One in four of today's 20-year-olds will experience a disabling event that prevents them from working one year or longer before reaching retirement age. At the same time, the Council for Disability Awareness reports that one in three working Americans do not have adequate disability coverage. Something doesn't add up.
Common reasons a person might steer clear of disability insurance is that they believe they can’t afford it or can't get it. But individual coverage is actually more affordable and accessible than you may think. And there are other reasons why people go without disability insurance, including the three listed below.
Disability insurance is misunderstood
Disability insurance is arguably the most complex type of insurance policy. There are a number of individual policies, group plans, and government benefits available to help protect people from the potential loss of income caused by an accident or illness. Each has a wide variety of provisions and stipulations on how they work and what determines whether benefits are paid.
So it should come as no surprise that long term disability insurance is also one of the most misunderstood financial products. LIMRA, an insurance trade association, conducted a survey in which only 4 percent of respondents demonstrated a high level of knowledge of how disability insurance works.
For most people, it’s easier to just ignore something you need rather than buy something you don’t understand.
Why is disability insurance misunderstood?
Disability insurance is often confused with other types of coverage, such as long term care insurance. Others think their disability needs are covered by Social Security and workers' compensation laws.
It’s not always obvious what constitutes a disability. There are several ways that disability insurers define disability to determine whether a policyholder qualifies for benefits. Just being sick or hurt won’t necessarily mean you’ll receive policy benefits.
People believe their lifestyle either means they don’t need it or they can’t get it. The healthiest people who take no unnecessary risks can still become sick or injured seriously enough to miss work. And people who may be considered risky to insure can get coverage with certain stipulations.
The consumer experience is archaic
Traditionally, applying for disability insurance is no small task. The insurance company requires a substantial amount of information to assess your risk of becoming disabled. It can take months to procure and review this information.
The application form gathers personal, professional, and basic medical information. You or your agent will submit that form along with supporting documentation. This includes proof of employment and income. You will also have to authorize the release of medical records. Some insurers will also check driving records and your credit report. If so, you will have to authorize the release of those documents.
Unnecessary delays can occur because of missing information on the application. The person processing the application will have to contact you or your agent to track down the information.
You will also have to undergo a paramedical exam as part of the application process. This is a crucial part of how the insurance company assesses your health. This exam is similar to a physical checkup. It should take about 30 minutes. It will consist of an interview to gather a medical history. The examiner will collect blood and urine. They will record your height, weight, blood pressure, and pulse.
The examiner will send the exam results to the insurance company’s underwriter. That individual will also review your medical, financial and employment records. Your physician will be asked to fill out a form called an attending physician’s statement. If the underwriter has trouble obtaining this information, it will delay policy issuance.
The process will typically take about four to six weeks. It has been known to take up to 90 days if underwriters have to track down or verify information.
People only think to apply when it's too late
As mentioned above, there is a comprehensive underwriting process when applying for long term disability insurance.
It’s not uncommon for insurance companies to deny coverage based on the underwriting process. According to LIMRA, 40 percent of disability insurance applications are either declined, rated, or are only accepted with an exclusion.
The most common reason for declining coverage is because of the applicant’s health. Once you have a certain condition, it may be too late to obtain coverage. Also, if you have suffered a disability in the past, it’s more likely to be denied if you try to apply for disability insurance.
People in less-than-average health, who have chronic conditions, or who have used tobacco are more likely to suffer disabilities. Conditions that could lead to application denial include renal disorders, blood disorders, cancer, hepatitis, arthritis, multiple sclerosis, and Parkinson’s.
How to overcome these obstacles
How do you overcome the complexity, the paperwork, and the scrutiny to go from an uninsured person to somebody who has adequate disability insurance coverage?
Enlist an independent insurance agent
An independence agent can seek quotes from various insurance carriers, which improves the chances of you qualifying for coverage if you have a medical condition or previous disability. Qualified agents can also explain disability insurance and handle much of the paperwork.
Be open to exclusions or limitations
Exclusions and limitations are added by the insurance carrier to mitigate their risk of paying a claim for an illness or injury resulting from high-risk conditions or activities.
If you are granted disability insurance coverage with an exclusion, the insurance company will insure you but will add language to your policy that they will not cover certain body parts, conditions, or disabilities resulting from certain activities.
The underwriter may also consider some of your underwriting conditions risky enough to limit coverage. For example, the company may limit your benefits period to 10 years because of a pre-existing health condition, even if you applied for benefits to age 65. Some policies may also limit your ability to purchase additional coverage in later years without going through the underwriting process.
Look for group disability coverage
Group disability insurance through an employer or trade organization is usually guaranteed issue and simplified issue. That means you can get coverage regardless of your health. There is also no underwriting, so you don’t have to fill out forms or provide employment and income documentation.
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