Ideal pieces of a DI policy

by Vincent L. Gallo

Vince Gallo is affiliated with First Financial Group, Lancaster, PA, representing the Guardian Life Insurance Company of America. He can be reached at Vincent_gallo@glic.com.

Many agents understand the importance of disability coverage for their higher income professional and/or medical clients. However, few agents understand how drastically disability income policies vary in contract language. The ill informed often shop around on price alone and ignore the language of the disability policy. This can be financially detrimental for your client in the unfortunate event of a claim.

For life insurance claims, the process is simple; the claim is paid upon death. There are not any arguments between the insured and the insurance company whether the insured is "really" dead or not. But whether you are disabled by definition and going to get paid is determined by your DI policy language.

Do you know what constitutes a good disability policy and why? I want to discuss my ideal elements of a DI policy, why they are important, and the consequences of not having these important features. Non-Cancellable and Guaranteed Renewable Definition: Non-Cancellable and Guaranteed Renewable means the insurer cannot cancel or change the policy and premiums will not increase as long as the premiums are paid on time.

One consequence of not having a policy with this structure is that the rate of the policy could go up to a level that you could no longer afford. Another consequence of your policy not having this basic structure is the entire policy can be cancelled without your consent.

Have you heard of someone getting into an accident and right after the claim was paid, they were dropped by their insurance carrier in an attempt to prevent another claim? Well obviously an auto insurance policy is not non-cancellable nor guaranteed renewable. Imagine having your disability policy dropped right after conclusion of a claim. You would not be protected if you had any other impairment or if your condition returned.

Another consequence of lacking both the Non-Can and GR structure is that in certain situations, the insurance company can change the definitions of the policy. For example, regarding a health insurance policy, possibly you've heard of a situation where the client files a claim and learns that the company no longer covers that situation or condition. You definitely don't want your disability policy to have that option. Group disability income insurance is most likely to have this option as premiums and policy language can change.

90 or 180 Day Wait and Benefits at Least to Age 65

Definition: The waiting period is the amount of time that must pass before benefits become payable (like a disability deductible). The benefit period is the maximum amount of time the benefit can be paid in the same claim.

A consequence of having a waiting period that's too long is that you may not have enough savings to pay your bills before disability benefits begin. Regarding a benefit period to age 65 or longer, the 1985 Commissioners' Individual Disability Table says about 60 percent of all people who have a disability that lasts a minimum of 90 days will make a complete recovery within a five-year period. This also means that 40 percent of the people that go on disability claim have a need for a benefit that lasts longer than five years. The consequence of not having a benefit period to retirement age is that the insureds place themselves at risk if they suffer a long lasting disability.

There is a minimal difference in premium between a five year and an age-65 benefit period. Since most DI claims are "front loaded", meaning shorter claims occur more often than longer claims, the difference in premium between a five year benefit and an age 65 benefit period is not all that significant when you consider the increased potential payout. In my opinion it is worth the extra cost for clients to purchase an age 65, age 67, or even a graded lifetime indemnity rider in certain situations, if available.

Protect Yourself in Your Own Occupation and Specialty-True "Own Occupation"

Definition: Being protected with a true own occupation definition means you are totally disabled if due to injury or sickness you are unable to do the material and substantial duties of your occupation (or occupations if more than one), even if you are at work in a different occupation, as long as you remain totally disabled in your original occupation.

A huge consequence of not having a true own-occupation definition of disability is, if you choose to do work elsewhere when on a claim, benefits being received may end or be reduced. The lesser definition of disability that is often confused with own occupation is called "modified own occ." It reads very similarly to a true own occupation definition in a policy but adds "and not working" to the own occupation definition.

Most people do not really understand the importance of having a true own occ disability income policy vs. having a modified own-occ disability income policy. To truly understand the difference we must first look at a typical claim from a different perspective. I do not know of any carrier that will insure you for 100 percent of your after tax income with base benefit. This means that when you are on a total disability claim and not working, there is always a reduction in net income to you. The companies do this so there is an incentive for you to get better, go back to work, and therefore hopefully end your claim.

