This is the core Disability Insurance product: it is designed to replace a portion of your earned income if you become too sick or hurt to work and should be positioned as the foundation of any sound financial plan. There are two basic types of individual coverage: Guaranteed Renewable and Non Cancelable.
Guaranteed Renewable Products state that the insurer guarantees continual coverage without cancellation as long as premiums are paid. However, they reserve the right to increase premiums should they have unfavorable claims experience for an entire occupational class.
This means the insurer cannot raise premiums for just one person—they must increase premiums across the board for each contract issued at that class. Guaranteed Renewable products are usually offered to all of the occupational classes that a carrier covers. In Guaranteed Renewable products the contract language, the benefit amount (or issue limits), the benefit period, and available options are generally more restrictive, but the premiums are also generally the most affordable.
The definition of disability is generally more basic with the Guaranteed Renewable products. Many of these plans offer a true or modified own occupation definition (see below for explanation) for the first two years. However, after the first two years it can change to what is known as Any Occupation. Any Occupation means that the insurer will pay a benefit if you become ill or injured and cannot perform the main duties of your occupation or any other occupation, by reason of your education, training or experience. Some carriers reduce the definition further to mean not engaged in any occupation for wage or profit. Even some of the non cancelable policies can revert to these definitions after the true or modified own occupation period. Guaranteed Renewable plans also offer shorter benefit periods and fewer, or less liberal, options or riders. These are “No Frills” policies that offer protection for more severe situations and may be the only type of protection your client is concerned about or can afford, as they are typically the most affordable types of plans. Guaranteed Renewable may be the coverage available to clients in occupations that are exposed to great amount of risk.
Non Cancelable Products state that the insurer will guarantee continual coverage and will not cancel the policy as long as premiums are paid. In addition, they guarantee not to increase premiums for the life of the contract, regardless of claims experience. These plans generally have the most liberal contract language, the highest issue limits and the widest range of options. Non Cancelable products’ guarantee of premium level, attractive features and options generally make this type of policy a more expensive product that is only available to certain occupational classes.
The definition of disability offered on most Non Cancelable products is the Modified Own Occupation definition. This defines totally disabled as:
1) Being unable to perform the material and substantial duties of your occupation
2) You are not working
3) You are under a doctor’s care
It can be modified even further by adding the optional Residual or Extended Partial Benefits Rider, which does allows you to work and still receive benefits provided you have at least a 20% loss of income due to changing jobs and are only able to work part time, as determined by your doctor.
Some carriers will pay these residual or partial benefits all the way to age 65; others may limit this. Limitations vary from five years to only six months. Depending upon the occupational class, the modified own occupation definition itself can also be limited to two or five years.
A current trend with the major carriers is to offer most occupational classes a choice of definitions, products, and optional features to select from. This allows you, as the financial professional, to design a plan expressly for your client’s needs. See the Sales & Marketing Ideas file in Broker Resources.
The most liberal definition of disability is the True Own Occupation definition. This is defined as being totally disabled or unable to perform the material and substantial duties of your occupation at the time of sickness or injury. Under this definition you would still be entitled to benefits if you are able to work in a different field. This definition became incredibly popular in the late 1960’s, especially amongst white collar professionals such as doctors and attorneys.
For example, let’s say that you have a 35 year old client who is a surgeon. A severe finger injury prevents the surgeon from holding a scalpel, but the surgeon is otherwise completely healthy. If the client has a True Own Occupation definition on the Disability contract, he or she would be eligible to receive full benefit— even if he or she begins doing something else and the new occupation ends up paying even more money than the client’s previous career.
Sound like a pretty good plan? Well, it’s been almost too good. When there is such a liberal definition on non cancelable contracts issued to a large number of very high income earners, the frequency of claims filed and the amounts of benefit being paid can cripple an insurance company—especially because premiums are waived while benefits are being received. Therefore, many carriers ceased to offer this definition. Some carriers were affected so adversely by these types of claims that they pulled out of the disability market completely, or aligned themselves with other carriers.
