Loss of Income Insurance
for Highly Skilled Professionals
by Rip W. Curtis, CEBS
There are two tracks disability could take that would be of financial concern. The first is returning to work, but not being able to make as much money as before. The second is where a person will never work again in any capacity.
It is the first scenario that should be of primary concern because the residual effects may be permanent. When an individual returns to work, they may not be the same person, so to speak. Energy levels, responsiveness, concentration, memory, judgment, general presentation, ability to reliably and routinely work on projects in a timely fashion, and other performance-sensitive skills may never completely return for former levels.
Returning to work is usually driven by financial need, not medical recovery.
Social Security Administration; Industry, Occupation, and Disability Insurance Beneficiary Work Return; Social Security Bulletin; Vol. 62, No. 1; 1999; p19. Among other reasons, 19% because they wanted to work, 11% because rehabilitation made work possible, and 8% for other reasons.
While most individuals believe the probability of being disabled for more than 90 days is about 2%, the actual risk is more like 30%*.
That's a gross miscalculation of risk. More importantly, what people fail to understand is that it's what comes after the absence period - the return to work stage - that causes the most instability and economic losses to pile up. That's because employees often depend on their employers for coverage without a full understanding of the what group Long Term Disability is designed for.
Group Long Term Disability (LTD) is not optimized for individual financial security or choice. LTD is optimized for the employer's interest in getting employees back to work. Although Return-to-Work benefits are baked into most LTD programs, these are often temporary. This works out well enough for those who fully recover within a year or so, but for those with ongoing residual deficits there is no path to full income replacement on a sustained basis, nor is there a blanket guarantee of continuity in the face of work changes. Furthermore, in order to qualify for any sort of return to work benefits at all, workers must continue to be medically restricted.
Professional, well compensated workers have the most to lose. The central question concerning disability for highly skilled workers in the intellectual economy is not so much whether work is possible, but how well they perform and how much they'll earn. Let’s consider a few examples.
A Software Developer who has undergone brain surgery may find it difficult to concentrate and remember things essential to keeping projects on schedule. Fatigue may make it impossible to put in the long hours required to earn bonus compensation. As a result, there may be fewer opportunities for project leadership but is not an essential duty for the occupation. It may not be a disabling situation, but ongoing underperformance and changes in how the individual job is conducted may result in a loss of income.
An Attorney could theoretically perform all material duties of that occupation in a wheelchair, and therefore would not qualify as disabled. Still, there may be a hit to income to the extent normal mobility contributed to income, impact on mental well-being, and general will to work in a high stress environment. Although work is still medically possible, individuals conduct their occupation a certain way for a reason.
An Executive who had a mini-stroke is now back to work. He’s a little spacey, repeats himself during meetings, and frequently can’t remember the word he was looking for. Nobody disputes that he is medically able to work, but it’s also clear that it just isn't going to work out for the firm.
A Corporate Sales Executive is office-bound or home-bound due to random seizures. There is no medical reason she cannot continue in corporate sales, but without the ability to travel and meet prospective clients as she previously did, she may not be able to match her previous value, especially in a competitive business environment.
A Chief Financial Officer having undergone chemotherapy may have chronic “chemo-brain,” which manifests as long term cognitive dysfunction, especially with regard to memory. In one study, 40% of survivors continue to suffer residual deficits after five (5) years. *** As with many disabilities, the treatment can be responsible for underperformance even if the disorder does not.
In the examples above, the ability of the worker to fulfill the material duties of their own occupation is unchallenged. But it's the ongoing loss of income and job security that concerns the individual, because LTD is simply not designed for individual financial security outside of the absence period.
Contractually, an important provision to deal with Loss of Income risk is a well-drafted Recovery benefits provision. In insurance-speak, "recovery" means medically released and does not imply restoration of performance. Recovery benefits extend the claim into the recovery stage by insuring the income itself, independent of whether a person continues to meet the definition of disabled. The distinguishing feature of Recovery benefits is that current medical restriction is not required.
Insurers protect themselves by applying sensible causality testing and special Benefit Periods. The most liberal Recovery benefits are accompanied by fairly selective underwriting standards so as to limit the availability to individuals who are somewhat less likely to take advantage of the subjectivity it affords. That rules out most blue collar occupations, with highly skilled well educated workers being the primary market.
Another important Loss of Income provision is extra partial disability benefits, which serve to increase total income replacement ratios on a more sustainable basis than LTD normally allows. Without extra partial disability benefits, workers normally experience the so-called "return to work penalty" one or two years after returning to work, after which total income replacement ratios settle in at 60%-85% including work earnings, and without Cost of Living Adjustments.
Extra partial disability benefits allow the worker to stay on their normal income track, and take on the risks associated with returning to work - notably, of job and income insecurity. With extra partial disability benefits, marginal compensation is potentially multiplied and adds an extra incentive to return to work as soon as possible.
How Loss of Income Coverage is Implemented
Loss of Income programs are implemented through individually issued policies separate from group LTD. It is important to implement loss of income protection separately from LTD for several reasons:
(a) LTD is structurally and philosophically an absence management product that relies on experience rated pricing rather than large scale risk transfer.
(b) Protection based features are often positioned for cost sharing, which cannot be changed over time without amending the LTD policy, limiting the employer's freedom to alter the funding mix as circumstances change.
(c) Portability is a higher priority if employees are paying any portion of the premium.
(d) Features in the individual market better address the need - in particular with regard to duration limits and causality testing which is important for loss of income features to fulfill their purpose.
(e) To avoid offsets, and
(f) Protection based features (of any kind) may be forgotten over the years because quality based features are relatively abstract compared to hard numeric data. Even even if they are kept top of mind, the scarcity of loss of income features would severely constrain vendor selection options.
After investing many years in education, training and relationships, highly skilled employees are keen to lock in their future income against health risks. Not all workers are paid by virtue of occupational title, but instead are paid based on how well they perform. That distinction necessitates a specific kind of disability coverage that goes beyond own-occupation coverage by protecting the income itself.
Rip W. Curtis, CEBS is an independent disability insurance agent in Seattle, Washington.
* Social Security Administration; Industry, Occupation, and Disability Insurance Beneficiary Work Return; Social Security Bulletin; Vol. 62, No. 1; 1999; p19. 58% returned to work out of financial need, 19% because they wanted to work, 11% because rehabilitation made work possible, and 8% for other reasons.
** Council for Disability Awareness; The Disability Divide: A Consumer Disability Awareness Study; 2010; "How likely are you to be disabled for longer than 90 days before you retire?" See also, Milliman Inc; The Real Risk of Disability in the United States; on behalf of the LIFE Foundation; 2007
*** Karen L. Syrjala, PhD., Fred Hutchinson Cancer Research Center; Journal of Clinical Oncology; November 23, 2010; As reported by Tara Parker Pope, New York Times; May 4, 2011; Chemo-Brain May Last 5 Years or More. In the study, 40% of survivors continue to suffer residual deficits after five (5) years.