One of the problems with this is when you are totally disabled, you automatically suffer from a net loss of income. Without having a "true own-occupation" definition of disability, you cannot do something else to better yourself financially because essentially anything you do that earns money may reduce or end your disability benefit. You wind up on a financial plateau and that means you are unable to better yourself financially, unless your new occupation pays more money than your old occupation, which in most cases is unlikely.

Below are two claim scenarios to further explain the differences. The first is "modified own occupation" and the second is "true own occupation". Which scenario would you prefer?

Modified Own Occupation Claim Example

"I'm sorry Mr. or Mrs. Client for what happened to you. Since you are totally disabled by definition of the disability policy you purchased, you will receive your $10,000 monthly disability benefit. I know that when you were working you made $265k and you likely cleared after all income taxes more than $10k a month, but it was the maximum benefit your disability carrier was willing to issue as no company will insure you for 100 percent of your income with base benefit. Unfortunately, now that you are considered disabled by the insurance company, you pretty much have to stay home. Why, you ask? Because if you work you may no longer be considered disabled and your benefits may end or be reduced. So, the financial goals you wanted to achieve: buy a second house, buy a Porsche, save for retirement, and pay for your kids to go to college, are not likely to happen anymore."

True Own Occupation Total Claim Example

"I'm sorry Mr. or Mrs. Client for what happened to you. Since you are totally disabled by definition of the disability policy you purchased, you will receive your $10,000 monthly disability benefit. I know that when you were working you made $265k and you likely cleared after income taxes more than $10k a month, but it was the maximum benefit your disability carrier was willing to issue as no company will insure you for 100 percent of your income with base benefit.

Fortunately, you have what is called a true "own occ" disability policy. As long as you are unable to do the material and substantial duties of your original occupation, you will be able to work in another capacity, supplementing the disability benefit. This may allow you to better yourself and your family financially plus give you the opportunity to possibly reach your pre-disability financial goals.

Do you see now why true own occ is important for the professional clients? This contract language gives the freedom of being able to do something else to better oneself financially when on claim. Even if the client chooses to not work, they will be happier knowing that they can make this choice.

Another important item regarding the true own occupation definition of disability is the importance of specialty language for medical and dental occupations. For example, one example of specialty language states if you have limited your occupation to the material and substantial duties of a medical or dental specialty, that specialty will be considered your occupation. Yes, it can be that specific.

Clients that have specialized occupations tend to be very ambitious. If they were not ambitious, they would not have been willing to do what it takes to get certified in their specialty. For example, a typical doctor goes through four years of college, followed by years of medical school, and then they complete residencies and sometimes fellowships. They spend a significant amount of time and money to become a specialist in their field. The moment you tell them they can't do something, that's when they really want to do it

Having a true own occ policy with specialty wording gives that client the freedom to choose to do something else to better oneself financially. The person with that choice will likely be much happier at time of claim because there is a chance that they can still improve their financial situation by choosing to pursue another occupation.

Protect You with Quality Partial/Residual Benefits with Unlimited Recovery Period

Definition: Residual disability provides benefits when you are gainfully employed but because of injury or sickness you suffer a loss of income. Usually the residual benefit is equal to the percent of income loss. For example: 50 percent loss of income = 50 percent of policy benefit.

Having a quality residual benefit is a very important feature of a disability policy that is often misunderstood. The best residual provisions do not require a total disability first, have a 15 percent loss of income threshold (vs 20 percent), have no requirement for loss of time and duties, and provide an unlimited recovery benefit. The consequence of not having a residual benefit with your policy is that your policy becomes an "all or nothing" policy, meaning if you are not totally disabled, you get no benefit. Keep in mind that most people at some point of a disability will be working while they are either getting better or getting worse. In other words, people are not usually totally healthy one day and totally disabled the next day or vice versa.

