Insurance company statistics have shown that the higher the percentage of a person�s predisability income that is replaced by disability income benefits, the higher the likelihood that claims experience will exceed claims expected. In other words, high levels of disability benefits tend to stimulate higher aggregate claims. This is especially true if the benefits exceed the cash income available prior to disability. There have been a surprising number of fraudulent claims in disability income insurance where the insured intentionally maimed himself or herself with the express intent of ceasing work and collecting disability income benefits. Some of the more notorious cases have involved medical practitioners who injected painkillers before severing fingers or other extremities of the body. In cases where fraud was detected, the individuals were unable to collect disability income benefits even though they were permanently disabled.

In order to minimize the motivation for fraudulent claims or even padding of legitimate claims by malingering, insurance companies limit the amount of coverage they will issue to any individual in relation to that individual�s income. Generally speaking, disability income coverage is not available for benefit amounts that exceed 60 or 70 percent of the individual�s income. In fact, as the level of income increases, the percentage of income replacement that insurance companies will issue decreases. High-income professionals are often limited to less than 50 percent of their income level in setting the maximum benefit level for their disability policies.

Some experts advise that, for individuals providing full disclosure to the insurance company, the appropriate amount of disability income protection to purchase is the maximum amount available from an insurance company that provides quality coverage. Insurance companies will want to know about existing sources of disability protection, such as group policies through the employer, group policies through professional associations or other affinity groups, and salary continuation or sick pay programs. The financial underwriting aspect of disability income policy issuance is just as important as the medical evaluation.

Business owners having financial difficulties and facing bankruptcy present a high risk of adverse selection. A high stress level increases the likelihood of a stroke, heart attack, or other stress-related disability. Stressed individuals with a history of high blood pressure or heart problems present an even higher risk.

The underwriting process for disability income insurance is much more complex than that for life insurance. Although the underwriting for life insurance and for disability insurance coverages has many similarities, disability coverages entail more refined classifications and therefore a more involved evaluation process. The evaluation process is more complicated because disability can be, and often is, a recurrent condition throughout an individual�s lifetime. For example, an individual with a bad back may require repeated hospitalization and rehabilitation therapy even though he or she may have a long life. Joint problems associated with knees and elbows often start with injuries at a young age and get progressively worse with wear and the onset of arthritis. Such problems can greatly increase the medical expenses for maintaining good health. The job of underwriting for disability insurance is to correctly classify individuals as to how costly their medical maintenance will be over their lifetime. The individual is to be classified appropriately on the basis of existing information so that the price charged in the premium for that individual and similar individuals will adequately cover the cost of claims for that group over the duration of their coverage.

In some ways it is similar to logistical planning for an ongoing business operation where different functions utilize resources at different rates. For example, telephone bills for telemarketing employees will greatly exceed those for secretarial support staff. Managers must anticipate and plan for needed resources at the applicable cost when they are needed. The insurance companies must do the same with claims. They have to anticipate the frequency of claims and the severity of each claim based on benefit levels that will be paid. Misclassifying an individual into a lower risk classification and charging too low a premium will result in inadequate resource allocation for that insured�s future needs. If the misclassification is widespread in all rate categories, the insurance company will be charging inadequate premium levels and may be forced to delay and limit claims settlement unless it can increase premiums for the group of policies. In cases where the insurance company is able to increase premiums on a class basis, it may both increase premiums and cut back as much as possible on claims. By properly classifying insureds in the first place, the company minimizes the need to adjust for past misclassifications at the time of claims settlement.

There are many more ways to adjust for anticipated claims differences in disability coverages than there are in life insurance coverages. Depending on the company, 40 percent to 60 percent of issued policies may require some sort of modification or adjustment from the "standard issue." This varies significantly from life insurance coverages, of which over 80 percent is issued as standard. As in life insurance, disability premiums can be increased for individuals presenting a higher level of risk to the insurance company. Another modification in disability insurance is to insist on a longer elimination period for some high-risk insureds, which eliminates more of the short-term problems and disabilities. In some cases a longer elimination period may be applicable to specified causes or conditions, or the insurance company may insist on a relatively long elimination period that applies to all causes of disability. Such an approach does not preclude coverage for a particular condition, but it limits application to bouts with the problem of longer durations. Another less frequently used method of adjusting for higher risk is to insist on a shorter benefit period for specified problems or conditions, which puts a predictable upper limit on the potential claims payments. The most limiting modification is an outright exclusion of any benefits associated with disabilities stemming from specified causes or conditions. Although this approach may seem drastic, it at least allows individuals to obtain disability coverage for causes other than the major problem that is preventing them from getting full disability protection.

Proper disability underwriting demands a sophisticated knowledge of medical problems and medical treatment. The home office underwriters often require much more information and supporting documents than are necessary to satisfy life insurance underwriters. The home office disability underwriter must get an accurate picture of the individual and the applicable risk without ever meeting that individual. The entire image must be created by the information supplied from the field agent to the home office staff. Very rarely will the home office underwriter even talk to the applicant by telephone. The documents presented with the application must bring the applicant to life and make him or her real to the home office underwriter.

The disability underwriting process commonly includes one or more requests from the home office for additional information. Although this does delay the issuance of coverage, it does not necessarily indicate that the coverage will not be issued. Disability insurers use many resources in an attempt to accept and insure all applicants who fall within their acceptable risk classifications. Obviously some risks will not meet the minimum company standards and will be rejected outright. Individual applicants who are rejected by one company may not necessarily be uninsurable; another company may classify risks in a different manner and apply different cutoff standards. Individuals who experience difficulty in obtaining disability insurance should shop for coverage from other insurance companies on a sequential basis and should not apply for coverage with many insurance companies concurrently. There are brokers who specialize in substandard insurance who can be helpful in obtaining disability coverage for individuals with serious health problems.

There are a few exclusions typically found in disability income policies. Disabilities resulting from war or any sort of military service are nearly always excluded from coverage by a specific policy exclusion provision. This provision often defines war to include declared wars, undeclared wars, and any acts of war. Exclusions also preclude benefit payments for any sickness or injury sustained during military service since they will usually be covered by military hospitals or veterans administration hospitals. It is also fairly common for these policies to exclude benefits for disabilities resulting from a normal pregnancy and disabilities resulting from travel in aircraft if the insured has duties relating to the plane�s flight or maintenance.

The total exclusion provision in disability policies is usually rather short. Longer exclusion clauses often indicate that the coverage may be less generous than that provided by premier-quality policies.