Preserving a Lifeline
By: Banham
Independent agents are navigating through some treacherous waters as the recession continues to wash away profits and batter agencies’ books of business. However, agents and brokers have something of a life preserver when it comes to weathering these tough economic times—disability income insurance.
Wholesalers and underwriters of disability income insurance maintain that many independent agents and brokers are missing a prime opportunity to sell group and individual disability products to small and medium size businesses. Ironically, the rationale derives from the root of the problem—the economic recession, which has pared personal saving and investments, making it tougher to survive the loss of income because of a disability.
Agents tend to perceive disability income (DI) insurance as a secondary pitch to marketing group health insurance, with much of the emphasis placed squarely on the former. DI insurers argue that agents should not shortchange the product, given the high risk of disability and the financial wreckage it causes.
“DI insurance just isn’t on the radar screen of many property-casualty agents,” says Barry Lun-dquist, interim president of the non-profit Council for Disability Insurance. “The risks argue otherwise.”
A Risky Situation
How big is the risk of a disability? According to the U.S. Commerce Department, one in seven workers can expect to be disabled for five years or more before they retire. If disability occurs, the effect on a person’s income is extreme. For example, a 25 year-old worker who earns $50,000 a year and experiences a long-term disability has the potential to lose $3.8 million in future earnings, according to the Life and Health Insurance Foundation for Education (LIFE).
Sobering statistics, certainly. But, DI insurers say the product is still a hard sell to agents. “The insurance can be confusing to agents because of the product design features, such as the definition of disability, duration, benefit percentage, elimination period and maximum benefits,” says John Ehrle, regional vice president in Prudential’s group insurance business. “It’s hard to match up different insurers in terms of these features to get to the bottom line costs, in addition to checking the insurers’ ratings. We’re trying to make this easier without commoditizing the product.”
The recession’s repercussions on savings and investments presents an opportunity for agents and brokers to talk to their commercial clients about group and individual DI insurance. “Obviously, pretty much everyone’s savings has been depleted, and in some cases a two-income household may now be a one-income household because of corporate downsizing,” says Lundquist. “Clearly, people are more fearful and aware of the risk of a lost paycheck. If they experience a disability that results in lost income the ability to pay the mortgage, save for kids’ college educations and just pay the bills is impacted.”
Indeed, more than a quarter of working Americans say they would have trouble supporting themselves financially “immediately” following the loss of their income, according to a survey by LIFE. Nearly half (49%) would reach that point in a month or less, and 79% would reach that point within six months. Other studies paint a similarly dire picture. Health Affairs, a health policy journal, states that nearly half of all mortgage foreclosures are due to a disability, while only 2% are caused by death.
Yet, the Council for Disability Awareness estimates that more than 100 million American workers do not have disability income protection. “It makes absolutely no sense that so many people are without an insurance product that costs pennies on the dollar when bought on a group basis,” says Tom Smith, founder and president of the wholesale brokerage, Voluntary Benefits of America in Franklin, Tenn.
The Short and Long of It
Disability income insurance has evolved since the first disability clause in a life insurance policy was crafted in 1896. The clause, which provided funds to a policyholder who is disabled and cannot make a living, made obvious financial sense—without income the policyholder might not be able to pay the life insurance premium.
Today, the two types of DI policies, short-term and long-term, when sold on a group basis, pay based on a percentage of the employee’s salary—50%, 60% or 66.33%. When the employer pays for the insurance the benefits to workers are treated as taxable income to the employee, thus reducing the overall payout. In some cases though, the benefit may fail to meet the income needs of disabled policyholders.
An alternative is to “gross-up” the group insurance policy to eliminate the tax burden on insureds. In such cases, the employee would pay for the group insurance premiums to render the tax issue moot, and the employer would raise the employee’s salary to compensate for the employee’s expense. For example, a worker earning $50,000 a year who pays $500 for the annual DI policy would instead receive a salary of $50,500.
