Guardian Disability Insurance Brokerage

Disability Income Insurance
Group or Individual
by Scott Dial

For most people their income is their most valuable asset. A thirty-year-old, earning $30,000/yr., will earn over $1,000,000 by age 65. If that thirty-year-old makes $300,000/yr., the total jumps to $10,500,000. Furthermore, the risk of a disabling sickness or injury over an individual’s working life is substantial – much more so than for most other types of insurable risks. Consequently, since your income is your most important asset, your financial plan must begin with the protection of this asset.

This protection, in the form of Disability Income Insurance, is available in two forms: 1) Group Long Term Disability Insurance (“LTD”) is usually provided by an employer and, 2) Individual Disability Insurance (“IDI”) which is usually purchased personally. Policies purchased through Professional Associations combine some of the features of LTD and IDI. There are clear differences between the types of coverage; this article briefly examines these differences. At the heart of this discussion is this fact: The best disability policy pays the most benefits in the most claims situations.

CLAIMS

What’s worse than not being covered? Being “covered” but having your claim denied! Any discussion of the differences between coverages, and insurers, MUST begin with claims. Unfortunately, there is NO “official” source for such information. Unofficially, at DisabilityInsuranceForums.com (a well known industry DI forum); the majority of visitors seeking help with claims are covered by LTD. Two problems are most commonly cited:

SOCIAL SECURITY: Virtually all LTD policies offset (reduce benefits while on claim) if Social Security Disability (“SSDI”) benefits are paid. Since initial SSDI benefits are often paid in a lump sum, the disabled employee suddenly faces a demand from the LTD insurer for the payback of the amount of benefits provided by Social Security; monies already long-spent. The inability to repay the LTD insurer can result in action by the insurer against the claimant. IDI policies, particularly for professionals and executives, rarely have a Social Security offset provision; receipt of SSDI will NOT reduce IDI benefits.

An exception to the ERISA and SSDI issues are some Professional Association policies (i.e. coverage available to physicians and attorneys through national or local medical/bar associations).

GUARANTEES

RENEWABILITY: LTD is “Optionally Renewable,” which means that the insurer can cancel coverage. Top IDI policies are Non-Cancelable and Guaranteed Renewable – the insurer cannot cancel coverage for any reason, other than non-payment of premium.

PORTABILITY: LTD is typically not “Portable” - insureds cannot “take coverage with them” if they leave the company for any reason (some LTD policies do have a limited “Group Conversion” feature). IDI policies are virtually always owned and paid for by the insured and provide coverage as long as premium is paid.

RATES: LTD premiums can increase whenever the insurer raises rates. With Non-Cancelable and Guaranteed Renewable policies, IDI policy premiums are guaranteed, typically until age 65 or 67.

DEFINITIONS

EXCLUSIONS & LIMITATIONS: The LTD policy typically excludes and/or limits coverage in many more situations than IDI. Of greatest concern should be limitations on disabilities caused by Mental and Nervous disorders. The very best IDI policies still do not have this limitation. However, it is important to note that IDI policies require full Medical and Financial Underwriting, while True Group (usually covering a minimum of ten employees) LTD policies are essentially Guaranteed Issue. This means that IDI insurers can issue policies with individual exclusions and limitations or decline coverage, while LTD will generally cover all employees (subject to the LTD Pre-existing Conditions clause).

TOTAL DISABILITY: The heart and soul of any disability policy is this definition; it is against this peril that the policy-owner most wants and needs protection. The most comprehensive definition, the so-called Own Occupation definition states, basically, “If, due to sickness or injury, you are unable to perform the substantial and material duties of your occupation, you will be considered Totally Disabled, even if you are at work in another occupation.”You will see some variations within the industry, but the above definition is indeed the most common for a true own-occupation policy.

