Broker, Beware The Definition Of Disability Trap

Sometimes the spreadsheet doesn’t tell the whole story. That is especially true when you are comparing group disability insurance contracts.

Understanding the intricacies of a disability contract is difficult for even the most seasoned disability expert. However, learning to understand the key elements of a disability contract is critical. Nothing is worse than selling a disability contract that fails to pay a benefit that the employer, the employee and even you think the insurer should be paying. You can find yourself unable to explain what happened, consequently losing credibility with your client.

One of the key elements in a disability contract is the definition of disability.

Because decisions about who will qualify for disability benefits and who will not will depend on the definition of disability, it is imperative that you understand the differences in definition wording and how these subtle differences in wording may impact the claims outcomes.

Let’s look at the wording and effect of one standard disability definition.

A typical definition of disability has 2 parts–an occupation test and an earnings test. In most situations the claimant must meet each of these tests in order to be considered disabled and entitled to benefits.

The occupation test requires that the employee suffer a “loss of duties,” meaning that the employee must be unable to perform some occupational duties. Some contracts may require a loss of all material duties; some only require a loss of one material duty. How many material duties and the degree of the material duties that a claimant must be unable to perform are important. Not being able to perform one material duty vs. not being able to perform all material duties, all other things being equal, provides a lower threshold for establishing disability.

Another important aspect of the occupation test that should be communicated to your client is the definition of the term “occupation.” Occupation is not the same as “job.” A job is what you do for a specific employer; the term “occupation” refers to the duties as they are performed in the national economy.

For instance, an administrative assistant in Minnesota may be required to shovel snow as part of an administrative assistant job for a specific employer, but the occupation of administrative assistant as regularly performed does not require shoveling snow. Therefore, the administrative assistant in Minnesota who can perform all other administrative duties except shoveling snow would not meet the occupation test, but that administrative assistant would meet the job test.

Use of “own job” or “own specialty” provides a richer definition of disability, because it creates a less stringent test than a definition based on “own occupation.”

The other test in the definition of disability is the earnings test, sometimes referred to as the “loss of income” test. Essentially, an earnings test provision requires that the claimant must not be able to earn a specified level of income due to his or her disabling condition.

Most disability contracts require a 20% loss of earnings to meet the definition of disability. Important factors that will influence this test are: “What is the definition of earnings?” and “Does the 20% ever increase over the life of a claim?” For instance, if the required loss of income increases to 40% after some period of time, a claimant is less likely to qualify as disabled. As you can see, how these questions are answered will make a difference as to whether a claimant will qualify for benefits.