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By W. Ronald Anderson

The insurance industry has made more rapid changes to the disability income product over the past 12 months than it had made in the previous decade, and the reasons for these dramatic changes are quite simple. The percentage of claims, particularly of large monthly indemnities among professionals, has increased while the major companies specializing in disability have not been able to increase premiums because of the guaranteed premium rates offered in their policies. Therefore, some companies have decided to increase premiums for new sales dramatically (30 to 40%) while offering lower indemnities and reducing the claims that are covered. In some cases, the companies have left the option open to increase premiums and to cancel coverage.

While this means higher premiums to most professionals, all is not lost. As a professional you should look for two important items still being offered by those companies that are committed to the continued sale of disability income policies: 1) noncancelable and guaranteed continuable to age 65 with no change in premium rates and 2) protection in your field of endeavor. This is also referred to as "own occupation" or "your occupation" protection, and a handful of companies still offer lifetime protection in this area. This lifetime "own occupation" protection may not be available in just a few short years.

What many purchasers of disability income coverage find to be most important is the answer to this question: "What will the policy pay if the covered person is sick or hurt and cannot work?" Since there are only seven possible claim scenarios, the seven claims approach to buying disability answers that question effectively and concisely.

Claim I: Totally Disabled in Specialty--Not Working. In this claim, the insured is totally disabled in his or her profession or specialty and does not work in any occupation. For example, a neurosurgeon loses the use of one hand in an accident. She obviously cannot do neurosurgery but could teach medical school or work in some other unrelated profession. Assume however, she chooses not to work at all. A good policy should pay the total disability benefit plus some cost-of-living feature.

Claim II: Totally Disabled in Specialty--Working in Another Occupation. This claim is referred to as the "own occupation" or "your occupation" claim payment. This is the claim in which the insured is totally disabled in his or her profession or specialty but chooses to work in another occupation. The neurosurgeon in Claim I chooses to go teach medical school or become a general practitioner. The choice to go to work in another occupation while disabled in a specialty, should result in at least a residual benefit. But some companies will pay the total disability benefit regardless of earnings in the new occupation.

Claim III: Presumptively Disabled--Working in Your Occupation. Presumptive disability is generally defined as the total and irrevocable loss of sight in both eyes, or hearing in both ears, or loss of speech, or the loss of use of two hands, or two feet, or one hand and one foot. If a covered person suffers any one of these losses and returns to a regular occupation, what will the company pay? For example, a dentist loses hearing in both ears, but chooses to continue to practice dentistry.

Claim IV: Presumptively Disabled--Working in Another Occupation. If a veterinarian mangles both hands in an automobile accident and chooses to work in another occupation, such as teaching at a veterinarian school, what payment would be expected from the disability policy? Most companies that cover presumptive disability will pay a total disability income benefit plus cost of living increases regardless of earnings in either Claim III or Claim IV.

Claim V: Residually Disabled--Working in Own Occupation. Residual disability is usually defined as the ability to perform one or more of the important duties of an occupation but in a reduced capacity. This generally means part-time work with a resulting loss of income. If the covered person were to suffer a mild heart attack and chose to return to work on a part-time basis, what would the company pay? The best policies make up for the lost earnings by making a partial or residual payment. There should also be an indexing of prior earnings provision that increases the prior earnings each year of a residual claim. This allows the residual benefit to keep pace with inflation.

Claim VI: Residually Disabled--Working in Another Occupation. What would happen if a covered person suffered a lingering sickness that prevented the performance of important professional duties on a full-time basis and that person chose to change occupations rather than to return to full time employment in the profession? Most companies make no provision to pay any benefits if the covered person decides to change occupations while residually disabled in a regular occupation.

Claim VII: Recovery Disability. This claim payment is relatively new to the industry within the past few years. The newer policies provide for the continued payment of residual benefits following a compensable total or residual disability even though the covered person may be back to work on a full-time basis with no loss of time or duties. This payment generally requires that you have an income loss of at least 20% of predisability earnings. This in one of the more important claim payments for professionals.

Example of a Recovery Claim

Assume that a professional suffered a disability and was either totally disabled or residually disabled for one year or longer. That person is now able to return to work full time following the disability. How long will it take to build up the professional's accounts receivable to the levels prior to disability? Most professionals agree that it could take several months. A recovery clause will allow the professional to continue to receive benefits if he or she chooses to return to full time employment even though there is still an income loss.

The key word in each of these claims is choice. The covered person needs to be able to make choices that will not penalize at claim time, the worst time to find out about inadequacies in disability insurance. To avoid claim-time surprises, the agent or financial advisor should complete the accompanying table based upon what the policy will pay in these seven claims. Once again, these seven claims are the only possible claims regardless of the sickness or injury.

If either group disability or association disability coverage is the foundation of the disability income program, there may be an unpleasant surprise at claim time. In many instances these policies pay in only three or four of the above seven claims. If the policy is deficient, the professional may want to consider individual noncancelable disability coverage as a supplement.

One important thought about cost-of-living features found in many disability income policies. A minimum increase should be guaranteed, as opposed to tie a benefit solely to the Consumer Price Index-Urban (CPI-U) that has no minimum guarantee built in. Both provisions cost about the same, but obviously a cost-of-living feature with a minimum guarantee is far superior. The same applies to the indexing feature mentioned in the chart above. The indexing feature will allow residual payments to keep pace with inflation. *

W. Ronald Anderson, CLU, ChFC, RHU, has been specializing in the sale and service of disability income to professionals for almost 20 years. He received his Chartered Life Underwriter and Chartered Financial Consultant designations from The American College, and his Registered Professional Disability Income and Health Insurance Underwriter designation from the National Association of Health Underwriters in 1982. He is a general agent representing The Berkshire Life Insurance Company, Winston-Salem
NC 27104.




Milton Miller, CPA


Contributing Editors:

Andrew B. Blackman, CFP, CPA\PFS

Shapiro & Lobel LLP

William Bregman, CPA

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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