Disability Insurance

Purchasing

Index

• Disability Insurance Generally: Where does one begin?
• The Important Components
• Your Preparation Before Meeting with an Agent
• Meeting with the Agent
• The Application
• The Policy
• The "What In the World Does This Mean" Test
• Agents and Brokers
  

Disability Insurance Generally: Where does one begin?

Disability can be even more complicated than other types of insurance. The policies are often filled with undefined terms, such as "the important duties" and "gainful employment."

Fine line distinctions are made between "total disability", "partial disability", and other types of "disability".

There are differences between policies regarding how long benefits must be paid.

Different requirements are used to qualify for coverage initially, then stay qualified over time.

Some policies contain benefit increases to keep up with inflation. Others provide no such adjustments; thus their value starts to evaporate the day the policy is purchased. Without a COLA, (Cost of Living Adjustment), the benefits can diminish in value by about half, every eight to ten years.

There are different standards applicable to the policyholder's obligation to continue paying premiums once he/she is no longer working normally.

Some contain mathematical formulas for computing benefits that are difficult to understand.

Some premiums can never be raised. Others can be increased without restriction.
The best way to approach disability, or any insurance purchasing analysis, is to organize yourself. (See Notebook)

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The Important Components

The most important components in a disability policy are:

• The occupation(s) insured.
  
  
• The definitions of each type of disability covered (total, partial, etc.)
  
  
• The benefits to be paid for each type of disability.
  
  
• The duration of payments.
  
  
• The cost of living adjustment provisions (if any).
  
  
• The premium cost and whether premiums can be raised in the future.
  
  
• The cancellation provisions (if any).
  
  
• The dispute resolution provisions (if any).

Your Preparation before Meeting With an Agent

Open your Notebook to the preparation section. Ask yourself detailed questions about what you are really seeking:

What is the precise occupation for which you are trying to insure yourself? Is it highly specific such as musician, computer programmer, carpenter, surgeon? Or more general such as business administrator? An injury that may be disabling to one type of occupation may not be disabling to another.

How large a monthly benefit are you seeking? Do you need a benefit large enough to make up the bulk of the actual income you would lose, or merely that amount necessary to supplement your income or savings from other sources? This will have a big impact on your premiums.

How soon do you need to have benefits kick in? Do you have any work benefits that would provide initial income, such as accumulated sick leave or other such arrangement? This will also effect premiums.

What is your tax situation and how might that effect your analysis of what is needed?

How long do you need your benefits to continue? For life? To age 65? Or just until you can be trained in some other occupation?

What kind of work are you suited for - by reason of your education, training and experience - other than your current occupation? Do you want your policy to require that you enter another of these occupations should you become disabled from your current line of work?

What disabilities do you expect to be covered for? Specific disabilities or for any illness or injury? Mental as well as physical?

Do you want your benefits to include a COLA formula?

What other issues are important to you and your family?

As always, take good notes on these issues and save them in your insurance Notebook.

What do you need to know about the claims handling track record of the company whose coverage you are considering?

 

Meeting with an Agent

Save any marketing brochures, pamphlets and ads presented by the insurance company. These may be beneficial should there be any inconsistency in policy coverages.

Question the Agent. Ask the questions you have prepared in the above section.

• With which company's policies is he or she familiar?

• How would the agent compare the different companies and policies?

• Does the agent feel that one is better than another?

• Is this based on specific questions you have raised?

• Does the agent have copies of each policy under consideration? If not, why not? How long will it take to obtain them?

• What does the agent know about the claims handling reputations of the different companies? On what is this knowledge based?

• How would the agent evaluate the amount of disability coverage you need?
  

The Application

The application submitted to the company is very important. Any errors or inaccuracies could result in big problems.

For this reason it is probably best for you to complete the application yourself and to provide complete and thorough answers to the questions.

Never sign an application - or any insurance paperwork - without reading and understanding what you are signing. If you do not understand anything, ask for an explanation and take down notes. Save these in your file. Again, these notes can make a big difference in benefits paid in the future. This is especially so for disability insurance.

There are some very basic rights that you must have as an insurance consumer, and that should be expected of any insurance company you deal with.

The Policy

1. Ask for a full and complete disclosure of all the key provisions in any policy you are thinking of buying. This should include an explanation of what is and is not covered by the policy. You need to know about all important coverage, exclusion, limitation and restriction provisions, as well as dollar deductions, waiting periods and limits.

2. Based on the information you provide, you are entitled to receive an evaluation of the amount of coverage you need, and an explanation of the basis for the amounts that would be provided. This is in order to assure that the coverage under the policy is sufficient and in order to avoid underinsurance in the event of a loss.

3. You should be sure to read the insurance application yourself, before submitting. If there is any significant misstatement or omission in the application you could wind up paying premiums for years only to have the company rescind (refuse to honor) your coverage at the time of a claim.

4. You have the right to be shown a copy of the actual policy being purchased, not just a proposal or summary, before you purchase it.

5. Ask if your policy is governed by ERISA. ERISA policies eliminate important rights under state insurance laws. Always ask the agent whether there is an alternative, NON-ERISA policy available. This is very important (see our ERISA section, FAQs and Glossary for more information)

6. Ask the agent whether any recent, substantial fines, disciplinary actions, jury verdicts or appellate rulings have been rendered against the insurance company you are considering. Bear in mind that the larger the insurance company, the larger the number of its policyholders, and the greater the chance a company may have made mistakes in the past. There is a difference between making mistakes and patterns of fraudulant or unfair claims handling.

7. In many situations, if the company's insurance agent has misstated the coverage offered, the company can be held responsible and must make good on the agent's promises.

The "What In the World Does This Mean" Test

Question specific policy phrases. For example, if the policy mentions inability to perform your "substantial and material duties", what does that mean? What are your substantial and material duties? Does this mean inability to perform all of your substantial and material duties? Most of them? Some of them?

Do the same thing with any other phrases you do not fully understand, such as any distinctions between total and partial disability; references to rehabilitation or retraining requirements; clauses about how to calculate the amounts of benefits you are entitled to receive; issues about how COLAs are calculated; how long benefits will be paid; whether or not there are any deductions that can be made from other benefits such as Social Security, pensions, retirement benefits, or any other monies are are entitled to receive.

Ask the agent to explain mathematical formulas used for the calculation of benefits.

As always, take notes on these things and save them in your Notebook.

Agents versus Brokers

You may be able to purchase a policy from an insurance agent, broker or directly through the insurance company.

Agents are representatives of the insurance company. Two types of agents are Captive agents and Independent agents. Captive agents work for one insurance company and sell only that insurance company's policies. Independent agents sell policies from several different insurance companies.

Brokers may be considered representatives of the insurance company if the broker is paid by the insurance company. However, if the broker is paid by you and they represent your interests, the insurance company may not be responsible for their representations to you.

Keep in mind that some agents and brokers do not fully understand the specific but important details of the policies they are selling. Therefore, before purchasing homeowners insurance, make sure you are dealing with a qualified, experienced agent or broker.