The good news is that True Own Occupation is still available. Several of our carriers do offer this definition on their non cancelable products. However, this definition is limited to select occupations within the top two or three classes and can further be restricted by industry, age, income, state of residence, benefit period or all of the above. True Own Occupation is offered only as an extra cost option to this group. The most restricted industry is the medical field. Very few carriers offer True Own Occupation to surgeons up to age 65. Only one carrier offers it to Dentists. However, you can still let your qualified clients or prospects know that True Own Occupation coverage to age 65 is a possibility.
Somewhat more readily available are contracts that offer a True Own Occupation definition for two or five years—once again, depending on age, occupation, and state. Even with these limitations, the premiums for this type of coverage are usually among the highest on the market. In some cases, it has become so expensive that many highly compensated professionals are willing to forgo this definition for more affordable premiums. See the Sales & Marketing Ideas file in • Broker Resources.
Recently introduced, on a more limited basis, is the Transitional Own Occupation Definition. This is a variation of the True Own Occupation Definition. Transitional Own Occupation will pay benefits if you are totally disabled in your occupation but are readily employed in another, provided your monthly earnings do not exceed or match the earnings from your former occupation. The benefit amount paid is based on the relationship of earnings to insurance. This definition will take you up to, but not over, what you were making before. Think of it as True Own Occupation with a cap.
For example: A dentist makes $8,000 per month, becomes disabled and takes a job as a consultant that pays him $6,500 per month. The benefits payable under the Transitional Own Occupation definition would be $1,500 per month. This would take dentist to his former level of $8,000 per month combining insurance and earnings. This definition also coordinates with benefits from any other source, including group or individual disability coverage, and depending on the carrier, Social Security benefits as well. Currently only two carriers offer this definition to the mid and higher occupational classes, and it is not available in all states. However, other carriers are expected to follow, as this definition presents a more affordable alternative to True Own Occupation and can be offered to a wider range of classes. See the Sales & Marketing Ideas file in Broker Resources.
This product covers the day-to-day operating expenses a smaller business incurs, should there be a loss of revenue due to a business owners absence because of sickness or injury. Small businesses often require the owner to be present or to be working to generate the revenue needed to keep the business operational. If they become injured or ill for an extended period of time, they may certainly lose business, customers, or perhaps some of their long-standing contracts. With a substantial loss of revenue, how will they pay employee’s salaries, the utilities, liability, or their rent? Many businesses would just have to shut down. Business Overhead Expense coverage can definitely help. It reimburses the owner for partial or full business expenses, to keep their doors open until they can get back to work.
This product is expressly designed for a smaller business with ten or fewer employees, or one that provides a professional service that is executed primarily by the owner or owners (generally no more than five owners that split the expenses). There are many businesses that can benefit from this product—doctors, small accounting, architecture, law firms, photographers… even a small insurance office. This is a product that can help most small business owners stay afloat until they recover and can get back to work. See the Financial Underwriting & Taxation file and the Sales & Marketing Ideas file in Broker Resources.
This is a product designed to fund a Buy-Sell agreement in the event of a disability. In a partnership situation, if one of the partners becomes injured or is suffering from an illness that prevents them from working, what do the partners do? After all, they are still in business with someone that legally has to continue to share in the profits. What if the disabled partner’s wife or husband, that knows nothing about the business, wants to step in? What if the other partners have enough cash, or someone else wants to buy in, yet the disabled partner does not want to sell? Or even worse, what if the most common scenario occurs, where the other partners do not have the funds to buy out the disabled partner, even if he or she wants to sell? They may even have to close the business.
