Ancillary market expert, Michael Castrillon, discusses disability contract terminology and shares some must-read tips on how to easily analyze your client's contract.   For more on this topic, contact Michael directly at 800-237-4009 ext. 154, or michaelcastrillon@savoyassociates.com.

Be sure to check our Events Calendar for upcoming continuing education courses featuring Michael's ancillary focus and expertise.

1. Definition of Disability is the heart of every disability contract.
   
   The "And" versus "Or" definition: It is widely understood that an "Or" definition is more liberal for the claimant.  The critical question is if the Claimant loses the capability to earn money AND/OR be able to work.  The disability contract MUST have other provisions to support the benefits of an "OR" definition, otherwise the definition is simply a marketing tool for the carrier.
   
   "Value" contracts always use the "And" definition.
   "Claims" contracts can use the "Or" definition or an "And" definition with supporting definitions.
   
   
   
2. Definition of Earnings is one of the most overlooked provisions of a disability contract.  Some policies will exclude deferred compensation.  So if an employee earns $100,000 per year and contributes 6% to their 401K plan and 10% for FSA/Sec 125 plans, the actual benefit will be calculated off of a salary of $84,000; not $100,000.  Despite the difference, all carriers will bill based on the actual salary.
   
   "Value" contracts will not use deferred earnings.
   "Claims"contracts will not identify deferred earnings in the definition of earnings.
   
   
   
3. Own Occupation: When is Own Occupation coverage NOT Own Occupation?
   When the coverage includes the National Economy Definition of Own Occupation.  When an insured becomes disabled, some carriers will review the employee’s job title as it relates to the National Directory of Job Occupations.  True Own Occupation is when a carrier discusses actual job duties with the employer.
   
   An important thing to consider here is that the National Economy Definition assumes a 40 hour work week and no travel for most occupations, and this includes executive descriptions.
   
   Specialty Own Occupation is a very rare definition usually found only on older contracts.  This provision provides a full benefit even if a claimant is able to work and earn a living in another Occupation, as long as they are unable to work in their specialty. This provision is a throw back to older Individual Contracts and is the main reason there is a misperception that Executives NEED Own Occupation Coverage to SSNRA.
   
   "Value" contracts will always use the National Economy Definition.
   "Claims" contracts will use the Employer Definition of Occupation.
   
   
   
4. Any Occupation:  Now that I am no longer protected by Own Occupation, what comes next?
   
   With a Gainful Occupation Provision: The carrier can terminate the claim if you are expected to recover within the next 12 months, even if you don’t actually return to work.
   With a Reduced Earnings Test:  After the Own Occupation period is over, some carriers will reduce the amount of required earnings loss from 20% to 40%.  Often, the reduction of earnings is not expressly written in the contract; it is often hidden within the Gainful Occupation wording.
   
   With Maximum Capacity:  Benefits can be reduced or terminated if the carrier determines that you are not working to your fullest capacity as determined by the doctor and the carrier - not by the claimant.
   
   Prudent Person: If the carrier determines that a "Prudent Person" would be conducting themselves differently, claims can be terminated.
   
   Mandatory Rehabilitation:  If a claimant refuses to undergo rehabilitation programs, claims will be terminated.
   
   "Value" contracts will utilize Any Occupation as the basis for terminating claims.
   "Claims" contracts will not rely on the Any Occupation definition to terminate claims.
   
   
   
5. Pre-existing Conditions:  Will a new employee receive equal benefits?
   
   Under a Pre-ex Limitation:  Depending on the conditions of a claim, benefits will ultimately be available after the employee is actively at work for ONE full day after the limitation period is completed.
   
   Under a Pre-ex Exclusion:  Depending on the conditions of the claim, benefits can be denied until the Exclusion Period is completed for a continuous period of time.
   
   Example:  A standard 3/12 Pre-Existing Condition applies and the group hires an employee on January 1st.  This employee is currently taking heart medication.  In August, the employee suffers a heart attack which disables him for a period of 3 months for which time he receives Short Term Disability (no Pre-ex on STD).  On October 1st, the employee returns to work:
   
   Under a "Limitation" Contract - The employee would be able to receive a LTD benefit for any future Heart Conditions as long as the Date of Disability is after January 1st (1 full year after joining the company).
   
