Your Comprehensive Guide to Understanding Your Disability Insurance Policy
Understanding your disability insurance policy is very important. There is a lot of technical information on this website. To be concise, a term or concept might not always be defined. This series of comprehensive posts will define all terms and moving parts in a disability insurance policy. It is broken up into three parts: Policy design, disability insurance underwriting (this post), and disability insurance companies. Alternatively, you can start here.
Part 2: Disability Insurance Underwriting
Where to begin? Disability insurance underwriting is very complex, with a number of variables affecting both approvals and premium costs.
What Is underwriting?
Underwriting is the process that an insurance carrier uses to determine how its policies are issued.
According to Merriam-Webster, the term goes back to the 14th century when it simply meant “to write under or at the end of something.”
Its roots in insurance surface around the 17th century, when ship owners, importers, and exporters would publically post proposals to insure their goods while in transit. Typically limited to marine insurance, those wishing to provide coverage would literally write their name under the proposal, also indicating what percentage of liability they were assuming.
Today, underwriting is used in evaluating and issuing (or declining) every type of insurance imaginable.
This process can vary greatly by product, carrier and desired coverage. It is the underwriting guidelines of the company and the risk analysis of the underwriter, the person who applies those guidelines to each application, who ultimately decides if you’ll be offered a policy, what it will cover, and how much it will cost.
Depending on the product, the underwriting procedures will be different. Insuring property is obviously a different process than insuring a person. Consequently, insuring someone from an untimely death is very different than insuring someone from a disability.
Since our agency focuses on insuring people’s incomes, we tend to focus on disability insurance and term life insurance. Even these two products, which have similar uses, have wildly different underwriting requirements.
Let’s compare traditional disability insurance underwriting to its more popular counterpart, life insurance.
Life insurance underwriting places the majority of its efforts on determining the health of the applicant. There are several classes of health both above and below the “standard” classification. Although there is some financial and lifestyle analysis, it is relatively uncommon for a life carrier to request tax returns or to charge a client more due to a blue-collar profession.
The underwriting or approval process for a disability insurance policy is typically much more in-depth. Your policy terms are not only affected by your health, but your premiums are drastically altered by your occupation. In addition, the amount of coverage for which you can apply is directly determined by your income. Even at smaller benefit amounts, tax returns are required and all earned income must be substantiated.
What are the Different Types of Underwriting?
To further confuse the issue, there are many different types of underwriting. For the purpose of this article, we’ll focus on individual disability insurance underwriting.
The three main types of underwriting are traditional, simplified and automatic issue.
For most people, traditional underwriting will be the path that leads to their disability insurance policy. For disability insurance, underwriting is going to be comprised of three primary components:
Your health is evaluated in a number of ways.
First off, when you apply for a disability insurance policy, you’ll complete an application. A portion of that application will have health questions that you’ll need to answer. You’ll also have to answer questions about your avocations, nicotine usage, and a handful of other lifestyle questions. This will be the basis for the health portion of your disability insurance underwriting.
A medical exam will also be necessary. Normally, this is a very simplified process involving blood, urine, height, weight, blood pressure and some other basic diagnostic tests. At higher benefit amounts, more in-depth tests may be necessary. Since these exams are less in-depth than a full physical, it is often completed in your home.
The insurance company might also order your doctor records, which are also known as attending physician statements (APS). If you’ve ever heard that insurance underwriting can take 4–8 weeks, 75% of that time is typically wrapped up in this step.
Depending on your doctor or hospital, this process can take a lot of time. Some physician groups require their own paperwork to release records and others are just slow in responding to a records request. Sometimes if the proposed insured calls, it speeds up the process. Other times, it is going to be a long road no matter what we do.
Also, there are times when a specialist is listed in another doctor’s records. The carrier will often want those records as well, potentially doubling the time it takes to complete your medical file.
Unlike most traditionally underwritten life insurance policies, fully underwritten disability insurance requires proof of financials. This means that, in order to be approved for the benefit amount requested, you’ll need to provide evidence of income.
