Over the course of the last two decades, the disability income marketplace has been forced to reinvent itself.
This is due in large part to the rise in fraudulent claims that took place throughout the 1990s as a result of policies written with fairly liberal definitions. To offset the losses, insurance carriers in the U.S. have steadily reduced limits and benefit amounts.
Consequently, the requirements surrounding qualifying for coverage and ultimately receiving benefits have become far more stringent. Yet according to the American Council of Life Insurers, Washington, 8% of working-age Americans were unable to perform their jobs in 2005 due to some sort of chronic condition or short-term disability–making it clear that the need for quality disability insurance remains very real.
To meet that need, many insurance companies today are adding to their existing product offerings in order to provide working Americans with the far-reaching coverage that was once available to them. And while the policies of the early 1990s with their under-priced premiums, loose definitions and lifetime benefits are a thing of the past, insurance carriers are once again taking steps to change the landscape of disability income insurance to provide the quality and scope of protection necessary for individuals to safeguard their incomes without jeopardizing their own bottom lines.
The current landscape
Today, the most prevalent type of disability income coverage is group long-term disability coverage offered via an employer. While these policies do offer some protection, those of us in the financial services industry know their downsides.
For one thing, group policies generally have very strict definitions that insureds must meet before they can qualify for benefits. In addition, the group policies often reverse discriminate against highly compensated employees, because monthly benefits cover 60% of an individual’s salary and are typically capped at $10,000 to $15,000 a month. For highly compensated people in particular, supplemental coverage can be absolutely essential–whether purchased through stand-alone policies or offered as an added benefit through employers.
Unfortunately, the shift that has taken place in the industry has left consumers with the general misconception that it is virtually impossible to qualify for disability income insurance at all and, if they do qualify for coverage, that benefits will not get paid. As a result, many people question the need and even the wisdom of purchasing a policy that, to their minds, is not likely to offer any benefit in the long run.
The good news is that recent developments in the industry have made it easier for advisors to overcome their clients’ misconceptions. With a handful of new policies and riders available from select carriers, we are now in the position to effectively help our clients secure the quality coverage they need to protect against both short- and long-term disability.
Own-occupation contract revamped
In the early 1990s, many insurance carriers stopped offering own-occupation contracts altogether because they were too broad and, therefore, the risk for claims too high. Generally speaking, this type of policy paid insureds in the event that they were unable to perform their normal job duties even if they were employed in another role or field.
This type of coverage, however, is making a return in the form of the own-occupation rider. Especially valuable for doctors and other medical professionals, as well as litigators, the best contracts include a residual disability rider that protects a client’s most important asset–his or her standard of living. As a result, newer policies give individuals the choice of added coverage that will pay if they cannot work in their own occupation but work in another.
Extended benefit periods
Another option that has recently become available offers an extension of benefits to age 67 or a graded lifetime benefit to replace income for a longer period of time. This is especially important should a client become disabled for life, since it effectively extends a portion of the benefit beyond the normal age of 65.
A graded lifetime benefit will pay the level benefit until age 65. The benefit received after age 65 will depend on the age at which the insured became totally disabled. It’s important to note that an individual must remain totally disabled to qualify for these benefits after age 65.
Generally speaking, if the insured becomes disabled before age 46, and remains totally disabled, 100% of the benefit amount will be paid up to and beyond age 65. If, however, a total disability occurs after age 46, the insured would receive 100 % of the benefit after age 65 and less thereafter. For example, if the insured becomes disabled at age 55, the benefit amount paid after aged 65 is scaled back to approximately 50%. This protects carriers by combating the likelihood of an insured’s retiring solely on disability benefits.
Very often overlooked, a retirement plan completion rider (which can also be structured as a stand-alone policy) can be very critical for certain individuals. Essentially, this rider makes it possible for a claimant to continue making contributions to a tax deferred annuity or trust account to replace 401(k) and profit-sharing plan contributions. This differs from a lifetime benefit in that it ensures a fully funded retirement plan regardless of whether of not the insured recovers or remains totally disabled. By comparison, a lifetime benefit makes no such contributions and has no advantage to someone who is able to recover or return to work.
The retirement protection rider, then, is especially important for those who are disabled for a short time but ultimately return to work, because a standard policy will discontinue benefits after age 65. In this case, without the rider, affected claimants also would lose the compounding of the missed retirement plan contributions.
One of the most significant developments in the industry is the availability of an increase in coverage. Limits on benefits allowed to doctors specifically have increased for the first time in 15 years. Additionally, insurance companies can issue $30,000 a month of tax-free benefit, which is more than the $15,000 seen in the past.
Relatively new is the ability to add a catastrophic rider to disability income policies. This benefit, which is similar to a long-term care policy, can provide clients additional monthly income for nursing, equipment or minor home renovations in the event that a disability results in the loss of two or more activities of daily living, or ADLs.
It is important to note that not all carriers offer these products and some are so new, or so little understood, that they are often not suggested. Bearing in mind, however, that most disabilities are not considered total and that the ACLI reports that a full 38% of all disabled Americans are able to work in some capacity–these riders can be critical.
It is our responsibility as advisors to educate our clients as to why disability income insurance is as important as life insurance, as well as what their options are for securing quality, effective coverage.