to have occupation protection until retirement than for just two or five years.

However, many individuals with serious medical conditions do not qualify for own occupation protection to age 65. Does this mean they are better off without any coverage at all?

Lets look at the facts. Its a fair industry assumption that over 75% of claims are settled within two years, and most within five years. The vast majority of claims of two-plus years usually are significant enough that the “own-occupation” factor is only relevant in a small minority of cases. Thus, a two-year own occupation definition, whether followed by an any-occupation or modified occupation definition or even by no coverage at all, is going to provide the majority of such insureds with adequate protection.

If your client can afford “Own Occ to 65″ and qualify for it, I would absolutely encourage placing it–especially for clients who are highly paid, healthy professionals. However, many of the new modified “Own Occ” contracts are also a good choice. What is certain is that even an any-occupation policy is far better than no coverage at all. I know this for a fact, because I claimed on one and it saved my career.

Assumption: “If the DI policy is not non-cancelable, it isnt any good.”

Yes, having a long-term guarantee that a company cannot alter, rate or rider is the single best thing ever invented in DI insurance. Again, for the healthy professional, you should not encourage anything less. But does this mean that the various types of renewable contracts, association plans or group contracts are bad?

Have you ever heard of non-cancelable auto, home or health insurance? No, but the coverages are still the critical blocks of personal risk management, and you probably own all three of them.

Again, if your client, for whatever reason, cannot qualify for or afford a non-cancelable product, any of these other types of policies are still a good solution to a significant risk problem. Some coverage, even if for a shorter period of time, is better than no coverage all. Ask anyone who has ever received disability benefits.

We would all love to live in a world where all of our clients could get and would buy the very best products available. But that is not reality. As advisors, we can best serve our clients by helping them make informed decisions–based on what they can qualify for and afford.

In the end, our clients assume that we are watching their back, protecting their future and serving their best interest. That is one assumption we should all want to prove as the truth.

is director of disability national accounts for BISYS in the Dubuque, Iowa,office, and founder and president of the Disability Income Advisor and Consumer Association. is e-mail is brad.parks@bisys.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 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.