The percent loss of income threshold is worth noting. The best carriers use a 15 percent loss of income unlike the common 20 percent loss requirement. This allows in many situations a quicker qualification of claim as the benefit may be paid on a smaller loss of income. Additionally, a 15 percent loss threshold potentially allows paying a claim longer.

"Time and duties" clauses reflect another area of concern. In order to get a residual claim paid, a "time and duties" clause adds the requirement of a time and/or a loss of duties in addition to the income loss. The best residual provisions have no "time and duties" clauses meaning if you have a loss of income solely due to disability, you simply get paid.

Another consequence of not having a high quality residual disability benefit provision is that the policy may not have or may have a limited recovery benefit. What does that mean? After you make a complete physical recovery from your ailment, your residual benefit may end, even if you are still suffering from a loss of income. You may still have a loss of income after you recover because you've lost some of your referral sources and your reputation. People are hesitant to go back to you for your services because they know you were disabled. In some cases you may have a loss of income for the rest of your life. A good residual policy will pay you residual recovery benefits up to the full benefit period as long as that income loss is due solely to your disability even if you are now completely recovered. Other policies that have a residual recovery provision, may produce a lump sum payment or a monthly recovery benefits for a limited time period. Ideally, the recovery provision should be up to the maximum benefit period.

Protect Your Benefits Against Inflation-COLA

Definition: Cost of Living Adjustment is protection from the effects of inflation while disability benefits are being paid.

The consequence of not having the cost of living adjustment (COLA) rider on your policy is that when on claim you will be on a fixed income, as your benefit will not adjust to compensate for inflation. Imagine living today on the income you have now and never getting a raise, or worse yet, imagine living on the income that you made five or ten years ago. Everyone needs their benefit to increase with inflation to make sure they are able to maintain their standard of living. The better COLA riders out there have minimum compound increases, typically three percent, and are not tied to the CPI, for increases less that three percent. Additionally, there is a relatively new option regarding COLA, which is a delayed onset COLA. This allows long term inflation protection, but at a lower cost because the insured self insures inflation for the first three years of claim. Depending on the situation, this may be a good option to help save premium.

Full Mental Disorder and Substance Abuse Coverage

Definition: Not having your benefit limited for mental disorder claims, i.e. depression, anxiety, drug abuse, etc.

According to the 2006 Long Term Disability Claims Review, conducted by the non profit Council for Disability Awareness (CDA), website: DisabilityCanHappen.org, these claims cause a significant number (6.5 percent) of all new disability claims. For example, imagine losing a child, losing your spouse, or going through a divorce. You could be emotionally devastated. Any normal person going through an experience like that may be disabled due to such a loss. Many of them will have a loss of income. It may be temporary or permanent. Think about this; imagine being out of work for a year or two because of severe depression that occurs after an emotionally difficult situation. Your clients will go somewhere else because you are unable to give the service they need. Now you recover and have to start from scratch. Unfortunately, now people know about your past and you may never be able to get back to where you were. Having full mental disorder coverage allows the benefit period to go all the way up to age 65 or even lifetime, whatever your benefit happens to be.

Future Increase Option (FIO)

Definition: A policy rider that allows the insured to increase your coverage, as your income rises, even if your health deteriorates so long as you are not already on claim.

The consequence of not having this feature is that as your income rises you will have to be fully underwritten for any increases in coverage. Most people when young are, as they say "young and healthy"; however, as most people get older, they develop health issues. Those health issues may prevent them from getting the additional coverage they need. Adding the future increase option rider to a policy guarantees the ability to buy more coverage without evidence of medical insurability to keep one's income protection at the proper level as long as you financially qualify. You're medically underwritten only once when young and healthy, so you can be protected later. Your income is going to go up, so why only cover the income you have now?

The best FIO riders allow the benefit to be exercised every year, have a pool of potential benefit to purchase from, add the additional coverage to the existing policy, allow off anniversary exercises for special situations like loss of underlying group DI insurance or graduation from residency providing an employment contract.

The Extra Benefit if Catastrophically Disabled (CAT)

Definition: Catastrophic disability provides extra benefit above the base disability benefit if a severe (or catastrophic) disability occurs. To be considered catastrophically disabled with most carriers, one must have: permanent blindness, permanent deafness, permanent loss of speech, permanent loss of use of any two limbs, inability to do two of six Activities of Daily Living (ADLs), or a permanent severe cognitive impairment.

The consequence of not having a catastrophic benefit feature is that you put yourself at risk because your basic disability benefit may not give you enough income to protect your standard of living in the event of a catastrophic disability. When catastrophic disability occurs, your living expenses are going to increase for the extra healthcare and assistance you're going to need. The catastrophic benefit feature gives you extra benefit on top of your base to help compensate for these added expenses. By using this feature, a quality carrier can bring you potentially to 100 percent of your prior income tax-free. Yes, 100 percent of your income tax free will give you more spendable dollars than 100 percent of your after income tax earnings. However, this extra income may be needed to help offset the increased cost of living often associated with a catastrophic disability.

For example, your client is a full time surgeon that makes $465k a year and has $15k month of a quality own occupation individual DI policy. This client becomes totally disabled by definition of the policy and can no longer perform surgery due to loss of fine motor control of his dominant arm and hand. Assuming that the surgeon is otherwise healthy, the $15k month would likely be enough to maintain his or her household even though the $15k benefit is less that what was being cleared after income taxes when working. What would happen if your client had a stroke, a horrible car accident that resulted in paralysis of the four limbs, etc? In any of those catastrophic situations the $15k may be inadequate due to the added cost of living due to the very significant change in health. The client may need around the clock care and may even need to hire a nanny to take care of the kids in addition to home modification to accommodate a wheelchair. Does this make sense why I am a big believer in the CAT rider? Another thing to note is that it is not an expensive rider but may pay significantly more if your client qualifies.

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Deconstructing the Misconceptions of Cross-Selling DI

by Ronald A. Farr, Jr.

Ronald A, Farr, Jr., is assistant vice president, business development at Disability RMS, a disability risk management firm in Westbrook, Maine. He can be reached at 207-591-3000.

Benjamin Franklin once said, "By failing to prepare, you are preparing to fail." This statement holds true in many areas of business, but appears to have particular meaning in the area of cross-selling.

The concept of selling additional products to existing customers is not a new one, nor does it seem difficult to understand. However, sales initiatives often lack the critical planning stage that will take the cross-sell from merely an idea to a formal, ingrained sales process that yields results.

As is the case in most industries, cross-selling insurance products within a network of previously established relationships can dramatically increase the chances of a successful cross sale. With the tremendous opportunity that exists in the disability insurance market, there has never been a better time to develop a cross-sell strategy that includes a disability insurance product in the multi-benefit mix. Research conducted over the years continues to underscore the benefits of cross-selling.

The Misconceptions of Cross-Selling Misconception: Implementation is simple

Most often, sales teams are given the directive to cross-sell without any further education, support or resources. In fact, the conversation likely stops after providing an overview of the sales targets they are expected to meet or exceed. These declarations, while well intended, often fall by the wayside. Executing cross-selling initiatives can be complex and requires thoughtful planning and appropriate time dedicated to implementation. In fact, the only simple part of developing a cross-selling program is promoting the idea itself.

The first step in the cross-sell process is determining which products will comprise the most attractive cross-sell package. According to the July 2008 LIMRA report The Different Faces of Cross-Selling, brokers believe that the most popular combination of benefits for companies with more than 100 employees is life insurance and long- and short-term disability insurance. However, a strong argument could be made that cross-selling disability insurance with medical benefits may be a much more logical pairing given that medical carriers have information at the group level that would lend itself to a more informed product and pricing structure. Properly identifying group employers' plan needs and budgetary constraints will also help guide a customized benefits solution. Once the product mix has been identified, the following steps must be undertaken:

