by William D. Brownlie, CLU, ChFC, CIP, LIA
If you become sick or injured, you will not be able to continue to live in the fashion to which you have become accustomed unless you have enough present-value money (in your checking or savings account) to provide the required yearly stream of income. If your current assets are not sufficient to provide the required yearly stream of income, you need disability insurance. Please keep in mind that because of medical technology illnesses and injuries that previously resulted in our deaths are today, disabling us.
Disability Insurance: How Much and What Kind?
How much and what kind of disability insurance should you have? You should have enough so that when it is combined with your other liquid (conversion to principal without a decline in value) assets it will provide you with the required yearly stream of income you need. The kind you need may depend in great part on your current occupation and on how you are employed - i.e., on whether you are a self-employed professional, the owner of a business, or an employee of a company or other employer. If you work for someone else, ideally you are being provided with long-term (benefit period to age 65) disability coverage by your employer, on either a group or an individual basis. The unfortunate aspect of working for someone else, in regard to disability coverage, is that most likely you have no say in the design of the disability plan provided by your employer.
Premiums and Taxes
A premium paid by your employer for either an individual or a group disability income policy is tax-deductible by your employer and non-reportable to you as income, pursuant to Section 106 of the Internal Revenue Code. A premium that you yourself pay is not tax-deductible.
Benefits Received and Taxes
When benefits are received from a disability income insurance policy fully (100 percent) paid for by your employer; the benefits are fully taxable. When benefits are received from a policy, which you paid for, and the premium was not tax-deductible, the benefits are not subject to tax.
In the short run, when the disability insurance premium is either paid by someone else or is deductible the negative emotional issues involved in buying disability insurance are either reduced or eliminated. This is a fact of life because the present-value cost payment is at a discount or removed. However, these extracted feelings are soon forgotten at the time of claim when the monthly check is subject to the federal income tax as reportable income. I personally prefer tax-exempt income having been disabled.
Before purchasing a disability income insurance policy make sure that you understand the claim process of the insurance company. Becoming disabled is not the same as "hitting the lottery" when it comes to receiving money from the insurance company. Equally as important, if you can, make sure the policy contains all of the criteria listed below. It is possible that a group policy being provided by your employer or a plan endorsed by your professional association does not employ these criteria. However the trend has been for group policies to become similar to an individual policy. In addition many professional associations now endorse the utilization of individual disability policies.
(Contractual and Non-Contractual Guarantees)
Premium discounts if certain conditions are met - non-contractual
- Non-cancellable and guaranteed renewable - contractual
- Long term benefit period coverage - contractual
- Coverage for both total and residual disability - contractual
- Definition of total disability "the inability to engage in your specific occupation at the time of claim" - contractual
- Dual occupation determination in writing prior to purchase - contractual
- Total disability not required for residual disability - contractual
- State or federal law which may render you disabled determination in writing prior to purchase - non-contractual
- Recovery benefit - contractual
- Residual disability indexed for inflation - contractual
- Waiting period - contractual - individually determined
- Lifetime benefits rider - contractual - an optional benefit dependent upon your current present-value retirement assets
- Cost of living rider - contractual - an optional benefit dependent upon your current present-value retirement assets
- No offset for other benefits paid e.g., social security disability, group long term disability - contractual
- No limitation for mental and nervous disorders - contractual
- Portability i.e., you own the policy it goes with you, with all contractual guarantees, non-contractual statements and premium discount, if any
Please remember: The peculiarity of any insurance contract (life, disability, long-term health care, etc.) is such that a knowledgeable professional must clarify it. It is a one-sided legal document in favor of the policy-owner. It is an unequal legal document because only the policy-owner can change the contractual stipulations. The insurance company cannot make any alterations (although consumer friendly companies usually make new improvements retroactive to an existing policy-owner). It is essential that the policy-owner understands all of the contractual clauses-failure to do so may result in frustration and economic disappointment.
It is absolutely essential that you have a knowledgeable advocate representing your best interests at the time of a disability claim. This very strong feeling is based upon my own disability claim and those of my clients. I will not leave it up to the claims department of an insurance company to define the contract. Nor will I allow the insurance company to act in a capricious manner.
Applying for a disability claim is a very subjective issue-the direct opposite of a life insurance claim-which has only one impartial topic: is the insured alive or dead. It is my opinion that because of the biased environment, (some insurance companies do not want to pay what the insured feels is his/her just entitlement) much care and thought is required by the insured when filling out the claim forms. A carefree attitude, (the insured is ill advised to think that the insurance company has his/her best interests at heart) must be avoided. A professional should guide the insured and his/her attending physician through the procedure. The insured should always see the attending physician's statement before it is mailed to the insurance company-if possible-and providing that the attending physician does not feel that it comprises his/her integrity.
Answer all questions in an honest brief concise manner. Do not volunteer any information not asked for-and all communication with the insurance company should be in writing. Avoid any interaction over the telephone and if necessary, ask if the conversation is being recorded. Should the insurance company send a representative to visit (face-to-face) do not allow the conversation to deviate from the main issue, your disability. In other words do not babble. If your claim is denied read very carefully what the insurance company has to say. Then study the contract with your professional adviser.
Ask yourself, does the denial language make sense after taking into consideration the contractual language? I quote from Elements of Life and Health Litigation by Leon Wasserman: "The courts have, for the most part, liberally construed the contractual provisions in favor of the insured. Upon the stated grounds that there were thereby giving to the contractual language a practical and fair result consistent with what the policyholder reasonably had in mind when he/she purchased the policy. In fact, in many instances the courts have simply discarded policy language in order to arrive at a just result." However, litigation with a deep-pocket insurance company is not only very expensive but, and equally as important, extremely stressful.
It has been my personal experience that a meticulous study of the contract and a word for word reading of the denial language are usually sufficient to determine if you have a just and proper claim.
When you are convinced that you have a just and fair claim and the insurance company realizes that you are not going to "fold your hand-in the claim paying game" you should prevail without having to go to court-I did.
William D. Brownlie is a Massachusetts Licensed Life Insurance Adviser, a Chartered Life Underwriter, a Chartered Financial Consultant, and earned a certificate in Investment Planning from the Boston University Program for Financial Planners. He is the author of Life Insurance Boot Camp Buyer's Guide - Second Edition 2000 ISBN 0-9662791-3-1 now in print. This article is based upon condensed material from Chapter 18 Life Insurance Boot Camp Buyer's Guide - Second Edition 2000 (c) 2000 William D. Brownlie all rights reserved.