An increasingly stressful work environment, among other things, has made psychiatric and substance-abuse claims one of the fastest growing sectors of the disability-insurance market. But as mental and nervous claims have risen, coverage for such disabilities has fallen. Individual disability insurance policies have recently begun to limit psychiatric benefits, parroting the restrictions that have been common in group policies for years. The bottom line for purchasers of disability policies, which provide you with a percentage of your earnings if you are disabled through illness or injury and unable to work: Buyer beware.
TWO-YEAR LIMIT. While you can still purchase the more generous policies at a higher cost, the industry's leading disability insurers--UNUM, Provident Life & Accident Insurance, and Paul Revere (which just merged with Provident)--now limit coverage for most psychiatric benefits to just two years for all ailments for the lifetime of an insured individual. The 24-month benefit can be used all at once or broken up over a period of time. Degenerative diseases, such as Alzheimer's, and mental disorders resulting from head trauma that require hospital confinement are excluded from the two-year limitation. The premiums are about 15% to 25% less for these newer policies with the time restriction than they are for those without it, according to insurers.
"The two-year limit for stress-related, treatable disorders lowers costs and allows for richer benefits for the most severe disabilities," says Russell Anderson, senior vice-president for individual disability at UNUM. The policy change was prompted, in part, by a 205% growth in psychiatric claims between the years 1989 and 1994, according to industry statistics.
The cost savings, however, are at the expense of a policy's flexibility. A 40-year-old, nonsmoking male executive with an annual income of $80,000 would pay $1,633 a year for a $4,705 monthly benefit with a 90-day waiting period (after the illness or injury), according to Provident. By contrast, that same 40-year-old male with a 90-day waiting period would pay $1,983 a year for a $4,100 monthly benefit from Guardian Life Insurance but wouldn't be subject to the two-year restriction on his psychiatric benefits. Northwestern Mutual Life Insurance and Berkshire Life Insurance also still treat mental and nervous claims as they do any other illness, which means there are no restrictions on the coverage except in California where there have been an extremely high number of claims (Berkshire limits benefits in Florida for the same reason).
Most insurers will allow you to protect only 60% of your income. But given that payments from individual policies are not taxed, a 60% benefit can equal up to 90% of your original pretax income. You will need to choose the amount of time to wait until you begin to receive benefits (30, 60, 90 days, or more) and whether you prefer noncancelable (the insurer can neither stop covering you nor raise your premiums throughout the life of the policy, usually until age 65) or guaranteed renewable (the company still can't drop you but can increase premiums for your class of insured). You can save 8% to 12% on your premiums if you choose a longer waiting period.
For psychiatric benefits, the most important issue is how the insurance company defines mental and nervous disorders, which will dictate the policy exclusions. One policy may include substance-abuse treatment or stress-related disorders in its disability coverage, and another may not.
PRIOR EPISODES. You also need to know if the policy covers preexisting conditions. This gets a little tricky and will depend on the timing and severity of the previous mental or nervous episode. Say you went through a divorce two years ago, and at that time you consulted a marriage counselor for a total of six sessions. You probably will have no problem getting covered. "The further back in a person's history and the briefer the event, the more likely the individual will be able to get standard coverage," says Al Robertson, an insurance consultant with Peachtree Planning in Atlanta. But if you're still in counseling two years later, there's a good chance the insurance company may deny you coverage. Some companies won't offer individuals coverage if they have had a recurrence during the three years prior to when they take out a new policy.
One additional piece of advice: "Be cautious about terminating an existing policy and buying a new one, because older policies have more liberal psychiatric benefits," warns Barry Barnett, a director at Kwasha Lipton, a benefits-consulting firm.
Of course, mental- and nervous-ailment benefits make up just one category of disability insurance. You'll want to review the entire policy to make sure it's suitable for all your needs, or else you could end up with even more worries.