How to Insure Your Income: Group Underwriting
Most people have at least a small amount of disability income insurance through benefits offered by their employers. These group disability income policies (like group life policies) are underwritten on very liberal terms.
Group underwriting usually is accomplished without any reference to an individual's medical information. Most insurance companies will require that a minimum number of employees participate in a group plan for that plan to be issued without evidence of insurability. Generally, the employee is required to provide his or her address, social security number and certain work-related information.
In these situations, the underwriter and insurance company will concentrate on such group factors as occupational duties, industry type and the amounts of disability income being offered. Due to the nature or risk of an occupation, the insurance company may limit or refuse to write group disability income coverage for certain occupational groups -- such as coal miners, the lumber industry, the entertainment industry, etc.
Group disability coverage usually will be limited to not more than 70 percent of your earned income and subject to a low maximum benefit -- such as $1,000 or $2,000 per month for a year.
Because there is no medical underwriting involved with group cases, the underwriter's primary job is to protect against overinsurance or large amounts of coverage and adverse selection against the insurer.
Adverse selection occurs when an insurance policy encourages people with the highest risk profiles to use the coverage -- and those with lower risk profiles to find more cost-effective insurance.
To avoid adverse selection, the underwriter may limit the amount of coverage offered, decline to write the group at all or offer the coverage on a non-occupational basis. Non-occupational coverage will not offer benefits for work-related disabilities.
Although not group insurance, strictly speaking, association coverage has some of the same underwriting characteristics of group coverage. Association coverage might be described as individual policies administered as group insurance.
If the association is to offer a guaranteed-issue plan, then there will be no medical underwriting, as all members are guaranteed the issuance of a policy.
However, most association plans require some medical underwriting, or what is sometimes referred to as simplified or progressive underwriting.
Association underwriting may take the form of three or four medical questions asked of the individual. Due to the size of the association membership, relatively minor medical problems may be overlooked and policies issued.
Nevertheless, even with simplified underwriting, it is possible for a member to be declined for the insurance.
In addition, the underwriting procedure is simplified by the fact that there are limits as to the amount of coverage that may be issued, as well as the length of the elimination and benefit periods. There is also no need to occupationally classify association members, as they all have essentially the same occupation, which is normally low risk.
Premiums for association types of coverage normally are banded by ages and amounts. For example, everyone between the ages of 25 and 30 pays the same premium for a 30-day EP and a $1,000 monthly benefit payable to age 65. From age 31 to 35, a new band of premiums would be used.
Another underwriting consideration with regard to association coverage pertains to the place where the association member conducts his or her business. For example, an association composed of artists may be difficult to write disability coverage for because many of these artists will work out of their homes. Normally, individuals who work out of their homes cannot qualify for disability income coverage because it is difficult to determine if, in fact, they do become disabled. Their work place is also their recovery place, and thus a conflict arises. Often, the underwriter simply may decline to offer this type of association any coverage at all.
