From the February 2010 issue of Investment Advisor • Subscribe!

Insurance Update: Along for the Rider

Using life insurance for disability coverage

If your clients are looking for limited disability coverage without taking on a whole new policy, they could look at life insurance.

Life insurance policies these days have riders for just about everything, it seems. And now there's one for disability insurance, introduced by The Hartford in August 2009 and aimed at small business owners or employees of small businesses.

According to The Hartford's Benefit Landscape Study, conducted in 2009, 97% of consumers would have major adjustments to make in the way they live if they lost part of the family's income for as short a time as three to six months. And only 36% of employees have long-term disability coverage.

While the new Disability Access rider does not provide long-term coverage, it's designed, according to Clifford Barron, director of life insurance product development for The Hartford, "to provide a safety net to small business owners, sole practitioners, and their key employees." The rider acts as a "bridge benefit" to help the recipient negotiate the time between disability and returning to work or finding a new career, or possibly qualifying for Social Security benefits. It's also, says Barron, useful for "a highly skilled person who can no longer practice their craft because of an injury, and who now needs time to find a viable career alternative."

Other unsettling facts of life that may make this rider popular indeed come from the Social Security Administration, which says that close to a third of those employed today will be disabled at some point before they are able to retire, and that almost half of those receiving Social Security disability benefits--that's nearly seven million people--are under the age of 51.

Once a policyholder has qualified for the rider, it provides a monthly benefit with a maximum lifetime benefit equal to 24 monthly payments. The amount of the benefit is determined at policy issue, and according to The Hartford, is usually tax-free to the insured. The maximum monthly benefit is the smallest of three values: 2% of the total initial face amount of the policy; $5,000; or 30% of the insured's monthly salary at the time the policy is issued. The rider is available on some new permanent insurance policies; it will cost an additional 6% to 10% of the basic policy premium.

The "sweet spot" is successful 40- to 50-year-olds with disposable income who have hitherto gone without disability insurance. They must buy a whole life policy first, The Hartford's Bicentennial UL Founders, Leaders VUL Liberty, or Leaders VUL Legacy. In addition to the additional premium, the Disability Access rider has a first-year issue fee.

Since the individual owns the policy, and not his or her company, the coverage is portable if the policyholder changes jobs. Coverage is renewable up to the policy anniversary date closest to the policyholder's 65th birthday, and the cost of coverage may go up.

Multiple Uses

Barron adds that it can be used as income protection for the insured's family, as key man insurance, or to fund an individually owned buy/sell arrangement. He explains that the life insurance policy also can be overfunded to use as a "cash accumulation vehicle, with disability on top of it."

The Hartford "does a lot on the disability side for corporations," says Barron; he points out that, as a life insurance provider, the company already collects "98% of the information" required to determine insurability for a disability policy, so the addition of the rider for "a small incremental premium" helps to "get out that there are more uses for life insurance than just providing a death benefit."

It's too early to say how popular this new feature will be, but Barron points to the successful introduction of the Life Access rider a couple of years ago as a model. Life Access offers an accelerated death benefit if the policyholder becomes chronically ill. "We pay for the condition, rather than treatment," Barron explains. The rider allows a policyholder to access the policy's death benefit, if needed, to pay for medical or other care associated with a chronic condition. Early adopters were few, but "once the marketplace understood what we were trying to offer," he says, "it took off, and we've had phenomenal success with it."


Marlene Y. Satter, a freelance business writer who can be reached at harpwriter@verizon.net.
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