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The ethical considerations of selling disability insurance

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May is Disability Insurance Awareness Month (DIAM), which of course is intended to raise awareness among consumers about the need to protect their income in the event they suffer a disabling injury or illness and can’t work.

But with such a small percentage of insurance agents actively promoting the need for and power of income protection, it’s also an ideal time to make producers aware of some of the ethical issues associated with offering, and not offering, disability insurance coverage to your clients and prospects.

While many more people have life insurance than disability insurance, most consumers are not aware that they are much more likely to experience an extended disability than they are to die before the age of 65. Americans actually have a three in 10 chance of suffering a disability that keeps them out of work for 90 days or longer at some point during their working career. More than 37 million Americans are classified as disabled, which is about 12 percent of the population. And accidents are usually not the culprit: Back injuries, cancer, heart disease and other illnesses cause the vast majority of long-term absences from work.

This can not only put a paycheck at risk; it can also mean additional medical and care expenses that threaten a family’s financial health. According DIAM sponsor Life Happens, half of working Americans couldn’t make it a month before financial difficulties would set in, and almost one in four would have problems immediately.

If consumers think their employer or the government will step in to cover them in the event of a non work-related injury or illness, they may want to think again:

  • 70 percent of private employers don’t offer long-term disability insurance.
  • Less than 5 percent of disabling accidents and illnesses are work related. The other 95 percent are not, meaning Workers’ Compensation doesn’t cover them.
  • 65 percent of initial Social Security Disability Insurance claims were denied in 2012, and the average monthly benefit paid by SSDI at the end of 2012 was just $1,130 a month.

Ethically, advisors and agents have a responsibility to make their customers aware of income protection via disability insurance. Here are a few things to consider, courtesy of a conversation with Andy Mathews, president of Berkshire Advisor Resource, a disability insurance brokerage in Greenwood Village, Colo., that is part of leading DI marketing organization The Plus Group.

  • Own it yourself: “If you want to sell something, you might want to own it first to really see how it works,” said Mathews. He notes there aren’t many agents actively selling disability insurance in the first place, and many of them don’t have DI coverage themselves because when they were first coming into the business, they weren’t making much money. But as they build their business and become more successful, Mathews says they need to practice what they preach by obtaining their own coverage.
  • Understand the product: Agents don’t always understand the insurance contracts they are selling, and disability policies are no exception. That can be dangerous, and can open the agent up to E&O claims if the agent, inadvertently or not, misleads or misinforms a client about what the insurance contract really covers and does not cover. Mathews said that when he was learning the business, he was taught to read and comprehend every disability insurance contract being offered to clients. There are a lot of nuances in different contracts, as similar terms can be defined differently by carriers. It is also important to understand appropriate levels of coverage for specific clients. While a 90-day wait and benefits to age 65 or 67 might be appropriate for a doctor or lawyer, a middle-market client may need a 30-day wait and two-year benefit to keep costs of the coverage affordable.
  • Be a good field underwriter: Agents that can provide as much information as possible about the client stand a better chance not only of getting the client covered, but also protect themselves by making sure they are securing the right coverage for that client. “Matching the right contract with the right client is paramount,” Mathews said.  “Too much information on an application is always better than too little.” He adds that some producers are hesitant to ask important questions about topics like substance abuse, mental health or chronic back problems. Disability insurance is far from one-size-fits-all. If your client ends up with a policy that doesn’t align with his needs because of your recommendation, another agent (or worse, the client’s lawyer) could come back and ask why they have this instead of that—either way, you likely lose a client and possibly face an E&O claim.
  • Urge clients to be upfront and honest: If a client makes a fraudulent statement on an application, there’s a good chance the carrier could rescind the policy. And due to the prevalence of social media, carriers today have more resources to help in their investigations of questionable claims. Mathews notes a case where a client, six months after obtaining DI coverage, made a claim due to Fibromyalgia. The carrier found that the client had been complaining about the condition for 3 years on social media. Claim denied; policy rescinded. “Tell them what’s going to happen, and that they need to be honest when completing the application. Tell them carriers will look at their prescriptions and their social media accounts if there is anything suspicious,” Mathews said.
  • Looking out for the client’s best interests: Financial advisors or brokers held to a fiduciary standard have a responsibility to talk about products like life insurance, long-term care insurance and disability insurance as part their duty to always put the client’s best interest ahead of their own. Suppose a client you sold a life insurance policy to becomes disabled and can no longer work. “If I was your client and I became disabled and you never talked to me about [disability insurance], the first call I’d make is to my lawyer,” Mathews said.

All that being said, Mathews said that producers have a huge opportunity in the DI market, which is growing and seeing an increased focus on serving more middle-market consumers. “It’s a little more difficult sale, but it pays well and has great renewals.”

And there’s no barrier to entry. “If you are a young agent in the business, you can’t go talk to someone about estate planning, but you can talk to them about DI,” Mathews said. “Learn about it, talk about it, and buy it yourself.”