Time for Disability Income Insurance?
Bob Herum, MSFS, CLU®, ChFC®, RHU®, REBC®
Bob is Second vice president of disability income sales at Union Central Life Insurance Company.
The last couple of years have been extremely difficult for many Americans. Many business segments have struggled. Your clients, both personal and business, have suffered. Each of you has likely had to retool your practice and probably made some tough decisions. So, why should you look at adding disability income insurance to your day-to-day sales efforts? First, the disability industry has righted the ship. Carriers are profitable and loss ratios are satisfactory—the number of claims hasn’t spiked despite the difficult economic conditions. The larger disability carriers have relaxed some of the financial documentation requirements and, particularly when combined with teleunderwriting, eased the medical requirements. There is a reduced dependency on Attending Physician Statements (APS) and paramedical exams due to other tools that have been developed to validate the proposed insured’s medical status. Another recent innovation is to simplify the medical and financial requirements through combo Life and Disability Income (DI) insurance sales. The internal underwriting efficiencies that can be exploited by the Home Offices of companies that have both life and disability income insurance policies allow you to provide streamlined underwriting processes and take care of the life and disability needs of your clients. Your clients really need both. You make two sales, your client’s family has financial protection against loss of family income due to death or disability, and you have a much stronger relationship with your client.
Another reason to re-explore disability income planning with your current clients and prospects comes from an understanding of what the last couple of years have highlighted for so many. Your clients or prospects are much more aware of the effect of lost income on their lifestyle. The need for planning and preparation is not a sales gimmick.
• According to the Social Security Administration’s Disabled Worker Beneficiary Statistics, new Social Security Disability Insurance (SSDI) applications increased 21 percent from 2.3 million in 2008 to 2.8 million in 2009. Two major drivers of this increase were the poor economy/high unemployment rate and the aging of America’s working population.
• According to the Council for Disability Awareness (CDA) Personal Disability Quotient calculator, 61 percent of surveyed wage earners personally know someone who has been disabled and unable to work for three months or longer.
• The CDA also reports that the average long-term disability absence lasts two-and-a-half years.
• More than one in five workers will be disabled for five years or more during their working careers according to the JHA Disability Fact Book.
Product and pricing options designed to improve the offering to professionals, white- and even gray-collar business owners are now available. Unbundling the product and providing multiple product options can allow you to meet the pocketbook needs of your clients, yet provide quality products and the ability to increase their benefits as their financial situation requires or allows.
Another area of tremendous opportunity exists when working with executive benefits for small- and medium-sized employers. You are uniquely positioned to look at these plans and suggest valuable product or plan design changes that provide needed and valuable benefits to the firm. These options might include executive Life and/or DI plans that supplement or augment the underlying group plans.
In many group scenarios, the decision-maker may be someone in HR. However, when working with individual products, particularly life and disability income products designed for executives, the decision to create and implement executive level benefits is generally made by the CEO or CFO. Designing and implementing executive benefits on a group basis, using individual disability products with Guarantee Standard Issue (GSI) offers, along with significant discounts for each participant, allows you to design and implement plans that the employer sees as part of their executive-level benefits. More importantly, demonstrating significant shortfalls when trying to use group products to handle the specific needs of the high net-earners within a firm is relatively easy.
Think about the non-W2 income that key executives and owners might receive that is not protected under the standard group Long Term Disability (LTD) contract. The following illustration shows an average employer-paid group plan covering 60 of earned income to a $5,000 monthly maximum. This is a very common scenario, and few highly compensated employees or executives fully appreciate their plan’s deficiencies, which include the issue of what income is covered, the fallacy of 60 percent of income and, finally, the likely taxation of benefits.
In the example the individual earning $240,000 only has 25 percent less taxes of his/her income covered ($60,000/$240,000). What do you think their response will be when confronted with this?
Following are a couple of other common disability scenarios.
