“Best Practices” is a term that was used frequently in the 1980s up to about 2010, but has faded a bit in the past decade. Best practices was a term used to describe a set of “standards” to ensure consistency and reliability for clients (and producers). It was designed to be a comparison with some sort of industry standards, which meant a reduction in liability for the producer and increased benefits to the consumer. A win-win!
While there are a number of items that go into a “Best Practices” scenario, today we are focused on one that has always been of utmost importance, especially in the disability insurance world—policy comparison!
When it comes to life insurance, there are only so many ways to say, “Die and we pay.” However, in the world of disability insurance, the words mean everything! This makes it of the utmost importance to review with your client so that they know exactly what they are getting and how it will impact them.
For the record, all disability policies will do what they say, within the scope in which they are written. As long as this is known upfront, and discussed along with options, then a Best Practice has occurred.
Throughout the 80s and until a more recent time, price, although always important, was not as important as the terms and conditions within the policy. There is always going to be a range from high premium to low premium, but what are you getting for your money?
Policy comparisons were usually quite extensive and broken down into various parts so that the comparison between one policy to another made sense. It also allowed an easy transition for the producer to discuss each of these components.
The problem we have seen recently has been a case of laziness. Price is king because it makes an easier sale. However, as our DI experts will all tell us, there is much more to a disability contract than price alone!
Let’s take a look at some of these components:
Policy Renewability. There are several basic types and some variants of each:
- Non-Cancellable—The beauty of this type of policy is that the carrier, once it issues a policy, cannot change the terms, conditions, or price within the time stipulated. This is usually to age 65, but could be shorter in time.
- Guaranteed Renewable—Like the Non-Cancellable contract, the terms and conditions are locked in, but the carrier has the right to alter the premium.
- Cancellable—While there is no contract that specifically states “Cancellable” it is, by design, a contract that can be modified by the carrier even during the term of the policy.
As you would guess, the more protection for the consumer, the higher the premium. Cancellable contracts are most frequently seen in group contracts. The employer and the carrier decide the plan coverage, and the employer as well as the carrier have the right to cancel coverage, usually with just a 30-day notice.
Recently we have seen individual contracts that traditionally are locked-in for some period of time contain a provision that allows the carrier to cancel coverage with a 30-day notice. Unless you read the policy wording you may not be aware of this!
Each of these types of policies are fine, provided the consumer (and the producer) understands what they mean and perhaps have offered options to consider as well.
- Disability—this is the most common definition found within a disability policy (duh). However, there could be variations of what it means to be disabled.
- Permanently disabled?—Often requires a doctor to confirm that there is no hope of recovery.
- Totally Disabled—This is the most commonly found definition, but again you need to read the full extent of this:
- Unable to perform the material and substantial duties of your own occupation.
- Unable to perform any occupation. While this may sound really onerous, further reading should reveal that it also says for which you are suited for by education.
Now we start getting into areas where a person could be “sort of” disabled:
- Partial Disability—Typically means unable to work part time due to a disability.
- Residual Disability—Typically means that you are losing income, due to a disability, but you may be working full time! Please note that many carriers use a blending of these two.
Then we have the area which says “how much”!
- There are two parts to a maximum benefit:
- A carrier’s maximum issue limit, and,
- A carrier’s maximum participation limit.
Issue limit is the amount of benefit in which a carrier itself will issue while participation is the amount in which a carrier will participate with other coverage in force. For example:
- A person needs $10,000 per month in benefits. A carrier may have an issue limit of $5,000, of which this would be the maximum benefit they would offer. However, if this person already has $8,000 in force, the carrier will issue a maximum of $2,000 as their issue limit within the participation maximum!
So what happens if someone needs more than what they can obtain from the carrier?
Sometimes it may take additional carriers to get the maximum benefit. Suppose we have a client who needs $20,000 per month in benefits, and we find that the maximum participation limit from the regular markets is $10,000 maximum. You can obtain additional benefits using an excess disability insurance carrier! Much like excess liability or excess property insurance, excess disability insurance is offered through specialty markets with which any disability brokerage outlet should be able to assist!
Lastly, we look at how long a benefit is paid! Typical maximum benefits range from two years to age 65. Like other parts of this article there could be hybrids of this, but these are the most common.
So what is the best for my client?
Now we get into some philosophical and some statistical discussions.
Assuming all provisions are the same (author note: They are rarely all the same!), let’s address the benefit amount first. Financial experts agree that about two-thirds of income is the proper benefit to have. Anything less than this and a person will go broke eventually. Notice we said two-thirds, not a dollar amount! In most cases this two-thirds can be satisfied with a single carrier, but other times you may need to use more than one carrier or an excess carrier.
Benefit period should also be the longest period possible. Why? Because even though the statistical odds are low that you will have a career-ending disability, would you want to be the one without the maximum benefit period when it was available?
What about the contract?
Remember, the more control an insured has over the contract and price guarantees, the more expensive it can be (should be). A non-cancelable contract, even if only for a few years, will be more protection than a cancellable contract (30-day cancellation clauses).
Best Practices is more than just policy comparisons, but there has been a trend away from policy comparisons for the sake of a quick sale (usually based upon price alone). We need to get back to doing the full due diligence for our clients even if it takes more time. There is too much they have to lose!