Self-employed individuals can use the last two years’ tax returns. W-2 employees can use last year’s return and a current pay stub. For business protection, such as key person or disability buyout, you’ll normally need to provide business returns. You may also be required to show P&L statements, a business valuation, and a buy/sell agreement, if one exists.
Self-employed people can be challenging since they tend to try and show as little income as possible. This hurts them for the purposes of individual disability insurance underwriting since the carriers only want to cover actual income, not business revenues.
This exposure can be reduced by purchasing business overhead expense (BOE) insurance, which is designed to offset business-related expenses in the event of a disability. A BOE policy will also require business tax returns to substantiate the requested benefit amount.
Your occupation class has a major effect on your premiums and benefit period. Certain occupations tend to have more disability claims than others, so those policies are priced accordingly.
It makes sense that a CPA would be offered more coverage at a less expensive rate than someone like a tree surgeon. Occupations that tend to be professional in nature are offered the best occupational classes, while blue-collar occupations are going to pay more for similar coverage.
In certain instances, occupations that have a high likelihood of disability will also only qualify for a 2–5 year benefit period. Most of the individual disability insurance that we write is structured to provide disability benefit payments to age 65 or 67 (or in some cases, age 70).
There isn’t much to be done with this part of the underwriting process. Some carriers will offer upgrades in occupation class for business owners or “select occupations” but, if you plan on staying in the same field, you’re likely stuck with whatever occupation class you’re assigned.
The exception to this would be office-type jobs, including sales. There are many occupational classes for these careers and they are normally tiered by length of service and income.
Thomas M recently started a new position at ACME, Inc.; a supplier of widgets. His job in phone sales pays $40,000 per year. Since ACME is a relatively small company, they don’t have group disability insurance. Thomas still wants to make sure that he has paycheck protection, so he asks a few of his co-workers for recommendations on where he can buy individual disability insurance. Jason M, one of the most senior sales reps, tells Thomas that he has great coverage through CYA Insurance. When Thomas applies with CYA, he notes that his occupation class is a 3A. On the other hand, Jason recommended CYA since his occupation class was a 5A. Why the difference?
CYA (a fictitious insurance company) has a similar sliding occupational scale as most disability insurance companies. Because Thomas earns between 30–50k as an office worker, he is classified 3A. To compare, Jason has worked for the company for several years and earns over 100k. His tenure, combined with his earnings, has a direct effect on his occupation class.
That means if Thomas and Jason bought identical policies (which they are unlikely to do due to their disparate earnings), Jason’s would be less expensive, even though they have the same occupation.
Simplified Issue Underwriting
In the insurance business, simplified issue has two separate connotations. One involves allowing a number of health conditions that normally wouldn’t pass muster on a fully underwritten policy to qualify for standard rates.
While that might sound great, these policies are typically double the price of a fully underwritten standard rate. This type of policy can be very attractive for someone with health issues, however, it is not reasonable for someone with relatively good health to ever purchase one of them.
For the most part, disability insurance offers a different definition of simplified issue. When it comes to disability insurance underwriting, simplified issue implies an easier process.
For instance, a simplified disability underwriting process will normally forgo the medical exam, financial verification, and the need to complete a very long application.
Simplified disability insurance normally has much lower benefit amounts than traditional underwriting although, for those making 150k and under who don’t have group coverage, it can be very attractive.
These types of plans are especially attractive for mortgage protection, student loan payoffs and fledgling businesses.
For those that have high incomes, typically defined as making more than 370k (the max limit for most disability insurance carriers to cover 60% of your gross income), automatic issue policies can make up for a lack of coverage.
The premise is simple. Purchase a fully-underwritten disability insurance policy at the maximum coverage allowable by your chosen carrier. Send a copy of the policy to an automatic issue carrier within 90 days of issue and voilà, you have a supplemental disability insurance policy to make up for the income gap.
The policies are underwritten by Petersen International, a cardholder of Lloyd’s of London. We use automatic issue disability insurance when a traditional disability insurance policy doesn’t have the coverage that the insured desires.
