DISABILITY INSURANCE – DURING A DISABILITY #2

As discussed in the previous issue, there are many levels of disability.

Unlike death, which is either a case of “you either ARE or you ARE NOT,” disability is very much a “Where are you on the scale?” This actually has at least two causes:

(1)   Many disabilities progress from one level to the next – either getting better or worse, depending on the underlying cause. Examples: (a) cancer or MS generally get worse over time – going from a level which may have little or no impact on your ability to work to one where you are completely unable to work; (b) if you have a heart attack, generally you will not be able to work at all – you may be hospitalized and then spend time at home recovering. Then you will probably gradually return to full time work.

(2)   Totally independent of the nature of the disability, we have the nature of the person who is disabled. Some people will try to work from their hospital bed. I actually know a broker who called to discuss a pending case WHILE IN THE EMERGENCY ROOM OF THE HOSPITAL HAVING A HEART ATTACK! Let me just mention the concepts of pain threshold and motivation. These concepts are totally individual and subject to extreme variation.

To simplify the handling of this issue, the industry has developed two approaches. The first is the concept of total disability, which I discussed in my previous blog.

In this blog, I will address the concept of non-total disability.

There are actually two methods of dealing with this: partial disability and residual disability.

1. Partial disability – this approach examines which duties you can and cannot perform and/or how many hours you are able to work. It does NOT consider the income that you are earning. Generally, you have many choices as to how long benefits will be paid out – 6, 12 or 24 months; for 5 years or until age 65. The amount payable in this case is generally 50% of the amount payable in the event of total disability.

            For example, if the policy pays $4,000/month for a total disability, it would pay $2,000/month for a partial disability. If partial disability benefits are payable beyond 24 months, they GENERALLY reduce to 25% of the total disability benefit – or $1,000/month in this case.

2. Residual disability – this approach examines the income you lose due to your disability. It does not concern itself with what you can do or how long you can do it, but merely with the reduction in income. (Another way to differentiate the two approaches is: partial disability looks at capability while residual disability looks at efficiency.) If your income is reduced by less than 20%, no monthly benefit is payable. If the reduction in income is between 20% and 80%, a percentage of the benefit for total disability is paid for residual disability.

            For example, a 40% reduction in income would result in a payment of 40% of the total disability benefit – or $1,600/month using the previous example. The amount of the payment would vary each month depending on the level of income earned in that particular month. If the reduction in  income is 80% or greater, the full benefit is payable. This would allow the client to earn some income without affecting the amount of payment.

My next blog will deal with how the companies calculate what you WERE earning prior to disability, which gives the basis from which the loss is determined.

So, we have two approaches. Is one better than the other? Frankly, it depends on the client. If their income is directly linked to their efforts (e.g. they are in sales or are a fee for service professional), there would be little doubt that residual plans would more accurately compensate for any loss. On the other hand, if they own a company with a significant number of employees, they may possibly be sheltered from a reduction in income by the existence of those employees, therefore partial benefits might be the superior choice. Certainly partial benefits may be easier to collect, as there is no complicated accounting required in order to determine the loss of income.

Some products offer both features and allow you to choose the one which best suits your needs at the time of a claim, taking into account changes in work patterns over a career. Others mandate a choice at time of issue, which offers less flexibility.

The most important thing is that you have SOMETHING – be it partial or residual – so that you are not penalized for trying to work – or for the nature of your disability.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

DISABILITY INSURANCE – DURING A DISABILITY #1

The first word that needs to be defined is disability. We all seem to know what death means, but legally dead seems to need a definition. If the victim lacks a heartbeat, brain activity, and is not breathing – chances are that, unless they are a politician, they are most likely dead. The only ambiguity about death arises when dealing with disappeared and presumed dead or cause of death. However, as long as there is a body, it seems fairly easy to agree on whether or not the body is dead or alive.

Disability is not quite that simple. How disabled must you be in order to qualify for disability?  Does the plan only pay for total disability or does it cover situations where your ability to work is reduced, but not completely eliminated?

In this issue, I will only discuss how disabled you must be in order to be considered totally disabled. In general, the definition is divided into three parts:

1.      Own Occupation

2.      Regular Occupation

3.      Any Occupation

1.      Own Occupation

Generally imposes two requirements

1 - You must be unable to do your own job and

2 - You must be under the care of a physician appropriate to the disability (more on that later).

There is no requirement that you not be working. As long as you cannot do whatever it was that you were doing prior to disability, you will be considered totally disabled. This definition actually permits you to economically profit from a disability. For that reason, it is generally available only to the most favourable occupation classes. Some carriers even limit it to specific occupations within those classes. Frankly, it is of most value to those professions with manual content, such as surgery or dentistry. I find it difficult to imagine a situation where someone whose occupation is primarily knowledge-based would be unable to do his or her job, yet still be able to do something else.

Further, the purpose of insurance is to protect against a loss. I find that Regular Occupation does an excellent job of that.

2.      Regular Occupation

In addition to the Own Occupation requirements, Regular Occupation sets a third: that you not be working elsewhere.

It is NOT an issue if you are ABLE to do that other job. That will have no effect on your total disability claim. The only question is whether or not you are actually performing that other job. If you are, then total disability benefits will stop. By the way, when group insurance policies use the expression Own Occupation, they almost always mean Regular Occupation. I have never seen a group plan that did not include the phrase Total Disability does not exist if you are engaged in any gainful occupation.

Those two definitions are quite straightforward and not that difficult to understand.

3.      Any Occupation

Any Occupation leaves much more room for interpretation. First, a lot depends on whether or not there are any additional words in the definition. For example, it might read any REASONABLE occupation; it may even include a method of determining reasonable, such as based on your education, training and experience; finally it may even include an income test.

The bottom line is that, unless you are in the late stages of MS or other such MAJOR illness, you will have a much more difficult time qualifying under the Any Occupation category. One point to consider here is that almost all group plans begin with some form of Regular Occupation (often two years) and then switch to Any Occupation. This means that your clients will have to meet a tougher definition in order to continue qualifying for benefits. Some individual products also take that approach but USUALLY offer to extend the Regular Occupation period to age 65 – an offer I ALWAYS recommend to my clients. This is the most important rider, if the policy is constructed this way. I would NEVER put a disabled client through the stress that this Any Occupation feature can create.

Last item: under the care of a physician appropriate to the disability. This may seem obvious. If I have a problem with my heart, I would not be seeing the doctor who gave me my last colonoscopy. As a guy, I would never see an obstetrician PROFESSIONALLY. If I have a health problem, I want to see a doctor who specializes in that area of medicine. The only time where this MAY be an issue is with stress or other mental or emotional disorders. We MAY want to see our family doctor for this, but the insurer will want the treatment at least overseen by a psychiatrist.

More next time on “non-total” disabilities.  

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance