[Editor's Note: This is a guest post from Rick Warren, who is an insurance agent and one of the owners of Insuring Income, a long-time WCI advertiser and a sponsor of The WCI Scholarship. In this post, Rick discusses exclusions and limitations of disability insurance. This is a topic near and dear to me, as my individual disability insurance carries a climbing exclusion, meaning if I'm disabled climbing, it won't pay out. I periodically get emails from readers dealing with similar issues and hope this post will help.]
The purpose of this article is to assist readers that currently hold, or are considering, a disability insurance policy to dig a little deeper when their policy has exclusions, limitations, or has been issued without the option of certain riders. To properly consider this question, we need to break down the variables that contribute to a disability policy being issued at less than 100% of its potential: the insurance company, the agent, and the client/insured.
Insurance companies protect against risk, this is the nature of their business model. Insurance companies offer policyholders a means to protect themselves against a risk of loss they cannot otherwise pay for on their own (self-insure). However, insurance companies also have to protect themselves, as businesses, against risk as well – this is why they have underwriting. Each insurance company has slightly different criteria within their underwriting model; underwriting is the way the insurance company determines if the risk a potential policyholder presents is “worth” the policy premium it would receive. In the case of disability insurance; the insurance company evaluates the risk an applicant presents and may approve a policy, but, that policy has exclusions, limitations, or restrictions. The insurance company does this so it can still insure someone, but protect itself from what it sees as certain “high risk” conditions pertaining to that applicant.
An exclusion is where the insurance company says that they will insure a client, but will add language to say that they will not cover certain body parts, conditions, or activities. Some black and white examples would be:
- Multiple knee surgeries to repair damage from skiing or playing sports. Disability carriers are likely to exclude that knee, at a minimum.
- A pre-existing health issue like anxiety treated with medication. Carriers are likely to exclude “mental/nervous” conditions.
- Free-climbing (rock climbing). The insurance company is not going to cover a disability stemming from an activity they consider to be a hazardous.
Exclusions can be written into the final contract as permanent, or “reviewable” after a certain period of time. Using our examples above; the medically repaired knee might be a permanent exclusion (although it cannot hurt to have it reviewed). The anxiety may come with language from the insurance company saying the equivalent of, “In two years, if the client can demonstrate [backed up thoroughly by medical records] that the anxiety is resolved, and the medication has not been taken [per the advice of the prescribing physician], a review of this exclusion will be possible.” This is not a promise on the part of the insurance company, but there is the possibility of a review.
[Editor's Note: Don't count on ever getting a dangerous activity exclusion removed, it simply isn't logical. For example, consider my climbing exclusion. If I stop climbing, I don't need the exclusion removed. If I'm still climbing, why would they remove it? The only incentive for the insurance company to remove an exclusion is if you are taking your business elsewhere because someone else is offering you a policy without an exclusion.]
A limitation may not be as pointed as an exclusion, but still limits the disability policy in some fashion. An example of a limitation would be:
An applicant has some health issue(s) and the insurance company issues a disability policy, without exclusion, but limits the policyholder’s benefit period to 10 years – instead of the “to age 67” they applied for originally. The insurance company is limiting their risk by limiting the duration they would potentially pay out benefits.
Restriction of Rider
During fellowship, a surgeon applies for a policy and the insurance company, based on their underwriting and the client’s medical history, issues the policy for the amount and the benefit period the applicant originally pursued (ex. $5000 in monthly benefit, to age 67). However, the final policy has a restriction that zero additional future purchase options are available throughout the life of a policy. This surgeon has the potential to earn $350,000 or more post-fellowship, yet a significant portion of their income will be left unprotected, and they will have no potential within that disability contract to cover those future earnings. Any increases or additional coverage that surgeon wants to add later would require full medical underwriting.
So, how does the agent factor in? The agent has a dual responsibility – they need to serve you as their applicant/client, and they also need to operate with integrity when dealing with the insurance companies. Your agent needs to do a lot of things to keep your insurance application process (or policy service) moving along smoothly. For the purposes of this article, we are going to limit our discussion to exclusions, limitations, and restrictions within a disability insurance policy.
What your agent should be doing:
- Help to clarify or expand your answers pertaining to medical history and questions.
- Work with the underwriter of an insurance company and fight (advocate) for the very best, and most robust offer that insurance company will write.
- Ensure that you are applying with the insurance company that is best for you; remembering that each company has their own matrix for underwriting, policy features & benefits, as well as their own pricing models. The agent should be going into the process with all options “on the table”. They should be willing to move to another carrier if underwriting is indicating a negative approval. This is not to say that the original carrier should be “off the table”, but rather, to say that they need to be fighting for the best possible coverage for you.
What your agent should not do:
- Hide things for you – no credible agent ever would, and there are ramifications to you as the policyholder, as well as to them and their career if they do.
- Only offer you one option, unless the marketplace (literally) only has one option for you. This is exceptionally rare. You, as a potential policyholder may not like all of the options, but you almost always have more than one option.
- Offer the insurance company that is best for them as agents.
The last “should not” bullet is where we need to spend some additional time. To understand whether or not you are getting an objective analysis of your disability insurance options, you need to understand –in brief – how an insurance agent gets paid. If you work with an agent and you put a policy in place, the insurance company pays that agent a percentage of your overall premium, generally called first year commission. If you continue your policy year after year the insurance company may pay that same agent a smaller percentage each year, for x number of years (each company is a little different), this is called a renewal. Getting paid is not inherently the problem; doctors, plumbers, architects, and insurance agents get up every morning and go to work to earn money to live their lives.
