Individual disability insurance is simply income protection.  You can’t predict what your health will be in the future.  You may stay active and eat healthily, but most disabilities are actually caused by unexpected illnesses such as cancer and accidents.  If a medical condition prevents you from being able to work, disability insurance is there to provide funds so you can focus on taking care of yourself instead of having to worry about how the bills are going to be paid.

“I don’t need disability insurance because…”

“I can use my savings to replace lost income.”

Are you actually saving just in case you become disabled, or are you saving for a new house?  Retirement?  Child’s college?  If you use your savings to replace income, what happens to those other goals?  Even if you save 10 percent of your salary, a one-year disability could eliminate many years of savings.

“I have enough disability coverage though my employer.”

Group long-term disability insurance is a great start, however, it typically only covers 60 percent of your gross income and the benefits are often taxable.  After taxes, you’re left with approximately half of your gross income.  Is that enough for you and your family to live on?

“I could borrow money from family and friends.”

The amount of money needed may be quite substantial and required for a long period of time.

“I could borrow money from the bank.”

As someone who is unable to work, how will you afford the loan repayments?

“Social Security or Workers’ Compensation will take care of me.”

The Social Security Administration denies about 65 percent of all claims and pays benefits for total and permanent disabilities only.  Workers’ Compensation benefits are limited to only occupational diseases or injuries that occur during course of employment.  Even if you were to be granted benefits from either, it’s likely these sources may not be enough to maintain your lifestyle.

Disability Insurance Underwriting Basics

As you probably know, here at Quotacy our world revolves mainly around life insurance.  However, life insurance and disability insurance are similar in the way that they both are made to protect income.  Life insurance protects your loved ones from financial difficulties in the event of your death and disability insurance protects you, and in turn your loved ones, from financial difficulties in the event of a disability that prevents you from working.  They are not underwritten the same though.

Life insurance underwriting involves mortality risk, basically the assessment of medical impairments and how they can attribute to premature death.  Disability insurance underwriting involves morbidity risk, basically the assessment of medical impairments that can result in prolonged disability.  As an example, a painful back isn’t going to cause a person’s death, yet back problems are a major cause of disability.

There are three levels of disability insurance underwriting:

  1. Occupation
  2. Medical
  3. Financial

Occupation

For disability insurance, classifying an applicant in the correct occupation class is critical in determining the proper benefit amount and premium rate.  When determining occupation classification there are five major factors:

  1. Job duties
  2. Environment
  3. Income
  4. Stability
  5. Dual occupations

Common questions asked when applying for disability insurance include:

  • What is your typical day like?
  • If you work any manual duties, what are they and what percentage of time do they represent?
  • Do you have ownership? If so, how many employees?
  • Do you work multiple jobs?
  • How many hours do you work?

The table below shows occupation class examples.  Higher occupation classes typically perform less manual duties.

A Shipping and receiving clerk, press worker
2A Building inspector, medical assistant
3A Administrative assistant, bookkeeper, graphic designer
4A Landscape architect, paralegal
5A Pharmacist, small animal veterinarian, computer engineer
6A Attorney, CPA, engineer

Your job title doesn’t necessarily automatically put you into a certain classification.  Two people can have the same job title, but different occupation classes.  Consider the table below.

Who would have the higher classification?

Jamie – President of Johnson Construction Kelly – President of ABC Construction
  • 75 employees
  • $100,000 annual income

Duties:

  • 70% office planning, managing, other admin
  • 25% meeting with clients/prospects
  • 5% visiting job sites
  • 6 employees
  • $30,000 annual income

Duties:

  • 80% supervision at job sites
  • 20% office planning, managing, other admin

Jamie’s everyday duties include little to no manual labor, so Jamie would be in a higher occupation class because Jamie is at less risk of developing a disabling impairment such as a sprained back.

Medical

An applicant’s medical history is crucial to underwriting disability insurance.  Common medical conditions such as back disorders, stress/ anxiety, or high blood pressure are unlikely to cause an application to be declined, but you may have higher premiums or a reduced benefit amount.  Certain medical conditions, however, may result in a decline of coverage.  If you have been diagnosed with any of the following medical conditions, be aware that you may not be able to obtain coverage.

  • Bipolar disorder
  • Cancer
  • Cirrhosis
  • Chronic fatigue
  • Emphysema
  • Fibromyalgia
  • Juvenile diabetes
  • Kidney disease
  • Heart attack
  • Hepatitis C
  • Multiple sclerosis
  • Pancreatitis
  • Rheumatoid arthritis
  • Stroke
  • Systemic lupus

Not all disability insurance carriers underwrite the same, so it doesn’t hurt to apply.  The severity, treatment, and amount of time since you have been diagnosed are all factors the underwriters will consider when evaluating an application.  Sometimes instead of declining an application altogether based off the history of a specific medical condition, an underwriter will offer to approve the application with an exclusion rider that states no coverage will be provided for a disability resulting from the specified condition.

Financial

Disability insurance helps to replace lost income, so it deems necessary to document the financials of an applicant to determine a benefit amount.  Disability insurance will only cover earned income.  For example, income from sources other than active work efforts, such as dividends or rental properties, is considered unearned income and is likely to continue accruing even in the event of a disability.  So, it may be necessary to prove to the insurance company what your earned income is by providing copies of current and prior years tax returns.

Consider the effects a disability could have on you and your family’s lives, your standard of living, and savings.  In addition to helping individuals obtain life insurance coverage, we work every day with people needing disability insurance as well.  Head over to our disability insurance page if you are interested in obtaining a quote.  We just need a few pieces of information and then our team will shop the market and provide you with personalized disability insurance quotes with the best options available.

 

Related Posts:

The Income Protector

Financial Planning: The 5 Ds

Common Financial Challenges – Belief Versus Reality

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