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Portfolio > Economy & Markets > Fixed Income

Insuring Against The Unthinkable

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Any time you can talk to clients about disability protection, you ought to discuss the importance of catastrophic coverage and make sure any policies purchased provide adequate protection in the event that the unthinkable occurs.

A catastrophic disability benefit rider, or CAT rider, can prepare clients to face severe or life-changing disabilities that might quickly exhaust basic disability benefits. At my company, approximately 20% of our policyholders have elected catastrophic coverage.

The definition of “catastrophic disability” can vary by state and policy, but one common guideline holds that a catastrophic disability is one that causes a person to be unable to perform two of six activities of daily living without assistance or causes irrecoverable and irreparable loss of hearing, sight or speech or the use of either both hands or both feet.

When discussing any financial strategy, agents always should present and discuss disability plans with and without catastrophic coverage and illustrate how each option could mean the difference between sufficient coverage and comprehensive protection.

A strong place for agents to start is by demonstrating how individual disability income insurance coverage can supplement group coverage. Begin by reviewing the basics of existing disability insurance and how effective it can be in protecting what may be clients’ most valuable asset: their ability to earn an income.

Many don’t realize group plans fall short by typically covering 50% to 70% of income, depending on tax status. In addition, many clients who earn commissions or bonuses forget to include these sources of income in benefit calculations. Ignoring commissions and bonus earnings can leave clients with monthly benefits that are too low to cover basic living expenses.

Following up the conversation with simple personal needs analysis and visual presentations that help prospects see how a disability could impact their income helps them understand the need for this coverage. Discussing expenses and any coverage gaps or shortfalls reinforces the sale.

Online tools can illustrate the potential shortfall and be tailored for the specific prospect while keeping the conversation friendly and informative. Review how an event causing a long-term disability could leave clients challenged to pay ongoing expenses such as a mortgage, car loans, child care, education and credit card balances. Then, show them how additional coverage can make up some of the difference, depending on their level of disability.

By purchasing a supplemental disability income insurance policy with CAT coverage, policyholders can increase their maximum potential benefit and potentially protect up to 100% of their income at the time of original policy issue, depending on the insurer’s maximum issue amount. More importantly, depending on a number of variables ranging from age and occupation to coverage needed, this rider generally can be added to a policy very affordably.

Who should consider CAT?

Those with existing coverage already understand the need for disability insurance protection and are, therefore, prime candidates for CAT. But many business owners and employees who have coverage through their workplace may be focusing only on the short term, and many may not have looked beyond to the potentially devastating effects, if a disability leaves them sick or injured and unable to work, even if they have a group policy.

A potential for growth also exists in the executive market, since group LTD policies can cap off and result in a larger gap between covered salary and total salary earned. In short, highly paid executives may have more to lose.

Here’s an example. John Doe, a client with an average earned income of $125,000 ($10,417 per month) who has group LTD coverage, will receive a replacement ratio of 60% or $75,000 per year (if $6,250 is the monthly benefit cap). If he were to suffer a catastrophic disability without having a CAT rider in place, a yearly income shortfall of approximately $50,000 ($4,176 per month) would exist.

Simply said, agents or brokers who are doing analysis and aren’t discussing the possibility of disability coverage and options may be leaving their clients exposed and overlooking an opportunity to help them protect what may be their most valuable asset: their income.

Fortunately, many carriers are approaching the marketplace with a mission to increase awareness, and the inroads made in the worksite sales arena are apparent. According to Eastbridge Consulting Group Inc., 23% of insurance products sold in the worksite in 2004 were DI products.

To continue this positive momentum, 12 of the country’s leading disability insurance providers have come together and formed a group called the Council of Disability Insurers. The primary focus of the group will be to create a cohesive and compelling presentation of the importance and value of disability insurance protection. The major emphasis in the organization’s activities will be a strong focus on education of consumers, providers (employers) and intermediaries.


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