You have been approved for a disability policy, but the insurance company is excluding a preexisting condition from coverage. Why do insurance companies exclude a known condition from the policy?

The reasoning is very simple – without excluding that condition, because of the increased risk of a future disability, the insurance company would probably not be able to issue you a policy.

Any insurance policy is meant to protect you from unknown risks and is priced accordingly. Ask Southern California homeowners who live near known fire zones. They pay considerably more for their homeowners’ insurance than those living at a distance from those fires. Many are at risk of losing their coverage.

In the case of disability insurance, if you have a known condition that presents a high risk of a future disability, the premiums the insurance company would have to charge would be prohibitive and, therefore, most people would not be able to pay the premium required to insure that condition. By eliminating the condition from the coverage, the policy will be more affordable.

Knowing there are many potential causes of disability, those who accept a policy with an exclusion for a preexisting condition are rightfully covering the majority of risks of becoming disabled in the future.

One of the most important definitions in a long term disability policy is the definition of total disability. How the insurance company defines total disability can make a huge difference in how much and how long your benefits will be paid.

Many professionals rightly seek out an Own-Occupation (Own-Occ) disability policy to protect their hard-earned incomes. However, when is Own-Occ truly Own-Occ? Many companies advertise their disability policies as Own-Occ policies and the unsuspecting consumer often considers them to all be the same.

A true Own-Occ definition will look something like this:

Total disability means that, solely due to injury or sickness, you are not able to perform the material and substantial duties of Your Occupation.

Some companies modify this definition by adding words such as and are not engaged in any other gainful employment to the definition. We call the former definition a True Own-Occ definition and the latter a Modified Own-Occ definition.

While the addition of those few words seems like a minor adjustment to the definition, the difference in benefits paid can be substantial. For example, let’s say a surgeon with an annual income of $350,000 has a disability policy with a monthly benefit of $10,000. She permanently injures her hand and can’t perform surgery anymore. As she is still generally healthy, she goes into private practice and earns $120,000 annually.

If her disability policy had a True Own Occ definition, her earnings would be $240,000 ($120,000 income plus $120,000 disability benefits) annually (of which $120,000 would be non-taxable). If her policy had a Modified Own-Occ definition, her annual income would be $120,000.

Which definition would you choose?

I speak with many prospective clients who consider self-insuring against disability (e.g. relying on savings, spousal income and/or credit). In every one of these cases, these individuals all make the following two mistakes:

• They minimize the degree of the risk (i.e. how likely it is that they will become disabled) and;
• They underestimate how financially exposed they would be if they were to become disabled.

In regard to the first point, most people consider that a permanent disability is something that will never happen to them. However, the statistics tell us otherwise.

• If you’re under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.
• Men have a 43% chance of becoming seriously disabled during their working years.
• Women have a 54% chance.
• At age 42, it is four times more likely that you will become seriously disabled than that you will die during your working years.

Regarding the second point, if, at age 40, you are earning $200,000 per year and you were to become permanently disabled, the loss of income (without factoring in inflation or increased earnings) would be $4,000,000 through age 65 (the typical term of a long-term disability policy)

Self-insurance works when it comes to handling predictable, low-percentage-type risks that carry modest financial exposure. However, the risk of disability is quite unpredictable and, as you can see from the above information, it is a relatively high-percentage-type risk that carries much less-than- modest exposure.

You can choose to retain the risk (self-insure) or to transfer the risk by purchasing a long-term disability policy. When presented with these facts, most of my clients choose the latter.

This is a question we hear quite often from our clients: Why do I need personal disability insurance? Won’t social security pay me disability benefits?

Unfortunately, most who apply for benefits do not receive them. On average, 65% of people filing claims do not receive any. For those who do receive benefits, the wait can be unbearable.

According to an article in USA Today the Social Security Administration faces a record — and rapidly growing — backlog of appeals by people who claim they are too disabled to work. Through June, it had just over 745,000 cases pending, and the wait for a hearing averaged 17 months, also a record.
Claimants in some parts of the country must wait up to 31 months, according to the agency. “People have died waiting for a hearing,” Social Security Commissioner Michael Astrue says.

The agency says the backlog doubled in six years and could reach 1 million by 2010.

In another USA Today article, they report that of 2.5 million people who file disability claims annually, nearly two in three get denied initially. If they pursue a federal hearing, they join about 745,000 others whose appeals are backlogged. As of June, their average wait for a decision was 529 days. The lengthy waits lead to bankruptcies and foreclosures, drinking and drugs, depression and divorce, even suicide, according to claimants, their representatives and employees of the Social Security Administration.

With the recent turmoil in the financial markets, we have been seeing more and more questions about the importance of the strength of the insurance company.

There are numerous factors involved in choosing a disability insurance company but the primary factor is financial strength:

• “Who is backing the claim if I get disabled?”
• “Which of my choices of insurance companies is the most likely to be there to pay me if I’m disabled for the next 30 years or so?”

How do you tell?

First of all, look at their financial strength ratings from AM Best and Co., Standard & Poor’s, Moody’s and Fitch. Make sure the company has at least an A+ rating from Best’s and AA (Aa) from the other services.

Among the disability insurance carriers we currently like the strength of Berkshire Life (a subsidiary of the highly rated Guardian Life Insurance Company).