• Secure buy-in from the senior management team and divisional heads of the respective product lines. Without the support of the leadership team, the effort will likely fall flat.
• Educate the key stakeholders down the chain of command. The message for this initiative must go beyond the all too familiar sales rhetoric regarding the value of cross-sell initiatives. This is critical as the sales effort is a multi-tiered process, one that, like any program, requires communicating the value proposition and providing the proper training, marketing materials, information and incentives.
• Once support throughout the entire sales channel has been secured, setting a timeline of clearly defined and achievable goals is necessary. Measuring the goals against key performance indicators (KPIs) is also essential. The cross-sell initiative timeline should include:
  - program design
  - marketing materials development
  - sales training
  - distribution modeling
  - official launch and roll-out
  - defined follow-up strategy
  - tracking, measuring and assessing prospect activity and financial goals
  - communication plan for frequent updates to stakeholders
  

A go-to-market strategy that pairs top insurance brokers with firmly established clients presents the optimal platform for launching a successful program. Brokers need solid tools and attractive incentives including, but not limited to, compensation. Employers must also understand "what's in it for them." Brokers must explain disability insurance, the critical role it plays in protecting an employee's income stream, and that it is a necessary and affordable employee benefit. Additionally, sales representatives should be prepared to offer discounted premiums and/or enhanced benefits on the lead product to further influence the cross-sell.

Misconception: Concept to execution is instantaneous

With a sales cycle that spans anywhere from 24 to 36 months, implementing a cross-sell program takes time, as relationship building is at its core. Begin the process by strategically targeting tenured inforce customers, they are often loyal and more likely to purchase additional benefit products. The same LIMRA report indicates that selling products to new customers yields only a 15 percent chance of success, while targeting existing customers can increase the odds to 50 percent.

Using this information in combination with the articulated needs of the employer best positions the broker for cross-selling success.

With an inforce block of business, sales representatives and brokers also have access to critical data that is helpful in creating highly informed rate proposals. Once prospects have been identified, it is the responsibility of the sales representative to educate the broker on the value of adding a disability product to the offering.

Assessing strategies and identifying what is working and what is not, at defined stages in the timeline, is also important to maintain sales momentum. The cross-sell strategy is one that must continually evolve. If an employer is not immediately engaged in the cross-sell, it should not be dismissed from consideration for a future opportunity. There are numerous reasons an employer may not be ready to make a purchasing decision, including a current rate guarantee, budgetary constraints and competing business priorities.

Brokers must leverage all of the information they have captured (group health information, sensitivity to pricing, customer pain points, etc.) to deliver an attractive, customized package to employers. By doing so, brokers can significantly improve the dynamic of the sales model. Using this information in combination with the articulated needs of the employer best positions the broker for cross-selling success.

Misconception: Success depends solely on the broker

When selling multiple products, incenting brokers is often deemed the most critical component of a winning cross-sell strategy. However, motivating customers is equally, if not more, important. In fact, the majority of group insurance producers believe that focus on the employer should be paramount. According to LIMRA's The Different Faces of Cross-Selling report, only one-third of group insurance producers consider broker-focused incentives important when determining whether to present their clients with multiple products from one carrier. Alternatively, two-thirds recognize the importance of employer-focused incentives, such as rate adjustments to medical and non-medical products or adjustments to participation rates.

Increased pricing stability, combined billing and consolidated customer service are clear benefits of a multi-product package. While these advantages are often obvious to the employer, brokers will need to arm employers with the additional information they need to understand the overall benefit of purchasing multiple products. Through focused marketing efforts and a clearly defined value proposition, customers will better understand the benefits and key differentiators thereby positioning them to confidently make a purchasing decision.

Developing a formal, thoughtful cross-selling program that will thrive long term is the ultimate goal. Companies need to embrace the complex process of ingraining cross-selling into day-to-day business operations. By instituting a formal plan that goes beyond the initial proposal, carriers and brokers can reverse the pitfalls long associated with cross-selling.

The opportunity to successfully cross-sell exists. If executed correctly, the benefits, for carriers, brokers and employers, far outweigh the challenges of implementation.

