Some Executive Worksite DIs Now Offer Retirement Benefit Protection

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For many high-income professionals and executives, a fully funded defined contribution retirement savings plan may be the most valued of all benefit programs.

They are so important that the interruption of contributions to such plans can have a devastating effect on the level of income available when the participant reaches retirement.

To address this problem, a few disability insurers are now offering individual disability income coverage that replaces lost retirement contributions. Called a retirement protection program (RPP), this concept is creating new sales opportunities in the professional and executive benefit markets. It is available on either an employer-paid or voluntary basis.

Here is how it works:

A participant in a qualified retirement plan is insured under an individual DI policy with the benefits irrevocably assigned to a trust established by the insurance company.

In event the participant becomes disabled, the DI policys benefits pay into the trust.

The trustee invests these benefits on behalf of the policyholder until the disabled employee reaches age 65. At this point, the trust distributes the principal and accumulated income to the insured. The insured can then use the proceeds to create retirement income or achieve any other financial goal.

Note: In order to manage issues of insurable risk and policy control, insurers offering the RPP concept do not allow benefits from the individual DI contract to be paid directly into a qualified retirement plan.

As many producers who sell DI coverage to executives and professionals may be aware, employer contributions to a defined contribution retirement plan are excluded when determining how much DI coverage is available. Under RPP, the total monthly benefit available depends upon the level of the applicants current earned income plus the employee and employer retirement contributions.

In addition to generous levels of benefit, the RPP concept offers other advantages:

The programs are easy to set up since the insurance company establishes a trust arrangement in advance.
The trust is activated only if the insured becomes disabled.
The claimant controls how trust assets will be invested.
If the insured dies before reaching 65, trust assets will be distributed to the estate or a designated beneficiary.

Very importantly, since the program is funded by an individual disability policy, the DI coverage is portable if the insured leaves the current employer.

Producers and clients should be aware that the policy benefits and trust earnings are subject to rules governing taxation of individual DI insurance and trusts, not qualified retirement plans. As for DI policy benefits, these are either taxable or nontaxable to the insured, depending whether the employee or the employer pays the premiums (either can do so).

Trust earnings are generally taxable on a current basis to the insured as beneficiary of the trust. The trust can reimburse the claimant for taxes created by trust earnings. There will be no federal income tax due on funds distributed by the trust at age 65 on which taxes have already been paid.

Some carriers offering RPP are now making the program available on a guarantee standard issue basis for select employer-paid groups.

Producers should keep in mind that this concept is not a retirement plan. Rather, it is a method of protecting defined retirement contribution plans in event of disability. They are not offered for protecting defined benefit programs, however.

Given that these are high-end products requiring significant premium outlay, they will be most attractive to highly paid executives and professionals who make very large annual retirement contributions. Target buyers include highly paid professional groups such as dental or physician group practices, law offices, certified public accountants or executive carve-out groups.

In short, the RPP concept has everything a producer needs to build an executive benefits practice. It has a large and growing market, public concern about a critical issue (retirement saving), cross-selling opportunities, a door opener with advisors, and substantial commissions associated with individual DI products.

Mark R. Ameigh, CLU, is manager, sales support and industry research at Berkshire Life Insurance Company of America, Pittsfield, Mass., a stock subsidiary of The Guardian Life Insurance Company of America, New York, NY. His e-mail is mameigh@berkshirelife.com.


Reproduced from National Underwriter Edition, March 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.