Those who are not covered by ERISA group disability, are generally high-level physicians, lawyers, executives and various other medical personnel. They either own their own practice, or work for a medical/legal facility. These professionals purchase Individual Disability Insurance, broadly referred to as, Individual Replacement Disability Income. Unfortunately, these professionals are also just as unaware about the underwriting of IDI insurance as the ERISA folks are about their Plans., even though it can be costly.
Misrepresented underwriting for IDI insurance contracts can quickly come back to bite you, if you are not careful. IDI policies have a state jurisdiction and are subject to the laws of the state in which the contracts are sold. Breach of contract are generally regarded as “torts”, and absent federal connection, litigants can be awarded “punitive damages in state courts.”
I’m sorry to say that IDI contracts are sold by “AGENTS”, representing the issuing insurance company, not you. Although many professionals tell me their insurance agent is treated like family, and are frequently invited to dinner, the truth is, he/she represents the insurer and knows very little about “risk management” inside their respective employer companies. In other words, they know the “sales pitch”, but are basically unaware of any “denial scenarios.”
Moving on, underwriting for IDI coverage result from a completed application. I’m not an insurance producer, and I don’t know how true this is, but I’m told that applications for coverage are filled out by the agents from what prospective insureds tell them. (Keep this in the back of your mind for just a moment.) The information is taken at face value and is submitted to an underwriter for processing.
First, disability contract underwriting applications are examined carefully for identification of past medical history diagnoses and treatments, habits, perils and hazards (opportunities for risk), and is then compared to huge data bases identifying YOUR data with everyone else in the data base of the same age, sex, and medical history. Risk factors are identified along with projections of probability (actuarial data) of the person’s likelihood of filing a claim. (Probable payout rate.)
Second, the new insured’s history of buying other disability products is also investigated to determine if the insured will be “over insured”. If the physician makes $350,000/year, why does he have 6 polices with total insurance of $3 million? I know at one time, Berkshire/Guardian was writing contract provisions insuring only a maximum amount from total insurance products purchased. You might want to check that out if you have many older policies.
Next, a financial reserve is calculated. It’s important to note that companies calculate the reserve differently, which may account for some of the differences in premium pricing. I can get pretty technical with the underwriting of IDI contracts, sometimes the math can be a little hard to understand, but the present value of “interest” is also calculated on future premium payments.The premium you pay is invested in insurance portfolio income.
Some disability products are “participating” meaning that the insured will receive a share of any dividend or interest income earned on the total collected premium. There are many options insureds can choose from as to what to do with the income, but declaration of “participating benefits” is optional and the company is under no obligation to declare the income.
Information given to an insurance company on the contract application is always referred to as “a representation”, not a “warranty.” This is for your protection since if any information is found to be false, it can be CORRECTED without anyone going to jail for fraud. A “warranty” is a guarantee the information is accurate, and subject to “intent” when given falsely. A “misrepresentation” is corrected and everyone is happy.
In order to protect the insurance company, the issue of “Contestability” is written into the contract provisions. Contestability gives the insurance company two years to challenge any information given on the underwriting application for coverage. In fact, if a claim is filed within the first two years of issue, a “Contestability” investigation is undertaken to make sure ALL of the initial information is accurate. If a claim occurs AFTER the two-year contestability period, the insurance company cannot take any action against you for misrepresentation.
So, what can they do, you might ask? First, the insurance company can “rescind” the policy entirely and not reissue it. Second, the company could rescind the policy, but reissue a new one using accurate information, IF THE INSURED REIMBURSES THE COMPANY FOR THE DIFFERENCE IN INCREASED PREMIUM that would have resulted if accurate information had been given from the start.
Third, if the misinformation had to do with the non-disclosure of a past medical condition, the insurance company will rescind the old policy, conduct additional underwriting, ask for compensation to bring premium up to date, and ALSO ISSUE AN EXCLUSION refusing to pay for any future claims with the diagnosis that was “left out”. The insurance company can refuse to reissue any policy, if it makes that decisions.
As you can see, IDI underwriting can become quite a bit more involved than ERISA Group underwriting, if accurate information is not disclosed, or unintentionally left out. The two-year Constestability investigations are nearly the same as “Pre-existing Condition” investigations with only a slight difference in overall objective.
A few IDI issuers take Contestability to the extreme, such as Unum Group, for example. The company actually rescinded a policy because the insured failed to disclose he was taking “Advil.” This whole issue was eventually thrown out on appeal after several years of fighting it.
Most people don’t lie when it comes to buying disability contracts. The examples used to train Consultants usually are about someone who misstates their age, but I don’t find too many people do that anymore. The “misrepresentations” seem to be a bit more complicated than that these days.
While professionals often regard IDI policies as “entitlements” once paid for, the advantages of “state jurisdiction” can be quickly undone when insureds fail to understand what these products are really about. I probably know more about the underwriting and management of IDI products than most agents do, because I represent YOU, not the insurance company.
Please give me a shout out if are finding these articles beneficial to your understanding of your own insurance contracts and policies. Sometimes, insurance is much more complicated than anyone realizes.