There are many innovative add-ons or riders to both short-term and long-term DI policies, reaping more premium dollars for insurers and greater commission revenues for agents. For example, Prudential Group Insurance offers an education benefit rider on its DI policies. An employee with college-age children up to 23 years-old who suffers a disability and cannot work would receive additional money to offset the cost of the schooling. Another rider addresses the risk of catastrophic illness. If the policyholder cannot perform two of six basic human activities, such as bathing, dressing, mobility or eating, the rider is activated to provide an additional percentage of the employee’s salary.
Assurance Employee Benefits in Kansas City, Mo., offers a cost of living adjustment (COLA) rider on its group DI policies. “If you start with the basic policy and want a feature that increases your benefit to reflect inflation, this is a way to do that,” says Tim Knott, senior vice president of Assurant’s voluntary business unit.
Lincoln Financial offers a retirement protection rider that pays an extra 1% to 15% of an employee’s salary into his or her 401(k) defined contribution plan, another qualified retirement plan or an annuity. The rationale is that employees unable to earn an income because of a disability may not be in a financial position to continue making contributions to their retirement plans. “We also have a spouse disability rider that will provide income in the event the employee’s wife is disabled,” says Bob Risk, vice president of sales in the group protection division at Lincoln Financial.
Overcoming Disability Myths
Industry participants say an obstacle agents often encounter in selling DI insur¬ance is the misconceptions employees have about potential financial recourses in the event of a disability. For example, many individuals mistakenly believe state Social Security Disability insurance will reimburse them for lost income if they are disabled. While true, the hurdles are high—the worker must be disabled for five full calendar months, the disability must be expected to last at least 12 months or otherwise end in death and the claimant must be unemployable at any occupation and not just the type of work at the time of the disability. Hence, 60% of applicants for Social Security Disability insurance are initially denied and those who make the grade often have to wait five months or longer to receive the benefits. Adding to these difficulties is the paltry payout—around $1,000 a month on average, according to LIFE.
Many people also erroneously believe that a disability resulting in lost income is covered by workers’ compensation, yet the insurance only addresses work-related injuries and illnesses. According to the National Safety Council, more than 90% of disabling accidents and illnesses are not work-related. Still others think that disability is essentially a consequence of an accident, yet a study by the consultancy Milliman indicates that cardiovascular problems, musculoskeletal conditions and cancer are the medical causes of most disabilities. “Agents are in the best position, due to their relationship with business owners, to separate the facts from fiction,” says Ehrle.
Risk from Lincoln Financial agrees. “The most important thing agents can do is help their clients understand that they are doing a disservice to their workforce and themselves by not pointing out the risks of a disability and the need for income protection,” he says.
Going Naked
Without disability income protection, much of America would confront harsh economic conditions. More than half of the U.S. workforce has no private pension coverage, and a third have no retirement savings, the Social Security Administration (SSA) stated in 2007. It is no wonder why more than 70% of Americans indicated that they would experience a “very difficult” or “somewhat difficult” time if their next paycheck was delayed for a single week, according to the 2008 Getting Paid in America Survey by the American Payroll Association.
As Lundquist sums up, “People’s incomes are their most valuable asset.”
Banham (Russ@RussBanham.com) is an IA senior contributing writer.
How Much is Enough?
Generally, individual disability income (DI) insurance costs more than group coverage (group policies generally cost about .5% of a person’s salary; individual DI costs about 2%), however, these products offer agents and brokers an additional opportunity to insure their customers against the unthinkable.
“Much like business interruption insurance where a business is forced by a natural disaster, or some other property catastrophe, to shut its doors for a period of time, this is human interruption insurance,” says Matthew Tassey, past chairman of LIFE. “The doors stay open at the company, the staff is paid their salaries and the mortgage or lease are taken care of.”
To assist insureds with calculating how much disability income insurance they may need, log on to www.lifehappens.org/disabilitycalculator. The site features an easy-to-use tool for calculating generalized coverage needs, sponsored by the Life and Health Insurance Foundation for Education.
—R.B.
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