If you need supplemental disability insurance coverage, please contact us today.
Possible Underwriting Results
You’ve gone through the process.
An exam, providing financials, detailing the day-to-day role that you play within your occupation.
You’re approved! With a few caveats……….
The bane of your disability insurance policy; exclusions are the conditions that allow your carrier to not pay a claim.
There are several inherent exclusions in every disability insurance policy. Disability due to war, committing a crime, or by self-inflicted injury are universally denied.
That being said, there are a number of “custom” exclusions.
These include conditions such as a previous mental/nervous disorder or a spinal injury. Depending on the severity of the health condition, the exclusion may be temporary or permanent. In some instances, the disability insurance carrier will allow for a reconsideration of the exclusion after a period of time.
Ryan R. lost both of his parents last year to a tragic car accident. Obviously, he was distraught. To deal with this monumental loss, his doctor prescribed him anxiety medication. He filled his prescription and took the medication for several months.
After the pain of losing his parents subsided, he no longer needed to take the medication. Two years later, Ryan applies for a disability insurance policy.
More than likely, Ryan is going to have a mental/nervous exclusion applied to his policy. Because his anxiety was brought on by acute circumstances, he might be able to get the exclusion lifted after a few years. Of course, this assumes that he doesn’t miss any work due to his previous condition, has no other anxiety issues, and is no longer on any medication.
Whenever you have a condition that is a leading cause of disability, expect an exclusion.
That certainly doesn’t mean that you shouldn’t accept the policy. Just because a chronic condition or acute illness prevents a disability claim that doesn’t mean that this type of coverage isn’t important to protect against other accidents or a possible sickness.
Like life insurance, disability insurance underwriting can include a health “rating”. Ratings are not a positive thing… each rating increases your premium by approximately 25%. Often referred to as “tables”, these premium increases can be assessed for a number of reasons, most notably build (height and weight) and persistent health issues.
Disability insurance has different pricing to life insurance. Disability insurance has a standard rating based on occupation and health and assesses ratings from there. On the other hand, life insurance has two to three health classes higher than the standard. Healthy individuals typically have a premium advantage when applying for life insurance, whereas everyone is on a relatively level playing field when it comes to disability insurance underwriting.
If you receive a rating, it is important to shop for your coverage. Carriers have different appetites for risk and sometimes where one carrier will rate, another will offer standard coverage. Call us today if you have been offered a rated policy. We can redesign your policy to fit your needs.
Your disability insurance policy is going to be priced according to your occupation, health, and financials.
That being said, not all insurance carriers evaluate risk the same way. Each carrier has specific guidelines as to what they will allow for a specific policy. They also have different programs that allow a potential insured to increase coverage and/or reduce costs if certain conditions are met.
There are several carriers that offer programs which allow for an occupational upgrade or a “preferred occupation” discount. As long as certain criteria are met, a person that might be classified as a lower (which equals higher premiums) occupation can be upgraded up to two classes. This allows the applicant to substantially reduce premium costs for a similar policy without an upgrade.
This is another area where you might be able to upgrade your coverage. Specifically, self-employed individuals and other business owners have the ability to get more coverage than their financials would otherwise allow.
Often called a “business owner allowance”, fitting the right criteria can allow a business owner to artificially increase their income, permitting a larger total benefit amount. This is particularly desirable since many business owners write off a lot of expenses and might make/need more money than their tax return shows.
As mentioned before, self-employed individuals tend to show little income. These allowances can be very helpful in securing additional disability insurance. Of course, most small business owners should also have business overhead expense (BOE) insurance, which will help to mitigate any disparity between revenue and income.
There is a lot that goes into insurance underwriting. Both life insurance and disability insurance have specific requirements, however, disability has its own special set of qualifications.
If you’d like to learn more on your own, then check out Your Complete Guide To Buying Disability Insurance. If you’re ready to have us guide you, then contact us today for a complimentary consultation to identify your needs and options.
If you’re looking to secure disability insurance for yourself or your business, we are here to help.
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