What are “Exclusions” on a Disability Insurance Policy?
Disability Insurance (and May is Disability Awareness Month) is a heavily underwritten insurance product. What this means is disability insurance has many different ways to show that a person is a higher risk for a claim than many other insurance products in the market. The concept of “rate classes” and “exclusions” are a perfect example of this.
Life insurance will generally have “rate classes” which will range anywhere from a “Super Preferred or Elite Rate” which is way above average or “Standard”, to as low as a “P” rating (which certainly does not stand for Preferred!). Similar to this range of rate classes which will dictate the range of “cost” or “premium” that the applicant will have to pay for coverage (tobacco use or not also being a factor), disability insurance will also give ratings but usually based on a percentage increase from the average or “standard” rate. For example, the Standard Rate for a particular policy might cost the policy holder $75/month, but if they have some health conditions that the insurer sees as creating a higher risk for a claim, they may give the policy holder a 100% rating, meaning, that for the same benefit they will have to pay $150/month.
In addition to these potential reasons for what insurer’s would call “adverse selection”, essentially a person that is a higher risk for a claim than the average person, disability products can also have “exclusions” on them. These exclusions can be added on any policy, rated or not, to allow the insurer to refuse a claim if a person has a particular pre-existing condition that would likely result in a future claim. Outside of this, the rest of the potential reasons for submitting a claim would be no more risky than if someone else who was perfectly healthy became disabled and had to submit a claim. For example, a person might have had a right knee replacement in the past but has no other past or present medical issues. The carrier/insurer could offer him the standard rate that everyone else would get by having no health issues, but would add an “exclusion” on to the policy stating that they would pay any claim associated with the person “not being able to perform the material and substantial duties of their own occupation reasonably suited by education or training”, but that they would not pay any claim if the person became disabled due to a right knee injury. Their cost/premium isn’t increased, just their chances of putting in a claim is lowered.
Carriers/insurers scrutinize applications for DI probably more than almost any other insurance product. This is most likely due to pressure to alleviate the large possibility of someone becoming disabled, which is a higher likelihood than someone passing away prematurely (life insurance), or going on an extended care claim (long-term care insurance). As an example, if a 30 year old person has a potential monthly benefit payout of $4,000/month, and a benefit payout duration to protect him until he reaches age 65, if he went on claim for a lifetime permanent disability right away, $4,000 X 12 months X 35 years, the carrier could be on the hook to pay $1,680,000 over the life of the contract having only received possibly a few hundred dollars from a few months premium payments!
There is a valid reason for disability insurance exclusions whether we as the customer like the idea or not. The fact of the matter is that we could become disabled in many ways: most will be from illness and not by accident! What is the likelihood of getting cancer and not being able to work, or some other debilitating condition we may never have thought possible? We could complain that we got an “exclusion” for a right knee pre-existing condition, but that won’t slow cancer down! If you are concerned because you do not have a disability policy in place and worried about the risk of having a loss of income, call me today.
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.