The two-year wait advice problem

From time to time, I come across a particular advice situation that looks good on the surface but has some serious outcome risks for clients.

Monday, September 9th 2024, 7:25AM

by Jon-Paul Hale

What I'm talking about is a split benefit disability cover approach, more specifically, what I refer to as truck and trailer disability coverage.

This is where a client has said a 2-year benefit term policy from their employer and wants long-term disability cover. The obvious, easy first solution is to put a 2-year/104-week wait to age 65/70 policy in place to take over once the 2-year benefit has run its course.

For example:
* IP Indemnity 75% cover on a 13-week wait paid for two years.
* IP Indemnity or Agreed on a 104-week wait paid until age 65/70.

Which is acceptable for a one-and-done short-term injury or permanent disability claim point of view.

And that is part of the problem: we're not considering the potential for more than one claim.
* This was a common discussion I had as a BDM for Sovereign. Multiple disability claims are the justification for agreed-value coverage, as income-earning ability often declines over the course of multiple claims and declining health. Maintaining claim value paid over time when this happens is what Agreed-Value cover does.
* The second aspect in support of agreed-value coverage is the degenerative condition claim: MS and other neurological degenerative conditions that take a long time to grind down to being off work, along with a long-tail decline in income that indemnity and LOE contracts don't capture well.

In recent times, insurers' adding the reset of short payment terms after returning to work for 12 months has helped some of the risks of the truck and trailer disability solution. However, it doesn't solve a critical risk that is still embedded.

That risk is the short-duration reoccurrence of a claim for the same condition. This is where the truck and trailer approach outlined comes with significant risk.

Take, for example, a disability claim that puts a client off work for 13 months, returns to work for, say, seven months and then goes off on a longer-term basis, 2-5 years, maybe permanent.

Do you see the issue?

If you don't, that's ok; many don't at this point in the discussions I've had.

Let's unpack a typical claim response across all providers. (there are some very limited exceptions to this, mostly relating to business products)

The initial claim, which pays for ten months following a 90-day wait, goes fine. The 2-year benefit claim works as intended; there is no issue here.

Even the return-to-claim with waiver of the wait period on the 2-year benefit works fine; the client pick up the remaining 14 months from their 2-year benefit.

This is where things fall apart.

With the 2-year benefit now finished, the client is facing another ten months without benefit before their trailer benefit with the 2-year/104-week wait kicks in.

Now, before you respond and go, "Hang on, they're still disabled from the initial event right back at the beginning", as almost everyone I have talked to has.

The challenge becomes even more challenging here because returning to work resets the wait period on the second trailer benefit.

The criteria for the trailer benefit to pay is being disabled for the entire wait period. Depending on the provider, this is somewhere between fully off work and 75% of usual hours, income, or occupational duties.

That return to work for seven months reset the clock on the wait period for the trailer benefit.

Because the claim for the truck benefit had been accepted and paid, the waiver of wait period on reoccurrence clause kicked in, and the claim continued.
The trailer benefit had yet to reach the point of being an accepted and paid claim, meaning the waiver of the wait period for a reoccurrence claim would not respond.

Now, most of you are probably thinking, "Same insurer for both benefits." Let's make this point a little easier to understand by having the benefits with two different providers.
This happens quite a lot, either due to underwriting terms or because the employer benefit gets moved, and underwriting terms for the trailer are now too onerous for provider consistency.

It's much easier to see when it's different providers. One has been paying a claim, and the other does not.

Now, some will ask about a wait period reduction for those with it?

While this is available on some products, it's not going to work in this sort of situation:
For specific wait period reduction benefits, the trigger is the reduction in sick leave or benefit in "front" being removed while not being on a claim or waiver of premium benefit with the same or other provider, including ACC.
In other providers that don't have the option but they have some of the features, these relate to the removal of business products, which is different from this situation too.

With reference to ACC, the above claim scenario is not an ACC one, as ACC would continue to pay regardless of the disability cover structure.

The other point here is you generally cannot change a policy under a claim.

Advisers know you can move and restructure things as you go most of the time. The acute issue here is that adaptability is severely restricted when you have a claim situation.

Like underwriting can be harsh because of the long-term view needing to be assessed, and when you have a medical condition being claimed, you don't have a whole lot of flexibility to adjust and change things.

What's the answer?

When giving advice in this space, always look to have the benefits overlap. Yes, there is a premium cost to this, but at the same time, the difference between a 52-week wait and a 104-week wait is negligible.

Most underwriters insist on a minimum 52-week wait for the trailer benefit, but some will allow a minimum 13-week wait.

Obviously, when you do this, you're advising your client that the resulting claims will have offsets, and it is to protect them from this sort of claim issue.

This leads me to my next thought: the horrible bank solution of two-year benefits with TPD cover. Until next time!

Tags: Jon-Paul Hale