There's almost universal agreement among producers and their employer clients, as well as the employee populations they serve, that one's income is a person's most important asset - and that a sound financial-planning strategy must be in place to protect those earnings.
Yet, as is the case with other employee benefits, a perception gap exists. While disability insurance coverage is widely coveted, there are many missed sales opportunities and confusion, not only about the nature of the product but also the extent to which policyholders may someday become claimants.
Today's difficult economic climate also comes into play, though the lack of enough decisive action demonstrates a puzzling indifference among workers - whose behavior could best be described as penny-wise but pound-foolish.
Adviser Chance D. Potts, a member of Employee Benefit Design, LLC in Springfield, Mo., reports solid participation in DI plans among customers and believes "the recession has brought a heightened sensitivity" about the need to insure income to pay bills.
Behind the numbers
But greater awareness doesn't necessarily translate into higher sales. While DI activity is flat in the individual market, it's moderately up among group plans, notes Matt Tassey, former chairman of the nonprofit Life and Health Insurance Foundation for Education, as well as a principal of Scribner Insurance and Burwell & Burwell in Portland, Maine.
He sees quite a bit of movement around changing DI carriers that's largely driven by the escalation of group medical insurance costs, but laments a huge under-penetration in the long-term disability market, with fewer than 40% having such coverage, which presents a great sales opportunity for brokers and advisers.
LIMRA International in Windsor, Conn., found that LTD was up 11% for the first three quarters of 2009 based on new premiums for employee-paid products, while short-term disability was down about 4%. Still, STD has shown more stable growth rates during the past few years.
Mike Simonds, a senior vice president for Unum in Chattanooga, Tenn., notes that researchers at JHA (a division of General Re Life), among others, reported flat sales in 2009 - even with regard to aggregate earned premium for disability insurance and other benefits based on a percentage of salary.
Despite such conditions, Unum disability sales through the first three quarters of 2009 actually were up about 12% - with most traced to employee-paid policies and activity in the leading DI insurer's core market of fewer than 2,000 lives. In 2008, roughly half of Unum's STD sales were offered on a voluntary basis, compared with about 29% in 2001.
Assurant Employee Benefits in Kansas City, Mo., reported an 18% increase in disability, dental and life insurance sales last year - with the number of companies seeking quotes on voluntary benefits rising 32%.
Principal Financial Group Inc. in Des Moines, Iowa noted that more than half of new sales last year included a combination of employer-paid and voluntary benefits, with fewer than 100 of the 60,000 company requests for benefit changes involving people switching from employer-paid benefits entirely to voluntary benefit programs.
Just 10% of more than 2,100 working Americans responding to a recent Harris Interactive poll conducted for Milwaukee, Wis.-based Northwestern Mutual are insured if they become disabled, with 30% receiving such coverage through the workplace.
Here's the kicker in the Harris poll: Nearly 80% of the survey respondents said they'd be devastated if a disability prevented them from earning a living - an emotional impact that ranked below only a fire destroying one's home and belongings. Ironically, 73% of the respondents have insured their home or rental property and 88% have auto insurance, but fewer than 50% of them consider having their car destroyed in an accident to be a devastating loss.
Low on the totem pole
In the pantheon of employee benefits, health insurance, a retirement savings plan, life insurance and dental coverage all seem to trump disability, according to Ron Neyer, LIMRA's senior analyst, distribution research, who says many employees "don't understand just how high the incidence is of somebody having some sort of disability before they retire."
LIMRA saw an uptick in simple products such as term and whole life insurance as a means of protecting dependents, though the urgency did not translate to DI - even though it seems like a logical step and something advisers could address when discussing a client's larger financial plan. "It's an emotional decision when it should be a financial decision," he says.
DI is a more technical benefit that can be harder to explain, says Amy Friedrich, vice president of the Principal's specialty benefits division. Mindful of this issue, she thinks "some of those technicalities will get simplified a little bit and sales will be more geared toward the average employee." Friedrich believes that more brokers, employers and consultants are discovering that there are ways to make DI meaningful and affordable without skimping on coverage.
Shift to voluntary plans
One such solution is to offer benefits on an employee-pay-all voluntary basis, which Tassey says appeals largely to organizations with 10 to 500 lives that are struggling with tight budgets.
"To the extent that you can add a benefit, whether it's voluntary group disability, critical illness, life, dental or vision, is an opportunity to begin a conversation with an existing client or prospect and grow your book of business," he says.
Even benefits offered on a voluntary basis can be a welcome addition for highly compensated employees, who will appreciate not having to pay retail prices for such coverage in the individual market.
"We can get a discount of anywhere from 15% to 25% off the individual rate, which is certainly a benefit to the executive," reports Andy Torelli, president of e3 Financial in Newport Beach, Calif., a brokerage that specializes in what it calls a multi-life disability layered on top of the corporate product for HCEs.
STD on a voluntary basis is palatable to even a decent-sized organization of 50 employees or more because "it is so reasonably priced," Potts says. "Most everyone will purchase it because they are living paycheck to paycheck, and they can't make it past eight days without a check. So they almost have to buy it."
But the trouble is that other voluntary benefits, which may be considered a lower priority in the grand scheme of financial protection, can drain precious dollars that may be more wisely spent on DI. "People will pay $60, $70, $80 a month on these products," he observes, "and they have no money going into savings, no disability coverage, and they're one paycheck away from bankruptcy."