However, if the above definition were changed to read, “… unable to perform the substantial and material duties of your occupation, and not at work in another occupation …,” the same surgeon would receive no, or reduced benefits. This latter definition is usually the best definition available in LTD policies. There are other, more restrictive definitions, the most restrictive of which resemble the SSDI definition, “unable to perform any job.” Why is this definition so important? No policy, alone, covers 100% of earnings, so the ability to continue to collect benefits while working in another occupation gives a chance of fighting back to prior earnings.

OTHER: Residual, Presumptive, Recurrent, Waiver of Premium and/or Elimination Period, Current Earnings, COLA, Future Increases, etc. There are many many definitions and features that vary greatly between LTD and IDI, as well as between IDI policies. While awareness of and appreciation for these differences is critical to understanding policy differences, for the sake of this discussion, suffice to say that top IDI policies are regularly superior in almost all respects. This superiority translates into the payment of more benefits in more claims situations.

PRICE/COST

You are offered two bags of peanuts. The price of Bag #1 is $1.00; the price of Bag #2 is $3.00. Which is the better deal? You can’t tell, until you know the number and quality of peanuts in each bag. What’s true for peanuts is true for disability income insurance. The price/premium for LTD is, initially, much lower than for IDI. If price is the only consideration, LTD will almost always be the choice. However, when the peanuts are counted, their quality is determined and the cost calculated, IDI is, most often, the superior alternative.

When does this calculation take place? Unfortunately, usually not until a disability has occurred and a claim has been filed. LTD’s lower price, coupled with the relative ease of obtaining such coverage through an employer (remember, true group LTD is typically Guarantee Issue), make it very attractive to someone who believes that they must choose one or the other. Fortunately, you may not have to make that choice …

COMBINING DISABILITY INSURANCE BENEFITS

As stated above, no IDI or LTD policy alone will insure 100% of income. There will be a “GAP” between what you earn and what you can insure, and the GAP widens as your income rises. But the good news is that this problem can be solved by COMBINING IDI with LTD. Here’s how to do it: purchase your IDI policy first. Any subsequent LTD policy, for which you may become eligible, will cover you, and benefits will be paid, regardless of your IDI coverage.

But what if you already own LTD? You may still be able to purchase some IDI. You won’t be able to buy as much IDI in this situation, but what you can buy will reduce your GAP. Important note: with the appropriate optional riders, you can guarantee your ability to further increase your IDI coverage if you lose your LTD, regardless of your health!

PRACTICALLY SPEAKING

As an individual, IDI provides the most benefits in the most claims situations; add LTD afterwards (from an employer or professional association), to narrow the GAP and maximize coverage for your most important asset.

As a Human Resource or Company Benefits professional, your task is different: how to afford the benefits your company offers! You typically do not have the luxury of dealing with cost – your budget is based on price (premium). If your company offers income protection, it will almost inevitably be LTD. However, you do have a no-cost option that provides a critical benefit to employees in this area: provide them with the opportunity to purchase their own IDI policy, at their own expense.

This opportunity can be offered at these times: 1) prior to the initial purchase of company LTD; 2) at the time of the annual benefit elections; 3) to a new employee during their “probation” period (during which they are not eligible for LTD); 4) any time that current LTD coverage is being replaced or canceled. You can explore this opportunity with an IDI Specialist who has dedicated systems for this important segment of the disability industry; systems that will augment and expand your company coverage, all at no cost to your company.

THE PROFESSIONALS

LTD policies are best purchased through insurance professionals who specialize in group benefits. Note that professional association coverage may be offered directly by associations to their members.

IDI policies are best purchased through insurance professionals who specialize in IDI.

SUMMARY

1. Since your income is your most important asset, you MUST insure it, with LTD and/or IDI.
   
2. IDI provides higher quality coverage at a lower COST.
   
3. LTD provides more easily accessible coverage at a lower PRICE.
   
4. Combining IDI with LTD enables you to best protect your full income.
   
5. HR/Benefits professionals can offer an IDI opportunity to employees, at no cost.