   Under an "Exclusion" Contract - The employee would not be eligible for an LTD benefit until October 1st of the following year (1 full year after returning from his Disability – providing no other disabilities or treatments occur)
   
   An "Exclusion" contract is not necessarily a "Value" contract, in some instances this could simply just be an outdated contract.
   "Claims" contracts will use a "Limitation" definition.
   
   
   
6. Trial Work Days:  Can employees return to work at all during the Elimination Period?
   
   There are 3 levels of Trial Work Days typically employed:
   
   The industry standard is to offer 5 days for every 30 days of Elimination Period.  A more liberal offering is 2x the Elimination Period.  And the best offering is no limit of Trial Work Days as long as the Definition of Disability is satisfied.
   
   This is where the "OR" Definition must be supported.  If the carrier employs the first standard, then the "OR" Definition is no better than the "AND" Definition.
   
   Trial works days separate an "And" Definition contract from a "Value" contract and a "Claims" contract.  With a strong trial work day provision, an "And" Definition contract is interested in managing claims.  With a limited trial work day provision, the contract is a "Value" contract.
   
   
   
7. Benefit Duration:  My employee is currently on claim: he/she is protected, right?
   
   Maybe not.  This provision could potentially cause a problem 30 to 40 years down the road.  Only employees born before 1938 will begin receiving Social Security benefits at age 65.  Employees born after 1938 and before 1959, will be able to retire at a designated month between Age 65 and Age 67.  Anyone born after 1959 will not receive Retirement Benefits until Age 67.  The extension of the national retirement age has created a gap of two months to up to two years between the age when a "To Age 65" provision will terminate, and when the claimant can actually receive retirement benefits.  As a result, Benefit Durations to SSNRA or Social Security Normal Retirement Age not only protect employees from this gap, but also protects against any future extensions of the national retirement age.
   
   Benefit Duration contracts are the very first indicators of the age of a disability contract.  Older contracts typically indicate weaker contracts.
   
   
   
8. Other Severe Plan Provisions:  What terms should never be in my client’s contract?
   
   Special Conditions or Self Reported:  Limits ALL benefits to 2 years Lifetime for claims that cannot be clinically diagnosed (Carpel Tunnel, Back Pains, etc.)
   
   Definition of Disability requiring Social Security Offsets:  In order to collect a disability payment an employee MUST satisfy the definition of disability for Social Security.  The catch here is that the carrier will collect premium on total salary, yet only pay a benefit on the amount above and beyond Social Security Benefits.
   
   Non-Occupational Coverage:  Does not provide any benefits for disabilities that are directly related to a sickness or injury while at work.
   
   Please Note:  As with any limiting provision, there is absolutely a place and a time to utilize these provisions, especially for extremely cost conscience employers.  As brokers, it is vitally important that the ramifications of these provisions be explained in gross detail.
   
   "Value" contracts offer these provisions as "Opt-out" options.
   "Claims" contracts offer these provisions as options in order to attain more competitive pricing.
   
   
   
9. Contractual Incentives:  Will a carrier offer any incentives?
   
   Work Incentive Benefit:  An employee can receive up to 100% of pre-disability benefits for one or two years after they return to work.  Make sure the benefit is not for the 1st or 2nd year after benefits are payable.  A true benefit is one or two years after the employee returns to work.
   
   "Value" contracts offer work incentives from the date of disability.
   "Claims" contracts offer work incentives from date of the employee’s return to work.
   
   Activities of Daily Living:  An additional percentage is paid for disabled employees who suffer a loss of two or more Activities of Daily Living.  Approximately 100 out of 72,000 claims have collected this benefit.
   
   "Value" contracts offer this provision as a marketing tool.
   "Claims" contracts offer ADL provisions to keep up with the market AND to collect additional premium for the provision.
   
   Rehabilitation Incentives: Rather than terminate claims for not participating in rehabilitative programs, an additional percentage is paid for voluntary participation.
   
   "Value" contracts mandate rehabilitation programs.
   "Claims" contracts incent claimants to participate.
   
   EAP Programs:  Employee Assistance Programs are provided for all employees to help avoid claims from ever happening in the first place.
   
   "Claims" contracts offer EAP’s as preventative provisions.
   
   Education / Re-training:  Some carriers will provide lump sum payments to claimants to return to school or to provide spousal re-training in order to shorten disability events.
   
   "Value" contracts will not offer these benefits.
   "Claims" contracts offer these benefits to ‘ease the pain’ of catastrophic situations.

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