One of the pitfalls for arranging coverage on a voluntary basis is that without the right educational process in place, Potts cautions that employers can be exposed to potential liability if they don't properly handle their enrollments. Any inertia in this area could be seen as a breach of their fiduciary duties under ERISA.
A tax-free alternative
Scott Horstman, a disability product manager for Assurant, sees a migration toward voluntary coverage, particularly with smaller firms. But one creative alternative to shifting these costs onto employees is an arrangement established in 2004 under Sections 104(a)(3) and 105(a) of the tax code whereby DI benefits can be offered tax-free.
He says IRS Revenue Ruling 2004-55 permits employers to significantly reduce the cost of coverage by as much as 20% to 25% when paying the DI premium through an employee's salary-reduction arrangement and lowering the income-replacement threshold to 50% from the 60% industry standard. For employees, he explains that the result is an even higher net benefit than they would have received under the 60% plan.
This solution is applicable to any type of employer or industry except for executives who own more than 2% of a subchapter S corporation or other partnership and already receive a tax-free benefit. To guard against fraud, the IRS analyzes the prior three years of coverage so that employees who know they're about to become disabled aren't able to switch to a post-tax basis of premium payment and realize a tax-free benefit.
A bigger challenge is dealing with fallout from cash-strapped clients. "Our market is kind of the high-end entrepreneurial white-collar service market," he says, explaining that about half his clients offer this policy and nearly all of them have a standard LTD plan. Torelli estimates that his firm's employer-paid DI sales may have plummeted a whopping 80% by the end of 2009. The expectation is that demand for executive DI policies will return to 2008 levels this year.
The need for HCEs to insure their income stream, of course, takes on a greater sense of urgency if they're accustomed to a lavish lifestyle, have children in private school or took a beating in the stock market.
Torelli notes that in the middle market, it's common for HCEs to cap out at $10,000 or $15,000 a month in benefits unless they work for a huge company. "So if you get somebody making over $300,000, their benefit is really not going to be 60%," he says. "After making $500,000 they are going to have a $180,000 benefit, which is over just 35%. You end up with kind of reverse discrimination."
An educated consumer
Neyer believes the biggest barrier to DI enrollment is poor education. "When there's confusion," he notes, "an employee doesn't want to allocate money toward a benefit that they don't fully understand. If the employer is going to give it to them, great. But if they have to pay for it out of their pocket, they need to understand it a little better."
Once the DI concept is explained to employers, Horstman says it's an easy sell, but the product doesn't have enough market traction because carriers aren't providing enough guidance to implement these plans. He says this is where brokers and advisers can lend a huge helping hand. For example, Assurant offers two sets of educational materials, one of which provides detailed side-by-side comparisons and frequently asked questions, while the other focuses on implementation.
Producers have startling data on their side to help promote DI coverage. Industry research, for example, suggests that about 40% to 50% of working Americans would have to file for bankruptcy if they had to go without income for much more than 90 days, according to Tassey.
Failing to protect one's income stream from the unfortunate event of a disability can take its toll over time. Calculations by the Life and Health Insurance Foundation for Education, which each May teams with more than 40 leading insurance organizations to promote Disability Insurance Awareness Month, show that a 25-year-old worker earning $50,000 a year who suffers a permanent disability could lose $3.8 million in future earnings.
The advocacy group also notes that one in five working Americans will miss work for at least a year before they turn 65 because of an accident or illness, while the U.S. Social Security Administration estimates that 30% of the 20-year-olds in today's workforce will become disabled before turning 67.
While the recession constricted discretionary spending, Simonds says tough times also can spark more acute awareness of the need for financial-protection products. And as merit-pay practices resume and payrolls generally increase, he's sanguine that industry growth will follow. Market volatility - through which scores of employees saw their investments cut in half, or even worse - made them see just how vulnerable they were to financial ruin, Neyer adds.
Simonds believes the broker's role as an objective adviser "is more valuable now than it has ever been," particularly with regard to helping employees enroll in a more consumer-driven environment where there's no cookie-cutter approach to benefits funding, plan design, administration, education and technology. "They're basing their recommendations and evaluations not just on the contract and underwriting, but also the delivery of that benefit and the provider's effectiveness with that delivery," he observes.
In this climate, it's easy for brokers and advisers to obtain a quote from 15 to 20 carriers in relatively short order. Where Simonds says they can differentiate their services is in being proactive about helping clients make their benefit costs more predictable.
Mindful of this challenge, Unum offers benefit credits that establish a defined-contribution approach through which a fixed amount of DI funding is given to each employee. "They can budget for the years to come and know that's going to be a very constant amount of cost," he says. "We work with brokers to enable employees to buy additional coverage."
With a national obesity epidemic giving rise to more chronic illnesses that can drive up the number of LTD claims, Tassey sees conditions that were once hidden from view, such as fibromyalgia, become more commonplace.
But there's also obviously an upside to living in these times. "The magic of medicine today is that we have a gentleman right now who is back to work now 120 days after a massive heart attack," he says.
Shutan, a frequent contributor to Employee Benefit Adviser, is a freelance writer based in Los Angeles.
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