| September,
2004 - CALIFORNIA BROKER
The Real Deal on Disability Insurance
by Arthur L. Fries, RHU
Understanding
contractual provisions can go a long way in helping you
become a better disability salesperson and advisor. This
involves knowing the history of the disability industry
and being aware of what is happening in the courts.
I feel compelled to write this article to clear up, what
I feel are, some inaccuracies in the disability article
by Lawrence Schneider, which appeared in the July issue
of California Broker Magazine, As one who has been involved
with more than 400 disability claims in the past eight
years and who has written more than 50 articles related
to disability insurance (25 related to disability claims),
I believe that I am competent to respond to Mr. Schneider’s
remarks. Also reviewing this article was Gerry Katz, a
former senior brokerage representative with Unum and,
in recent years, a disability claim consultant/expert
witness.
This
article by Schneider says that there are policies that
contain the killer word, “thereafter,” which
are “own-occ” initially and then change to
a less liberal definition at some point – usually
after five years and for the remainder of the benefit
period. However, almost all of the policies that I have
reviewed have a definition change after two years, not
five years, when not written under the “pure own-occ.”
It is very rare that I have seen a change after five years
– especially in the professional marketplace.
Schneider
states, “Remember, the policy’s definition
of “total disability” usually reads, “unable
to do all the substantial and material duties of your
occupation (occupations).” Most of the thousands
of policies I have reviewed that related to “pure
own-occ,” did not have the word “all”
in the definition. That one word, “alll”,
can be subject to a different interpretation. There are
court cases discuss the difference between the above wording
without the word, “all.”
The
article states that, with respect to “own-occupation
for the full benefit period,”…the definition
looks at the occupation of occupations being performed
at the time of claim, not at the time of application.
As a general rule, the occupation or occupations you were
in just before the disability will be the one the insurance
company uses for claim purposes. However, some court cases
have stated the opposite. They relied on the occupation
as stated in the original application for insurance. Sometimes,
a “specialty letter” was issued, which gave
the courts the incentive to rely on the occupation as
stated in the original application for insurance.
The
article discusses the use of “specialty letters”
in which surgeons and some other types of medical doctors
can use a specialty letter, in which their definition
of “total disability” is enhanced to cover
their AMA recognized specialty. However, specialty letters
were discontinued over a decade ago.
The
article states that, “Most residual benefit contract
language also includes benefits for partial disability,
which only requires a loss of duties, as opposed to a
loss of income, to trigger benefits and pays a minimum
of 50% for the first six months.” However, most
of the residual language that I have seen indicates a
loss of earnings of 20% and some at 25% and a loss of
time – usually a 20% loss of time or the loss of
one or more duties. It is very rare that I’ve seen
a “loss of duties” only type of wording. Some
contracts only discuss a 20% loss of earnings and don’t
even mention time or duties.
The
article says that, “Higher-issue limits are available
if the employer pays the premium with these benefits being
taxable, in contrast to tax-free benefits when the employee
pays the premium! There are some tricks of the trade’
to have it both ways.”
But,
tricks should not be used by insurance professionals.
Let’s suppose your prospect wants to purchase as
much disability as he can get and he wants the benefits
to be tax-free at claim time. Assume the prospect earns
$300,00 per year ($25,000 per month) after business overhead
expenses including any monies put into a pension/profit-sharing
plan, Sepe, IRA etc. Assume there is no significant money
(over $5,000) in the form of unearned income. Based on
most issue and participation tables, the applicant would
be eligible for a monthly benefit of about $10,000. The
premium paid is not tax-deductible and the benefits are
tax-free at claim time. However, the applicant is a professional
corporation. You tell them to pay the premium from the
corporate account, which allows them to secure an additional
$2,500 of monthly benefit or $12,500 a month total.
In
such case, at claim time, the benefits would be taxable
since the corporation is deducting the premium as a business
expense. Here is where the “trick” comes in,
which also happens to be really bad advice: You have the
applicant pay the premium initially through the corporation
(say monthly check deduction). A month or two after the
policy is issued, you change the payer of the premium
to the individual. The corporation no longer pays and
deducts the premium. You will now collect benefits 100%
tax-free at claim time and you secured an additional $2,500
monthly benefit. If the insurance company had known you
were going to do this, it would not have issued more than
the $10,000 monthly amount based on the issue and participation
tables. But, since you purchased a “non-can”
or “GR” contract, the insurance company is
stuck with the $12,500 monthly obligation.
So
what’s wrong with that advice? It was a fairly common
approach that sophisticated disability insurance sellers
used for many years, but under court precedent, beginning
about five years ago, this “trick” has become
nothing but bad advice. One court case involved a San
Diego attorney representing a physician who had paid just
one premium through his professional corporation 17 years
before the claim. After the one premium was paid, the
physicians used the “trick” approach. The
judge ruled that this came under the ERISA guidelines
because the corporation paid a premium even though premiums
were paid on a personal basis for almost 17 years. How
was this bad for the claimant? Under ERISA guidelines
you cannot sue an insurance company for bad faith (punitive
damages) so the judge threw out the bad faith aspects
of the claim, which meant that the attorney could only
talk about the contractual language and not the bad prior
deeds of the insurance company. In addition, ERISA guidelines
say that the claimant cannot have a jury and cannot sue
for the future potential value of the contract. The claimant
can only sue to get the monthly benefit plus attorney
expenses and fees. In essence, it gives the insurance
company a legal edge. Many of the heavy hitter disability
attorneys do not want to be involved in ERISA claims because
they can’t sue for bad faith. They cannot secure
“future benefits” or a percentage of same
in the form of a settlement as it relates to ERISA claims.
They usually cannot charge a 30% to 40% contingency fee
on the contractual benefits (future value) and that does
not make for a happy attorney!
Referring
to my earlier example, if the policyholder went on claim
during the first two policy years, the insurance carrier
might question the “trick” under the two-year
incontestable period. That makes sense. For too many years,
they did not ask for tax returns, which only created problems
at claim time – especially where a “fraud
case” in the contract was involved. For many years,
banks asked for tax returns when you secured a mortgage
on a house – often for much less money than the
future potential payout of a disability policy. Insurance
companies finally got around to asking for tax returns
when they realized how much future potential benefits
were involved.
If
you believe that tax returns are not required on a total
disability “your-occ” type claim – you’re
living in another world. Insurance companies are demanding
complete copies of personal and corporate tax returns
often going back five years. Two years is more than reasonable
from an investigative standpoint of a total disability
claim and it gives the carrier the opportunity to see
if there is a “dual occupation” issue or if
there are economic issues related to the claim.
_____________________________________________________________
Art
fries is a disability consultant/expert residing in Newport
Beach. He sold his first individual disability policy
to himself in 1963. For the past five years, Fries has
attended the annual meeting sponsored by the American
Conference Institute related to “Litigating Disability
Insurance Claims.” He can be reached at (800) 567-1911
or www.afries.com.
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