To prevent all of this, the partners can have their attorney draft a buy sell agreement that has a funded provision for disability before this occurs. That funding can come from a Disability Buy Sell policy. It can be structured with a long enough waiting period to see if the disabled partner recovers and wishes to return. Many partnerships have a Buy Sell agreement funded with life insurance in case a partner dies, but may not take into account the fact that disability is a more likely possibility. See the Financial Underwriting & Taxation file and the Sales & Marketing Ideas file in Broker Resources.
With mortgage rates being as low as they have been in years, and with the influx of first time home buyers, the insurance industry has developed a disability plan that covers only monthly mortgage payments.
Lower in cost than income protection, this is an ideal product for new home buyers whose primary concern is making sure that their mortgage note is paid. In fact, one of the major causes of mortgage foreclosure is the sickness or injury of the major income earner in the household. See the Sales & Marketing Ideas file in Broker Resources.
This is a disability product that protects the amount of your retirement plan contribution should you not be able to work due to a sickness or injury. If you are not working, you are not contributing into the plan. If you are not contributing, neither is your employer, if you are in a plan with an employer match. This is in a sense free money that you are missing the opportunity to save. Over an extended period of time, this amount could be a considerable portion of your retirement savings. These retirement completion products can cover a wide range of retirement plans. In the event of a disability, the benefit amount is placed in a trust, can be funded with like investments, and will be paid out when you reach retirement age. See the Sales & Marketing Ideas file in Broker Resources.
This coverage protects a business or corporation against a loss caused by the sickness or injury of major or sole revenue generators. This disability coverage is available from specialty carriers. These are benefits that are paid to the corporation—not the insured. However, they do not count against individual coverage for that insured. Typically, the amount is based on the annual salary of that Key Person, or the amount of revenue that is attributable to them. This is generally paid out in a lump sum after a 365 day elimination period. Other payout options are available. See the Occupational Underwriting file in Broker Resources.
This product provides a benefit equal to a loan payment amount for the duration of the loan period. This way, if a disability strikes and income stops, the loan payment can be made. This type of plan can be offered in addition to any other disability coverage in force, as the loss payee would be the actual lender. See the Sales & Marketing Ideas file inBroker Resources.
The reality of disability is that assistance with the normal activities of daily living may be needed. One current trend in the industry is to offer an optional feature that will pay additional benefits if an insured becomes severely disabled and needs assistance with two or more of the Activities of Daily Living (ADL) during their working years. This important extra-cost rider can now be added to an individual plan and will provide additional Long Term Care type benefits to clients who are still in their working years. See the Sales & Marketing Ideas file in Broker Resources.
The Compassionate Care Benefit is unique and only available from The Standard. It pays you a monthly benefit if you lose income while taking time away from work to care for a loved one who has a serious health condition. A loved one is a parent, child (including an adopted child and stepchild), spouse, domestic partner, and child of your domestic partner. The maximum amount of Compassionate Care Benefit that is paid under any one policy for all claims and all loved ones, is an amount equal to six times the basic benefit. See the Sales & Marketing Ideas file in Broker Resources.
A few carriers offer a lump sum benefit as opposed to or in addition to a monthly pay out. Ameritas offers a lump sum or 6 month pay out contract as a simple and basic Guaranteed Renewable and Total Only contract for those looking basic and affordable coverage with limited underwriting. It is not available to medical professionals but is available to non-working spouses, on a limited basis.
Guardian offers a Lump Sum Benefit rider that provides a Lump Sum Benefit Amount equal to 35% of all Total Disability and/or Residual Disability Benefits paid under the Policy at the Policy Expiration Date. For a payment to be made, the sum of Contributing Payments must exceed a the insured must have received Total Disability and/or Residual Disability benefits that are greater than or equal to 12 times the Monthly Indemnity as of the issue date. This is offered in place of a Lifetime Benefit Option.
Lloyd’s of London has several variations of a Lump Sum payout that are designed to provide benefits that can last beyond their typical 5 or 10 year benefit periods and for highly specialized cases.
See the Sales & Marketing Ideas file in Broker Resources.