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Bridging The Income Protection Gap At Smaller Companies

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Small and midsize businesses may be the growth engine of the U.S. economy, but at companies that have failed to implement income protection programs, a single disability affecting an owner or employee can cause the engine to stall.

There’s a reason for this income protection gap: Although disability insurance should be a primary focus for most consumers, it simply isn’t. Americans often focus on coverage for material possessions such as homes and cars, while leaving perhaps their most important asset – their ability to earn an income — underinsured.

If you are an agent or broker who is just starting to think about disability insurance market, consider serving the many underinsured or uninsured small and midsize employers by offering them a “holistic” combination of group and individual products, to help them tailor coverage to fit their own unique needs.

Talking about group disability coverage makes sense as an initial step for a number of reasons.

Companies large and small can leverage their size to help keep costs down and premiums reasonable for employees, and they can take care of many of the complicated decisions that might have kept employees from signing up for their own individual coverage. The medical limitations for group coverage are usually not as stringent as for individual policies.

Group policies work well as a beginning safety net. They usually cover no more than 50% to 60% of an employee’s income. Depending on an individual’s specific needs, additional coverage may be needed to supplement a group policy. Remember, too, that since an employer often pays for group coverage with pre-tax dollars, it is usually a taxable benefit. Many employees can benefit from additional individual coverage to fill in the gap, to avoid an uncomfortable lifestyle change if they were forced to leave work due to illness or injury.

In some instances voluntary plans can give employees an option to supplement their basic group package with additional features or additional disability income coverage by enrolling and paying for incremental benefits on their own. Other times, small and midsize businesses might not have the wherewithal to subsidize a group plan but can use their market leverage to secure their employees a disability option at an economical price. In either case, voluntary benefits present workers with an important add-on or alternative to base group coverage. For employees at companies with group plans, that often represents a “step up” in coverage or options. At companies where no group plan exists, voluntary benefits are an initial – and critical –foundation.

Meanwhile, individual disability products have evolved from their “one person – one policy – one sale” origins to more flexible offerings that can provide a solution to a wide range of worksite small business solutions.

The fastest growing segment of the individual market, multi-life disability insurance, is something of a hybrid option that can be paid for by a company or offered in a similar fashion to voluntary group coverage as a benefit “carve out,” to give employees the option of adding on to their basic disability coverage.

In some cases, a company might designate certain features to offer to specific groups of employees. In either case, as with voluntary group coverage, the employer uses its buying power as leverage to obtain the best possible disability program for employees.

A multi-life program may allow employers the option to tailor disability benefits to meet specific needs within the firm’s workforce. And, since each participating employee has an individual policy, the coverage is portable. It is sometimes regarded as the best of both worlds – the benefits of individual coverage obtained with a group-like underwriting technique.

It goes without saying that owners and partners also need disability coverage, but often even the best of group plans fall short for the top brass. Individual policies, however, can provide additional protection riders to owners, small and midsize company executives or even business partners.

Policy riders and features of an individual offering can build off a group coverage foundation to provide much-needed protection in the event of a short- or long-term crisis. Some attractive features of individual policies include:

1) Portability. While group plans usually cannot be transferred from job to job, individual plans are portable and provide protection no matter how many times an employee moves from one company to another.

2) Non-cancellable and guaranteed renewable coverage. These two important features can provide policyholders peace of mind beyond the protection offered by their group policy. Individual policies can offer non-cancellable coverage – essentially a promise to honor a contract as long as a holder pays premiums and that those premiums will never change in the future. Guaranteed renewable coverage, meanwhile, lets an individual policyholder ensure the renewability of his or her contract by paying the premium while the insurance company reserves the right to change premium levels in the future. Although it sells at an extra cost, non-cancellable coverage will provide a consumer with long-term peace of mind that is sometimes lacking with the less costly guaranteed renewable only contract.

3) Residual disability and recovery benefits. There are two things never to be overlooked when considering disability insurance. First, not all disabilities result in a total loss. And, second, sometimes the most daunting aspect of a disability is the road to recovery. It can be physically and mentally demanding. A residual disability benefit rider can help clients close an income gap if they have to cut back on hours as a result of an illness or injury by covering any differential in income between their current earnings and their salary before they became disabled. For fee-for-service professionals, like attorneys or doctors, it is not unusual for a disability to lead to a depleted client base. Adequate recovery benefits with an individual policy will help close the income gap created by a disability, even if they are no longer disabled, until income returns to pre-disability levels.

4) Bonuses and variable income. A number of executives and top-ranking professionals rely on income that fluctuates from year to year, such as bonuses. While group policies can’t usually don’t cover variable income, individual insurance typically does.

5) Retirement contributions protection. We all know that individual employees are increasingly shouldering the responsibility for retirement savings. A few insurers have developed individual plans that can cover 401(k) contributions to ensure that a disabled worker can continue funding a retirement plan and building his or her nest egg over time. It is also important to note that some group plans will also provide such coverage.

Millions of Americans are ignoring the impact that a disability can have on their retirement savings. According to a 2006 Guardian study, nearly half (48%) of Americans say they would probably have to stop making contributions to their retirement account should they become disabled.

There are also a number of up-sell opportunities in the small and midsize employer market.

* Overhead expense coverage: There are a number of outlays to pay that must be made in order to keep a company or practice running if the boss owner or partner has to leave or cut back on hours. Overhead coverage can help cover everything from salaries to equipment and utilities. Overhead coverage can also foot the bill for a temporary replacement to fill the boss-owner’s shoes. The typical benefit period for overhead coverage is 2 years. And, the waiting period for this coverage is typically short at 30 days.

* Business loan protection: An individual policy can be structured to make loan payments in the event of total disability. Many loan obligations terms are longer than the benefit period of even the best overhead expense coverage. Don’t overlook these long-term fixed obligations when helping your clients understand their exposures.

* Buyout policies. A buy-sell agreement should not only contemplate retirement and death, but also disability. Disability buyout, or “DBOI,” policies can provide a healthy partner with the sum needed to buy out a disabled partner’s share of the business.

Matthew Gottfried is director of individual disability income at Berkshire Life, a subsidiary of The Guardian Life Insurance Company of America, New York. He can be reached at [email protected]. Craig Guiffree is vice president of group life and disability at Guardian. He can be reached at [email protected]


Why offer individual disability coverage together with group coverage?

- Portability.

- Non-cancellable and guaranteed renewable coverage.

- Residual disability and recovery benefits.

- Better ability to adjust coverage to suit insureds with variable income.

- Retirement contribution protection.


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