Disability Plans Emerge To Protect Retirement Contributions

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What happens to your clients retirement plan contributions if he or she becomes totally disabled?

Pure and simple, the contributions stop and the worker stands to experience a “dramatic loss” in retirement plan value, says John L. Newell, manager-DI training for Berkshire Life Insurance Company of America, a Pittsfield, Mass., subsidiary of Guardian Life Insurance Company of America.

A few disability insurers have come up with an insurance solution to the problem: a rider or stand-alone policy that pays the plan contributions of totally disabled workers.

The idea is not new. Somewhat similar plans popped up in a few group disability policies in the mid-1990s. But the new versions are more varied, providing solutions for different markets. Consider:

Berkshire Life has been marketing Retirement Protection Plus since the first of the year. This is a stand-alone individual disability income policy that pays the employees contributions to the defined contribution plan, plus employer match, in event of total disability.

Massachusetts Mutual Life Insurance Company, Springfield, Mass., has started selling RetireGuard, a rider for two of the insurers individual DI policies. This product also pays the employee plan contributions plus employer match in event of total disability. The design mirrors that of MassMutuals stand-alone individual retirement contribution DI, which bears the same name.

Corporate Compensation Plans Inc., Danbury, Conn., is marketing the 401(k) Disability Wealth Protection Feature. This is a contribution program designed for group long term disability insurers to offer to retirement plan sponsors. The product embeds the insurers group LTD policy into the plan sponsors retirement plan [a 401(k) or profit-sharing plan]. In event of an employees total disability, the embedded LTD pays the employees plan contributions directly into his or her retirement account.

The first two approaches use individual DI insurance to accomplish the goal. The monthly payments are additional disability benefits, paid over and above other disability benefits the person may receive.

The third approach uses group LTD insurance, but it, too, pays in addition to any other disability insurance the employee may receive.

What is driving disability insurers to offer these products? For one thing, says Phil Davis, president of Corporate Compensation Plans, the plan sponsors he routinely works with have told him they would like such a product.

In fact, he says, the reason he started developing products for this market was a discussion he had some years ago with a human resource executive. That executive cited research his company had conducted showing large retirement plan losses suffered by workers who go on disability. Davis says his firm did arrange a supplemental disability program to address that need.

Now, however, the new product goes well beyond that by LTD insurance as the coverage vehicle and targeting distribution through LTD insurers who then take the program out to plan sponsors.

Another reason for developing these products is demographics. “One need not be a professional demographer to see that America is graying and intent on financing a comfortable retirement,” explains a Guardian statement.

Individuals age 55 and up now number 59 million, the company points out, and that number is growing. Meanwhile, the number of new 401(k) plans (and thus new plan participants) has grown steadily in the past five years. Hence, more people will be facing this exposure.

Furthermore, “we are hearing a lot of buzz about health insurance costs continuing to rise,” notes Paul Gribbons, vice president-DI product development at MassMutual. This is eroding net income levels, he says. Meanwhile, the costs of benefits continue to shift to employees; dual-income households are at record levels; and voluntary worksite sales are increasing–with the result that many families increasingly focus on preserving assets.

Information gleaned from consumer focus groups conducted by MassMutual confirms this, he says.

Some consumers in the focus groups did indicate they had not thought about what would happen to their retirement contributions if they became disabled, he allows. But once informed about the issue, these individuals showed “very high” interest in learning about a product that would protect against this financial exposure, he says.

What about the field? Brokers were “very excited” about the concept right from the start, when MassMutual introduced its first retirement contribution product, the stand-alone RetireGuard policy, says Gribbons. In fact, many of these producers were instrumental in convincing the insurer to offer a rider for this market as well, he says.

Here are some frequently asked questions about retirement contribution products:

What do they cost?

“We think the cost is nominal,” says Davis of the LTD product recommended by Corporate Compensation Plans. “It runs about 0.50% to 1% of the contribution amount. On a $1,000 a month plan, for instance, it could range from $5 to $10 per month.” The plan can be structured so the employees pay for it as a deduction from their contributions, or the plan pays for it as an administrative expense.

For the individual DI products, the cost varies by age, waiting period, benefit period, etc., point out executives.

For instance, take a 40-year-old man, rated for occupational class 4A, who purchases a MassMutual rider with a 365-day waiting period and a $1,000 per month retirement contribution benefit. This mans annual premium will range from $141 to $263, depending on benefit period (10 years or to age 65), base product (two choices), and market (worksite or individual).

How do the plans work?

These new plans pay a separate disability benefit for the retirement contribution. In the MassMutual rider, for example, the benefit is paid monthly, as an addition to the base DI benefit. In the LTD plan from Corporate Compensation Plans, the product would pay without regard to the benefits in the companys group LTD program.

Some insurers offer a rider that takes a portion of the clients monthly DI benefit and puts it into an annuity for retirement contribution purposes, points out Newell of Berkshire Life. By contrast, his companys new stand-alone product underwrites an additional amount of DI over and above the normal issue limits of a regular DI policy–”and we do so at a very generous issue amounts,” he adds.

Where are the disability benefits sent?

The Berkshire/Guardian and MassMutual products both pay the benefits into a trust each insurer has set up for this purpose.

The individual can invest the money in the trust as desired until age 65, points out a statement from Guardian about the Berkshire product. If the person dies before age 65, the trust assets are distributed to the estate. If the person recovers before age 65, the person can continue the trust or use its assets to purchase a single-premium deferred annuity, the company says.

The product designed by Corporate Compensation Plans takes a different tack. The LTD policy that supports the plan is an investment owned by the 401(k) trust, says Davis. Therefore, the benefits from the policy go right into the 401(k). (He says two Private Letter Rulings–PLR 200235043 and PLR 200031060–make this structure possible.)

Can policyowners access the benefits before retirement?

Generally, no. However, exceptions for hardship are possible. For instance, MassMutuals plan will allow distribution before age 65 in case of such financial hardships as facing medical expenses not covered by insurance.

Do owners pay taxes on the build-up?

Plan design will affect this. In the individual DI products, for example, the insured is taxed annually on gains in the trust. “This is not a qualified plan,” notes Gribbons.

In the embedded LTD product, however, the insured would not experience an immediate tax liability, since the funds stay inside the 401(k) until retirement, says Davis.

There are alternate solutions emerging in this market, concludes Davis. Thats good, he says, because it increases the chance that plan participants will have coverage for this exposure.

These products help “ensure that people have the money they need to live in retirement as they planned,” maintains Gribbons.


Reproduced from National Underwriter Edition, May 19, 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.