SALES OPPORTUNITY 1
This first scenario is the small, closely held business. Often these firms have 25 or less employees; the most have less than 10 employees. Often this type of group has limited disability options. A few group plans are available in this market, but the need for disability planning is extremely high. These smaller employers are often without anything other than an employer-provided accumulation of sick days. Most companies limit these to 10 or 15 days, and any disability lasting longer puts the employee at financial risk. Typically, the employer is not going to be in the position to do something for everyone, but perhaps for the owner and one or two key employees. Most insurance companies have pricing breaks at three or more lives on an employer-sponsored plan. Additionally, most insurance companies use sex-neutral rates on their list bill cases. Your goal in these types of situations is to show the owner (and other key employees) how they can use individual disability policies, sold with a list bill discount and sex-neutral rates, to provide the key employees a valuable benefit. The employer can use individual disability policies as golden handcuffs. Additionally, the business owner often realizes that they would most likely (or already do) continue their own or a key employee’s salary if disabled. This is extremely common, and few business owners are aware of the tax consequences of continuing salary to a disabled employee. They also are unaware of the risk they assume if they have paid a key employee and, later, another less-key employee becomes disabled and assumes they also will have their salary continued. Once someone continues to receive a salary while disabled, a precedent is established for the firm.
SALES OPPORTUNITY 2
Picture a small manufacturing firm of 90 employees with four key individuals: a president, vice president, CFO and sales manager. Each of these high-wage earners also receives a bonus, other variable compensation, car allowances and other non-W-2 income. The firm has a Group LTD plan in place with the following plan design: 60 percent of base salary and average of two years of bonus to a maximum of $6,000 per month of benefit, age 65 benefit, 90-day elimination or waiting period, employer-sponsored and employer-paid. This is a very common plan design. Following are the incomes and replacement ratios for these top four key employees:
|Base Annual Income||Total Income||Gross Monthly LTD Benefit||Net Monthly LTD Benefit*||% Net Income Replaced**|
* Employer paid group LTD is taxable upon receipt
**Assumes a 20 percent tax-rate
How do you think your key employees might feel about these replacement ratios? Surprised? Unhappy? The fact is, Group LTD does a great job for the rank and file, but can struggle when dealing with the top wage earners. We could try to address these shortfalls by increasing the cap, having the key employee pay for the premium through a Section 162 Bonus, and so on, but the bottom line is nothing really can be done to overcome some of the plan constraints. However, one could look at the same group and suggest an alternative plan design that addresses their specific concerns through the addition of individual policies to supplement the group LTD. Here is how it might look:
|Total Income with Bonus||LTD Benefit*||Individual DI Net Monthly Benefit||Combined Net Monthly Benefit||%Net Income Replaced**|
* Employer paid group LTD is taxable upon receipt
**Assumes a 20 percent tax-rate
Look at the dramatic effect of using individual disability policies in conjunction with the underlying group LTD plan to significantly improve the replacement ratios. Additionally, other tools, such as a Section 162 executive bonus plan could reduce the negative effects of taxation on benefits. Another very important note to give your client is that the individual policies can be noncancellable with guaranteed premiums or guaranteed renewable with significant savings to the firm. Additional riders, such as a cost of living adjustment (COLA) rider, which indexes benefits by the annual cost of living adjustment during a period of disability, can be added either by the employer or via payroll deduction to the employee. That type of personalization is not available on a group LTD product.
So, what does a prospect for this type of presentation look like? Literally thousands of companies have some variation of what I have shown you. You simply need to look at your existing group clients or owners/ principals of small and medium-sized companies to uncover these opportunities. Your sale to the group should demonstrate how to cover the shortfall, create the program and show the advantages to both the employer and key employees. A decided advantage to you and your client is the use of precompleted applications, limited underwriting and the use of gatekeeper questions rather than full applications. Another key point: All group agents and agencies have lost business through the infamous Agent or Broker of Record (AOR) fax or letter. Individual products like disability income insurance policies are not subject to an AOR. You could be sitting on a gold mine of potential business, generating significant income for you and your agency by offering necessary products to fill clients’ coverage gaps. Another advantage of this type of marketing effort is that you can be perceived as bringing significant value to your relationship with your business clients.
What’s holding you back?