Understanding Disability Insurance
“Own occupation” disability insurance pays benefits if you become unable to perform the substantial and material duties of the specific occupation (eg: orthopedic surgery) you were performing at the time you became disabled.
“Any occupation” coverage pays benefits only if you become unable to perform the substantial and material duties of any occupation you are qualified to perform based on your education training and experience.
Fine line distinctions and vague undefined terms often appear in disability policies. This is no accident. Vague terms can be used to give an insurer wiggle room when it comes to determining coverage. For example, to qualify for disability benefits, many LTD policies contain phrases requiring insureds to be unable to perform “the important duties” of their occupation. What does that mean? Does it mean unable to perform “some” of your important duties? The “majority” of your important duties? “All” of your important duties? Some carriers will argue that it means that to qualify for Total Disability benefits an insured has to be unable to perform “all” of their important duties. So that if an insured surgeon whose pre-disability duties included diagnosing medical conditions can still perform diagnoses, they do not qualify for Totally Disability benefits. We disagree with this position. We say that important duties means those duties that were essential to the performance of the surgeons practice before they became impaired, performing them in the usual and customary manner, and with reasonable continuity.
Another example: many policies contain wording to the effect that an insured does not qualify for Total Disability benefits if they are gainfully employed. What does the phrase “gainful employment” mean when a policy purports to restrict or eliminate benefits if an insured becomes gainfully employed? Some insurers say all it requires is that the insured be engaged in any work for compensation. We disagree on two grounds. One, that a gainful employment exclusion is of no effect because it defeats the entire purpose of own occupation insurance. Two, we argue that even if enforceable under some circumstances, a “gainful employment” limitation is not applicable unless it refers to a kind of work suitable to the insured’s background and status.
The point is that any undefined terminology in a disability policy can be used by the insurer to underpay or deny a valid claim. An insured should never give in to a benefit denial based on such an argument. This is important because how phrases like these are interpreted can make the difference between an insurer paying a claim and denying it.
Another closely related bread and butter issue in LTD insurance is the difference between payments made under Total Disability versus payments made under Partial Disability. This distinction can be worth tens and hundreds of thousands of dollars in benefits over the life of the policy.
For one thing, a Total Disability claim amount is based on a flat figure stated in the policy. Partial Disability is a lesser benefit based on a formula that is only a portion of the Total Benefit. In addition, a “Total” Disability benefit is often payable for the insured’s lifetime whereas “Partial” disability is usually cut off at age 65. Distinctions such as these can make a very substantial difference in the total payout.
Set Offs and Buy Outs
Many Long Term Disability insurance policies contain provisions requiring claimants to apply for Social Security benefits and to appeal any adverse decision. These policies provide that the insurer can then deduct the amount paid by Social Security from the benefits owed by the insurer.
In calculating the value of the monthly benefit that is owing, or for purposes of establishing a present value of the future benefits, you have to deduct for any Social Security or other set off calculations. Be careful when calculating future set offs. Just because Social Security is being paid today does not necessarily mean it will be paid forever. For one thing the program could be changed or reduced by Congress. And if your Social Security benefits are cut off or reduced, your disability benefits could be cut off or reduced accordingly.
Two other issues relating to buy out calculations are “mortality” and “discount rates.” Mortality has to do with the insurer asserting that an insured will not be living their normal life expectancy. Therefore the company should pay less. Discount rates have to do with lowering the buy out amount to account for inflation. You are getting the money now, not five and ten years from now, and therefore the present value of future payments should be lower. As to both of these issues you really need to consult with medical and accounting experts. Both mortality and present value calculations can make a very substantial difference in a buy out amount.
In addition, insurers will argue that their policies do not require them to offer a buy out, and so it has to be worth it for them to offer one. This argument is at least partially correct. And many insureds want to take cash now and avoid the uncertainty of future hassles. On the other hand it is expensive for an insurer to continue to administer and monitor a claim year in and year out, and so there is something of a mutual advantage to offering and accepting a buy out. Be very careful when it comes to this.
For additional information on buy outs continue reading…