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Physicians reevaluate DI needs, look to group coverage to reduce costs

by Patricia M. Pfeifer

Patricia M. Pfeifer, GBDS, is physician segment program manager for group disability and group life insurance for The Hartford Financial Services Group, Inc. She can be reached at patricia.pfeifer1@hartfordlife.com.

It takes years of education and experience for physicians to develop the finely tuned skills they need to effectively practice medicine. The probing diagnostic capabilities, gentle dexterity and common touch that successful healers possess are held in high esteem by patients and fellow practitioners alike.

But one skill that is often underappreciated is the ability to walk a tightrope. Today's doctors practice medicine while balancing between rising costs for malpractice and health insurance on one hand, and continued reductions in reimbursements on the other. The business of medicine is becoming harder to manage than ever before.

Those financial realities are prompting many physicians to reevaluate their costs for a wide range of insurance services; among the highest priorities being their premiums for disability insurance. Increasingly, physicians are considering group disability insurance policies as a low-cost option for quality protection.

Few people understand the value of disability insurance more than doctors, who see both the physical impact of disabling medical conditions and need to protect their most important asset, their ability to earn an income over a 30 or 40-year medical career.

With so much at stake, most doctors need significant amounts of disability insurance to protect their long-term earnings potential against disabling accidents or illnesses. They want coverage that protects their income over the long term, particularly as it relates to the special skills they possess.

Specialty Coverage for Physicians

The newest group coverage provides significant benefits and features especially designed for physicians at a fraction of the cost available through individual policies. Many group long term disability policies provide benefits of up to $15,000 a month. The better policies include "own-specialty" and "sub-specialty" definitions of disability, meaning physicians will receive benefits even if they can practice medicine in a different specialty, but not their original specialty. An insured is considered to be disabled if he or she is unable to perform one or more of the essential duties of his or her specialty or sub-specialty.

Extended and Progressive Benefits

The better group LTD policies include a physician-oriented benefit that take into account the special risks that medical professionals face, including infectious and contagious diseases, progressive illnesses, continued loss of income after a return to work, and loss of income to a practice.

When most salaried executives return to work after a disability, they typically earn the same salary as they did before becoming disabled. That's not necessarily so for a doctor, especially if he or she runs a small practice. It's common for doctors to continue to suffer from a loss of income after recovering from a disability. While disabled, many of their patients were probably referred to other practices, reducing their receipts. Even upon returning to practice, fewer patients may be referred them or their former patients may have decided to stick with a new practice.

Another income-related hazard that physicians face is exposure to contagious diseases. Doctors spend a lot of time around sick people and, despite being cautious, risk catching their patients' maladies. A benefit that protects a physician's earnings level, while they are not disabled, will help assure that they are financially protected. The likelihood of becoming disabled increases with age, and like the rest of American society, the population of physicians is getting older too. That makes them equally susceptible to progressive conditions, such as arthritis.

Doctors can help protect themselves from a continuing loss of income by securing a group LTD policy with an extended protection benefit. The benefit pays a portion of the original LTD benefit based on a proportionate income loss formula if the insured continues to see a loss of income beyond the triggering level.

Progressive illness benefits protect physicians if their income should slowly decrease due to a progressive, debilitating illness or condition. In instances where someone suffers a progressive illness, it's conceivable that the insured may never qualify for disability benefits because the decrease in his or her monthly income never reaches the loss threshold required to trigger payment. To counter this problem, it's possible to obtain a policy that establishes the insured's pre-disability earnings at the higher of his or her income when the diagnosis of a progressive illness was reported or their current income.

Portability Problem Solved

Many physicians, given their extraordinary need for high quality disability insurance, know nearly as much about their coverage as the agents who sell and service the policies. So why haven't more physicians gravitated to group coverage until now?

In the past, one of the reasons many doctors relied primarily on individual LTD policies is the portability factor. With an individual policy, the doctor owns the policy and can continue coverage even if he or she went to work for a new practice or decided to start his or her own practice. Group LTD policies also allow continued coverage without proof of insurability if he or she leaves the current practice. This can be critical, especially if a doctor suffers from a medical condition that could impact his or her future insurability.

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