Disability Insurance - Proceed With Caution
By Michelle Leder
The New York Times
Feb. 13, 2005
Ann Marie still remembers a conversation more than 13 years ago with her boss, Dr. Fred Danziger, as if it were yesterday. Dr. Danziger, a dentist in Long Beach, N.Y., asked Ms. Hurley, then a 26-year-old dental hygienist, if she had ever thought about disability insurance. She had not, but after listening to him and meeting with his insurance agent, she decided that the policy made sense.
Three years later, when she developed pronator teres syndrome, a painful nerve problem, in one arm and carpal tunnel syndrome in both hands and was no longer able to do her job, the policy premium of $519 a year seemed like the best money she had ever spent. But in 1997, after a year and a half of collecting $2,250 a month in benefits, the insurer, First Unum, stopped paying, even though Ms. Hurley's contract provided for lifetime benefits. For eight years, Ms. Hurley, with the help of a lawyer, has been fighting the company, now called UnumProvident, to have benefits reinstated. So far, she hasn't had much luck.
"I never thought this would happen to me," says Ms. Hurley, now 39. "In good faith, I submitted a claim, and in not-so-good faith, they're torturing me."
A spokeswoman for UnumProvident said the company was unable to comment on Ms. Hurley's case, which was heard by an appellate court in Brooklyn early this month.
But in November, UnumProvident, which has repeatedly been criticized by regulators who say it has denied legitimate claims, reached a $15 million settlement with regulators in 47 states, including New York, and agreed to review more than 200,000 rejected claims. The company said there was no finding of wrongdoing. Richard J. Quadrino, a lawyer in Garden City, N.Y., who represents Ms. Hurley, said it was unclear if her case would be one of those reviewed.
Over the last few years, televised reports of business practices and problems at UnumProvident, which is based in Chattanooga, Tenn., and is by far the nation's largest provider of disability insurance, have led to plenty of caution about disability policies in general. This is true of both independent agents and consumers, who pay an average of around $1,000 in annual premiums for policies. Brokers and financial planners sell practically all disability policies, except for the group disability insurance offered by employers, which costs policy holders, on average, about $200 a year.
The number of people buying new policies has fallen, according to Limra International, an industry trade group in Windsor, Conn. In 2003, about 372,000 new policies were sold, about 5 percent fewer than in 2002. Fewer than 215,000 policies were sold in the first nine months of 2004, suggesting that the decline was continuing.
Agents and financial planners routinely recommend disability coverage, and consumer advocates tend to agree. For those who are self-employed or work for a company that does not offer group disability insurance, that means buying individual policies. A Limra study found that while practically all companies with more than 5,000 employees offer disability insurance, availability declines sharply as head count falls. The benefit is offered at under half of companies with fewer than 100 employees.
While policies vary greatly, the basic idea is to ensure that when people are unable to work because of an illness or injury, they can still cover monthly expenses. Policies, which typically pay around 60 percent of an individual's pretax salary, can cover both short-term disabilities, which may keep someone out of work a few weeks, and long-term disabilities, which may last years. About 3.85 million people have bought some form of disability insurance on their own, according to Limra. Many are doctors, lawyers and corporate executives with high incomes, though middle managers are increasingly adding it, too, said Guy W. Bertsch, vice president for product development at UnumProvident.
Anyone who does not have an investment portfolio large enough to cover monthly expenses should probably consider disability insurance, said Larry Ginsburg, a financial planner in Oakland, Calif.
"People need to ask themselves what happens if they become sick or get hurt, which happens a lot more frequently than most people would like to think," added Mr. Ginsburg, who also serves on the board of United Policyholders, a nonprofit consumer advocacy group based in San Francisco that focuses on various types of insurance.
Indeed, industry data shows that while it is far more common for people to carry term life insurance than disability insurance, the chance of an illness or injury that leaves a person unable to work for several months, or even years, is much greater than the chance of premature death. The data also shows that women are much more likely to become disabled over the course of their working life than men, primarily because women have longer life expectancies and risk complications from pregnancy.
A Census Bureau study found that a typical 35-year-old making $50,000 a year had enough savings on hand to cover only two months of expenses. Yet most disabilities last 90 days or longer, and more than 1.5 million Americans are considered permanently disabled and unlikely ever to return to work.
Five states, including New York and New Jersey, provide state residents with short-term benefits, though the amounts are typically small - a maximum of $170 a week in New York and $470 a week in New Jersey for 26 weeks. Federal disability insurance under Social Security typically kicks in only for disabilities expected to last more than a year, like chronic heart ailments.
"Most people don't tend to look at disability insurance as much as they should," Mr. Ginsburg said.
Part of the problem is that disability insurance tends to be much more complicated than other types of insurance, like home or automobile coverage, said Jeff Sadler, a broker in Ormond Beach, Fla., who has sold disability insurance for nearly 30 years and has written two books about it. Consumers must select from a menu of complicated options, and many terms are confusing.
Last summer, a Limra study found that more than half of those who bought disability insurance in the previous year did not know what percentage of their salary they would receive if they were injured, and that 45 percent did not know their policy's definition of disability. Nearly two-thirds of those surveyed had postponed buying the insurance so they could study it further.
Those who buy policies find that they often have to hand over a mass of personal financial information, including bank statements and tax returns, and submit to an extensive review of their medical histories - a much more comprehensive review than is required for either life or health insurance. Mr. Bertsch, of UnumProvident, said that reviewing these records was a normal part of the underwriting process.
"We're insuring income, so we need proof of income and we need to determine if the person is physically healthy," he said. He declined to say what percentage were turned down. The extensive review also helps to prevent fraud, which Mr. Bertsch said could occur at the time of application or when a claim is filed. When the economy is doing poorly, claims tend to rise, he added.
Because disability insurance is more complicated than other types, consumers may have trouble shopping for the best price online. And many agents, said Mr. Sadler, who often travels around the country training others how to sell disability insurance, are still somewhat reluctant to offer it, after years of listening to clients complain when their claims are held up or denied. "A lot of people have stopped selling it because of the problems," he said.
Still, instead of avoiding the insurance altogether, Mr. Sadler suggests buying a policy from a smaller, well-established company with a good record of paying legitimate claims. Mr. Ginsburg and Mr. Sadler both suggest checking with state insurance commissioners before buying a policy to see whether customers have filed complaints against a company. "Despite the problems, the whole point for disability insurance has never changed," Mr. Sadler said. "Most people don't have a way to earn any money if they're injured."