Where it becomes difficult for a consumer is in understanding if your agent is working for you as a client, or “for” an insurance company. Insurance agents, generally, fall into one of three categories – regardless of the title they have on their business card:
This is an insurance agent who represents a variety of companies and in all likelihood, places insurance business with multiple different carriers throughout the year and over the course of their career. This agent is appointed by these carriers to represent their insurance product portfolio, but they have very limited contractual obligations (read: production requirements) to those carriers. For you as the client, this can afford you an objective look at the entire marketplace without wondering if your agent is guided by a sales goal.
Full disclosure: some insurance companies pay more than others but agents should not be compromising their objectivity over +/- 5%.
Company “X” Representative/Advisor
This is an agent with a “home team” company and they have formally aligned with company “X” by virtue of a contract. Within this agent’s contract with company “X”, is some form of production requirement to place that company’s insurance product portfolio. This agent likely has the ability to represent additional companies to their clients, but it may be to their advantage to get as many clients as possible to buy the “home team products”.
Full disclosure: you are not necessarily disserved by a company representative. I know many phenomenal agents who look out for their clients, always deliver solutions and products that are the very best fit for the client needs/wants, and objectively represent multiple companies while maintaining their contract with the “home team”. For you as a client, you just need to mindful that you are receiving the best offer for you, not for your agent.
“Captive” or “Proprietary”
This is an agent, who by some contract of employment, only represents one company and the insurance products that company offers. They may not be allowed to represent any other companies at all, or may have a limited secondary offering only when the client is declined for the “home” company insurance product. This can be very restrictive for you as a client because “every peg just has to fit in the same hole”. The product, cost of insurance, and approval may not be the best for you – but ultimately, that is the only thing that agent can offer [i.e. sell to you-ed] you so they may try to persuade you to take it no matter what.
Full disclosure: there are great agents who have found the right “profile” or “target market” of potential clients where their offerings fit well and serve the best interest of the client.
Type of Agent and Exclusions, Limitations, and Restrictions
If your agent is trying to get you to accept a policy with one or more exclusions, limitations, and restrictions, you need to wonder – would other quality carriers have the same modifications? Your agent should be able to provide you objective feedback on that question. If you are the person with multiple reconstructive-level knee surgeries, you should know that it is likely that all carriers would operate the same way when it comes to that knee.
What if the modification to your policy is more of a gray area than a black and white example? Is your agent looking to get you the best possible policy (perhaps without the same modification) or are you just discussing the “home team” insurance policy? Remember, while they all operate in the same industry, different insurance companies may view variables differently. “Looking” for better options means that you should have correspondence direct from the other carriers. If the agent lightly mentions the other companies, it could mean that it is time to “dig deeper”.
What if you already purchased a policy that has exclusions, limitations, or restrictions? Is your agent actively looking to get an exclusion reviewed on the predetermined timeline to see if removal is warranted? As the dynamic of the disability insurance marketplace, not just their company, continues to change is your agent staying abreast of opportunities for you as a client? If your exclusion was reviewed and the insurance company kept it in force, would another carrier possibly issue an equivalent policy without the same modification?
So, what is the bottom line for you as the policyholder of, or applicant for, disability insurance? (A similar approach should be taken when applying for term life insurance)
Sometimes, an exclusion is an exclusion and the modification to the policy is just going to be there. Insurance agents can research, advocate, and scour the marketplace, but in the end, certain exclusions are warranted. As the policyholder, you now know that options were explored for you, and can make the informed decision of whether to place that modified policy or not.
If you are dealing with an objective agent:
- They will be professionally firm and help you navigate if a slightly modified offer from Company A truly is better than an offer from Company B that is not modified. Would you take a disability insurance policy that did not protect your own occupation as a surgeon because it excluded a hazardous activity like free climbing? (By the way, all high quality carriers will likely exclude free climbing.)
- They will help you compare carriers, their respective pricing, the contract features & language, and advise you of what best fits you as a client, not them as a person with a sales goal.
- If you flip over their business card and read the fine print, they should be able to cogently explain which company or companies they represent and how they intend to serve you as a client.
In the end, your insurance agent should be sitting on the same side of the table as you – their client, not an insurance company.
[Editor's Note: One other option not mentioned by Mr. Warren is to purposely choose a less than ideal group policy for part or all of your insurance coverage. Group policies available through your employer or professional association may not be portable and may offer less comprehensive coverage, but what they often don't do is ask pesky questions about your health and recreational activities. You may find it less important to have true own-occ coverage, portability, or a high-quality inflation rider than to have your SCUBA diving, anxiety, or knee injury covered. Be sure to discuss ALL your options, even if you have a truly independent agent (who won't get a commission at all if you go with a group policy.) One additional benefit of that group policy is it is likely MUCH cheaper, at least while you are young, allowing you to buy more coverage.]
What do you think? Do you have an exclusion, limitation or restricted rider on your policy? Have you been able to get one removed? What did you choose to do with regards to health issues or dangerous activities? Why do insurance companies always ask about climbing but never about asphyxiation games? Comment below!