In managing long-term disability income for high-net-worth clients, or even for advisors themselves, there are several challenges to ultimately seeing benefits paid, according to Evan Schwartz, founding partner of Quadrino Schwartz, a New York-based law firm that handles a variety of insurance claims for national clients.
One of those challenges is the policies themselves. Advisors and clients need to understand their policies and exactly what they cover, Schwartz said. “They need to know and understand what their policies say: how disability is defined, what are the limits on their coverage and when they would occur, does it provide for total and partial or residual benefits?”
Having residual coverage becomes especially important, Schwartz stressed, because “the vast majority of claims that I see aren’t from someone who had an accident and immediately became disabled. More often it’s an injury or sickness that progresses, where someone is limited in their ability to work and ultimately makes a decision that they’re unable to continue working at all.” Professionals who continue to work in a limited capacity and don’t have a residual provision in their policy can hurt their ability to claim benefits to replace the income they lost as they slowed down. “If you’re actually doing some of the responsibilities of your occupation, it becomes harder to make the argument that you can’t do it,” he said.
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As an example, Schwartz described a dentist with a condition that makes it difficult to hold instruments and see patients. “If you have to work fewer hours and working fewer hours means you might have to lay people off or you won’t be able to generate the income you were earning before and you’re losing your patient base, your practice will be ultimately unsellable,” he said. “If you don’t have residual benefits at the time you stop working, the company may say, ‘You don’t meet the definition of total disability. You may only go in once or twice a week or it may have taken you longer to work on a patient, but you could still do it, so we don’t think you’re totally disabled. You’re partially disabled, but you don’t have a rider for that.’ Then you stop working entirely because your practice isn’t generating revenue anymore and they say, ‘Well, you were never totally disabled and now you have no occupation to be disabled from.’”
Continuing to work in a limited capacity is bad for professionals in several ways, Schwartz said. First of all, “they’re doing nothing to improve their own health,” but they’re also adding stress and potentially hurting their claim.
Instead of working as long as they can before they’re forced to stop working, he suggested high-income professionals turn to a lawyer as soon as they anticipate a claim might be in their future “If you think you might have the need to access your disability policies, get to a lawyer who understand how this process works as soon as possible so you don’t do one of the things that will wind up potentially ruining your ability to successfully submit and collect on one of these policies.”
Also making it harder to claim long-term disability benefits is the fact that insurers are less litigious these days. Disability insurers are more likely to scrutinize a claim immediately, Schwartz said, than they were when he started handling disability claims back in the mid-90s. Back then, a lot of companies oversold policies and went out of business when “claims started coming in in droves,” according to Schwartz.
Many went out of business or were taken over by reinsurers, and “the whole market shrank until five or six years ago. Now all these companies are taking a very, very, very careful look at claims at the time of filing. Back in my early years, they would just terminate claims when they were losing money, then try to buy somebody out during litigations.”
Insurers are also less interested in litigation “in part because they don’t want their reputation impugned by having a lot of lawsuits and being bad-mouthed on the Web,” Schwartz said. That, and it’s simply a lot cheaper to scrutinize a claim and deal with problems at claim time. “If somebody has an opportunity to resolve a claim early, then they’ve paid less to their lawyer, which means their net’s going to be higher. Now the insurance company can offer less money knowing the person’s not into their lawyer for a ton of money, and they didn’t spend money defending the case.”
A less litigious environment means it’s more difficult for a claimant to get benefits, though. “They’re going to put an insured who’s filing a claim through his paces,” Schwartz said. “The vast majority of people who don’t have a severe accident or horrible sickness are going to encounter frustration and barriers during the claims process and, in this day and age, are probably going to need a lawyer to assist them.”
It can be hard for claimants to establish their occupational duties and how their medical condition prevents them from doing those duties, information insurers are looking for to determine the validity of a claim. Complicated financial issues can also affect how benefits are paid, Schwartz said.
A typical claim lasts about four months, Schwarz said, but the complexity of the claim has a significant impact. “Business owners who have more complicated financial reporting have much more difficulty than a W-2 employee whose tax return shows their earnings. If you own a business and you’ve got K-1 earnings, deductions, employees, maybe your spouse works in the business–you create a lot of questions for the insurer when evaluating the financial side of things. Then there’s the question of how complicated your medical condition is.”
Schwartz recalled a client who was a high-level Wall Street worker with extensive group and individual coverage. “He came in and said, ‘I left my job about four months ago.’” The client hadn’t seen a doctor and wasn’t sure if he was technically disabled, but quit working because he was unsatisfied with his performance. By asking a lot of questions, Schwartz suspected the client’s disability might have been psychiatric in nature, such as depression or anxiety. “I told him, ‘Look, I’m a really good lawyer and I can do a lot of amazing things, but without medical support I can’t help you. If I don’t have a doctor supporting your claim, it’s dead on arrival.” A forensic psychiatrist examined the client and was able to opine that he likely suffered major depression and anxiety at the time he stopped working, and could backdate his total disability. The client subsequently won his claim.
In securing coverage in the first place, Schwartz suggested that consumers or advisors find a “broker who understands the long-term disability market and their particular profession. It’s helpful to have a broker who understands that particular profession and the products that are available to people in their profession.”
It’s also important to find an independent broker. “What might be a good product for one company, they have others that aren’t as good as what other companies sell. Better to have a broker rather than an agent,” Schwartz said.
Schwartz recommended high-income professionals secure individual coverage before adding any group coverage through their employers, not just because the features are frequently better, even with the higher cost, but because they can avoid the income underwriting component on group policies. “If you got hired by a law firm and you got covered based on a certain percentage of your income, that policy will prevent you from buying individual coverage because they’ll factor that [group coverage] in to determine how much you qualify for. In group coverage, the underwriting is a lot more simplified, so you’ll want to have your individual disability policies first and then get your group coverage.”
Another drawback to group coverage is that it is frequently not guaranteed renewable or non-cancellable, Schwartz said. As long as professionals pay their premiums, individual policies can’t be cancelled or changed the way group policies can.
For business owners like independent advisors and other firm leaders, they should look beyond individual coverage at policies like key man insurance, disability buyout coverage and business overhead expense coverage. Those types of products will help high-income professionals “given statistics that you are more likely to be disabled during your lifetime from your job than you are to die before” you reach your life expectancy.
Even if advisors and high-income professionals don’t become disabled themselves, if they have partners who leave due to disability, those products can help smooth the transition. “The concept that one of your partners is going to get sick and be unable to work and that it’s going to trigger some sort of buyout, to have that type of coverage available to both the partner and the entity itself will help financially deal with the loss of a key person. When that person’s not there generating revenue, the business overhead expense policy will help cover the expenses of the practice.”
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