Advisers, clients ignoring disability risk, experts say

NEW YORK — Financial advisers and their clients aren’t giving the risk of becoming disabled the attention it deserves, according to disability insurance experts.
“Some people think that Social Security, personal savings and home equity loans would be enough to tide them over if they became disabled,” said David Woods, president of the Life and Health Insurance Foundation for Education in Washington. Those people are mistaken, he said.
It is extremely difficult to qualify for Social Security Disability Insurance benefits, because of stringent legal definitions and other requirements, Mr. Woods noted.
Fewer than 40% of disability applications are approved, and benefits are less than $1,000 a month, said Robert Taylor, executive director of the Council for Disability Awareness in Portland, Maine.

Using savings can deplete retirement resources, and loans have to be repaid, Mr. Woods said.
Compounding the disability awareness problem is that many agents and advisers — especially the younger ones — shy away from the subject because they think it is overly complex, Mr. Taylor said.
Disability issues can be confusing because of varying policy definitions of what constitutes a covered disability, he said.
The subject also must be considered in conjunction with related topics such as workers’ compensation if the disability is job related, medical-leave laws and the multitude of Social Security rules, Mr. Taylor added.
But advisers ignore the exposure at their peril, as data released in May in connection with Disability Insurance Awareness Month indicate that becoming disabled is much more common than many clients are willing to admit.
Risks high
The probability that a white-
collar worker 35 to 65 will become disabled for 90 days or longer is 27% for men and 31% for women, according to a study commissioned by LIFE and conducted by Seattle-based Milliman Inc.
More than 500,000 people collected $7.2 billion in long-term disability benefits from CDA-member insurers last year — a 7.5% increase from the amount in 2005, a CDA study found.
Advisers should encourage clients to buy disability insurance when they are young in order to lock in premiums while in good health, said Frank Darras, a disability insurance attorney with Shernoff Bidart & Darras LLP in Claremont, Calif.
Careful attention should be paid to waiting periods, whether the disability prevents working in the policyholder’s own occupation or any occupation, and any policy limitations on mental disabilities, pregnancy and hard-to-diagnose conditions such as chronic fatigue, headaches and fibromyalgia, he added.
About one-third of full-time workers have group disability insurance through their jobs that pays them about 60% of lost wages, Mr. Woods said. But what many of them don’t realize is that the portion of benefits paid for by their employer is taxable, so they are in reality receiving only about 45% of their gross pay, he noted.
Tax-free bennies
The flip side — the good news for clients — is that benefits aren’t taxable to the extent that the client paid for the insurance, such as by contributing to group policy premiums or purchasing individual coverage, Mr. Taylor said.
There is a dramatic shift right now away from employer responsibility for pension, retirement and health-care benefits to personal accountability for providing for those needs, he said. That shift applies to disability insurance as well, Mr. Taylor added.
Despite recent bad press that some disability insurers have received for denying or delaying claim payments, most insurers will pay legitimate claims for which sufficient medical documentation has been submitted, according to Mr. Woods.
“Some conditions — such as migraines and nervous disorders — are hard to medically verify,” he said. These types of claims may be more closely scrutinized by the adjuster, Mr. Woods added.
Insurers carefully monitor disability claims, because some people will try to game the system, the experts noted. That is especially true when job layoffs are imminent, they added.