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Portfolio > Economy & Markets > Fixed Income

Placing DI Coverage In The Medically Impaired Market

By Bill Marshall

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I can remember when Cadillacs and Chevrolets were the primary cars of choice, can you? These automobiles seemed to serve most Americans’ travel needs very well 3 or 4 decades ago.

The “Caddy” epitomized luxury and served the wealthy but with a high price tag, while the “Chevy” provided the rest of us with a reliable, comfortable vehicle that the middle class could afford.

The high-pressure salesperson would try to sell a Caddy to everyone who walked into the showroom. He would entice us with the leather seats, eight-track tape player and many other “bells and whistles.” With each option, our excitement would grow. But, when we sat down to discuss price, we were disappointed to realize that affordability would have to be the deciding issue. We “wanted” a Caddy, but “needed” and could afford a Chevy to satisfy our basic transportation needs.

This analogy may have been a long lead-in for an article about disability income coverage, but I believe you’ll see that it’s appropriate.

When proposing a DI product in the medically impaired market (someone who cannot obtain “standard” coverage), you have two distinct issues. First, the product design is a Chevy compared to the Caddy plan that the person does not qualify for due to their health. It has “graded benefits” for the first 2 years and the benefit periods are 2, 5 or 10 years compared to the Caddy’s “to age 65″ period. You really are comparing Caddys to Chevys, or even apples to oranges.

Second, the biggest difference to consider among products is the price of the plan. The impaired market has its Caddy–the loaded 10-year benefit period. And, proposing the maximum program for which your client is eligible is in everyone’s best interest. However, in the medically impaired market, the cost can be 5%, 8% or even 10% of a client’s income. That amount is just too much to expect someone to pay. In the “regular” DI market, the rule of thumb for estimating the cost is approximately 2% of a prospect’s income. The medically impaired client realistically should pay a higher premium for DI coverage, but how much higher is reasonable?

Most of your impaired-risk clients have been shown (and were declined for) the “to age 65″ DI programs through the non-impaired or regular market. Most of the carriers in the regular market will consider applicants with health conditions. But, they will only extend their risk to an additional 50% or 75% extra rating. As a result, when quoting or closing an impaired-risk program, work with the “target” premium from the to-age-65 plan, plus add that 50% to 75% more premium. You may find it helpful to work backward and review the amount of impaired-risk coverage that can be purchased with 150% to 175% of the premium for a regular market product.

Many proposal programs have a page that shows alternative plan designs with their costs. For example, for a 50-year-old male non-tobacco user, the 2-year benefit plan with a 90-day wait is approximately 44% less expensive than the 30-day wait, and the 2-year benefit plan is approximately 54% less in cost than the 5-year plan.

Additionally, keep in mind that the vast majority of DI claims resolve themselves in less than 2 years. The 2-year benefit period provides adequate time for disabled clients to restructure their lifestyles.

Along with mixing and matching waiting periods and benefit periods, you might consider reducing the income replacement (IR) level. At the lower incomes, replacement levels can be at the 70% level. Individuals with higher incomes can still qualify for 55%. Reducing the IR level by 10% to 15% will still give your client significant income protection and will make the impaired program’s cost more affordable.

By utilizing the above-referenced tips and working with your clients to customize affordable plans, you will close more sales and save your clients significant premium dollars. Considering an alternative to the impaired Caddy may save the sale, although it may be an impaired Chevy.

Caddy? Chevy? What’s important is providing your client with affordable and valuable income protection. Planning for affordability gives your client the vehicle, and in turn gives you, the broker, a satisfied client who will return when in need of other coverages.

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