It's Claim Time: How Do We Determine Predisability Earnings?
Want to help your clients avoid confusion at claim time? If questions come up about trailing or variable income, use the opportunity to redirect the conversation to policy definitions. Here are three quick pointers to help explain how we determine and pay benefits:
1. Explain the difference between total and partial or residual disability.
- During a total disability, the policy will pay the stated monthly benefit.
- For a partial or residual disability, the monthly benefit payable is often based on income loss when predisability earnings are compared to monthly earnings. We calculate predisability earnings based on a specified “look-back period,” which is outlined in the policy and may be 12-24 months or three to five years prior to the onset of disability. Monthly earnings are calculated based on income received during the claimed period of disability.
2. It's key to help clients understand how the policy defines earnings vs. income. This is especially important when income includes commissions, bonuses or profit sharing, or if the income is received at a time other than when the work is performed.
- Annual earnings includes all income from any vocational activity. This includes salary and fees, commissions and bonuses (including stock options and stock bonuses), wages, pension and profit-sharing contributions, and other payments as reported on personal and business tax returns. Ordinary income from a business you own would also be included.
- What's not included? Typically, passive or non-vocational income, such as rental income, annuities, savings or investments; income from retirement plans; and other disability insurance benefits are not included in earnings.
- How are accounts receivable handled? In determining earnings, both predisability and post-disability, we use the accounting method that the client uses on their federal income tax returns.
- Under the cash method, income is applied when it's earned. If work was done prior to the claim — but the money isn't received until after the claim begins — it may be included in predisability earnings. But that income would be excluded from monthly earnings (those that are used to calculate any loss of income).
- Under the accrual method, income is applied when it's received. So, regardless of when the work was done, income received after the claim begins is considered monthly earnings.
- During a partial or residual disability, we'll ask for proof of earnings each month — either pay stubs or profit/loss statements. We'll pay benefits based on the loss of income compared to predisability monthly earnings. If predisability earnings included fees, commissions and retirement plan contributions, we'll include them in post-disability earnings.
3. We understand that each client's situation is unique. We'll work with you and your clients individually at claim time. We'll review their situations to gain a complete understanding, including what's changed since we issued the policy. Our goal is to always give your clients outstanding personal service and pay claims accurately and fairly.
To learn more about Platinum Advantage, refer to the Annotated Sample Policy. It's another great tool to use with clients.
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