Here is an excerpt from my book, “Successfully Managing Private Disability Claims” to be published in early 2017. I know that this can be a tough subject to understand, but I have been asked over the years how to calculate “indexed” figures relative to disability policies – mostly by attorneys. The calculations are actually pretty easy once someone (like me) tells you where to look for the indexes and how to apply them. This subject has been a long time in coming.

One of the most misunderstood calculations dealing with disability claims is the “indexed pre-disability earnings” definition using indexing that is only used in three distinct policy situations:

- To determine whether new applicants have at least a 20% earnings loss (if indexed pre-disability earnings is mentioned in the Plan or policy).
- To calculate “residual” or part-time earnings and benefit amounts.
- To determine “gainful” alternative occupations as part of an “any occupation” investigation after 12, 24, 36, or 60 months change in definitions.

“Indexing” is NOT a Cost of Living Increase, but is frequently misidentified by insureds and claimants as one. Caution should be exercised not to confuse “indexing” with COLA policy calculations because they are not the same thing.

The Glossary of most group Plans define indexed monthly earnings as:

*INDEXED MONTHLY EARNINGS** means your monthly earnings adjusted on each anniversary of benefit payments by the lesser of 10% or the current annual percentage increase in the Consumer Price Index. Your indexed monthly earnings may increase or remain the same, but will never decrease.*

* **The Consumer Price Index (CPI-W) is published by the U.S. Department of Labor. [The insurance company] reserves the right to use some other similar measurement if the Department of Labor changes or stops publishing the CPI-W.*

* **Indexing is only used to determine your percentage of lost earnings while you are disabled and working.*

Most insureds, claimants and insurers ignore “indexing” and rarely perform the calculations correctly. I am aware that the concept and calculations may be confusing to some, but the subject of “indexing” does merit explanation in any book about disability claims.

The Bureau of Labor Statistics (BLS) publishes the Consumer Price Index of *Urban Wage Earners and Clerical Workers* (CPI-W) on a monthly basis. The CPI is a measure of the average change over time in the prices paid by urban workers for a market basket of consumer good and services representing approximated 89% of the total population.

The Social Security Administration also uses the CPI-W to adjust benefits paid for SSDI, SSR and SSI income recipients.

The CPI-W index chart is located at:

http://www.ssa.gov/OACT/STATS/cpiw.html

Most of us are aware that most goods and services cost more today than they used to. The increase is often referred to as a “cost of living index” which is why some insureds and claimants confuse indexing with COLA. Nevertheless, the ultimate result of “indexing” takes into account any inflation that has occurred over time.

The Bureau of Labor Statistics uses the years 1982, 1983, and 1984 as a base line of 36 months and assumes the average of these years is equal to 100 or when the value of $1 was valued at 100 cents. For example, a current index of 120 means there has been a 20% increase since the baseline, and an index of 80% shows a 20% decrease since baseline.

Although “indexes” are documented as ratios, they are often converted to percentages of increase from one year to the next.

For example:

Year 1 Index was 112.500

Year 2 Index was 121.500

Change 121.500-112.500= 9.0

% Change 9.0/112.500 x 100= 8%

Another example:

Year 1 Index was 225.000

Year 2 Index was 243.000

Change 243.000-225.000=18.000

% Change 18/225.000 x 100=8%

The above cited definition of disability states, you are disabled if, “*You have a 20% or more loss in your indexed monthly earnings due to the same sickness or injury.” *Let’s take a look at how this should be determined.

Employee A became disabled on July 1, 2015. At that time his annual salary just prior to his date of disability was $65,500, or $5,458.33 per month. After his date of disability, Employee A must show at least “an indexed 20% loss in monthly earnings” calculated as follows:

CPI-W Index for July 2014 was 234.525 (From chart for year before date of disability.)

CPI-W Index for July 2015 is 234.789 (from chart)

Change in index = .264

% Change = .264/234.525 x 100= .113%

Monthly indexed earnings = $5,458.33 x .113% = $6.17 + $5,458.33 = $5,464.50

Calculated 20% of indexed monthly earnings: $5,464.50 x 20% =$1,092.90

An easier way of looking at this is to say that Employee A must have been unable to earn greater than 80% of his indexed monthly pre-disability earnings of $5,464.50, or $4,371.60/month. ($5,464.50 x 80% = $4,371.60)

It is important to always compare “apples to apples” so to speak and use monthly pre-disability earnings figures rather than yearly ones.

The advantage of “indexing” monthly earnings gave Employee A an monetary advantage of $6.17, taking inflationary purchasing power into account, before calculating the required 20% earnings loss.

Admittedly, the United States economy has not experienced great inflation in the last 10 years or so, in fact, we’ve experienced recession, the opposite of inflation. Therefore, the advantages of indexing are not significant, but it could make the difference between receiving a benefit and not receiving it.

Likewise, when claimants return to work and have earnings, or undergo any occupation investigations, indexed figures are used. Because indexing involves “changes in percent increases” indexing can only be applied to claim situations after the first anniversary of benefit payments. However, determining the initial 20% monthly earnings loss for the purpose of meeting the definition of disability is, of course, the exception.

As I indicated earlier most claimants including attorneys often disregard “indexing” due to the perceived complexity of figuring it out. Still, when the policy definition of disability states, “20% loss of indexed monthly earnings”, it’s a good idea to put pencil to paper and verify that you do indeed meet the definition as written in your policy.