Many National Underwriter Life & Health readers already are making a serious effort to sell disability insurance.
I’m writing here to try to get the attention of those of you who are not.
Disability insurance protects the greatest asset most clients own: their ability to earn a living, and advisors may be missing an important opportunity. By focusing more closely on the current environment as well as some key basic strategies for disability insurance, advisors can better protect their clients and add value to their role.
In the past, disability insurance was sometimes abused and used as a retirement tool as well as for financial support for people unable to work. Today things have changed. Insurance carriers have changed course and redefined the disability product by adding more restrictions, and making it harder for individuals to qualify for benefits. In 1980 there were a couple hundred companies offering disability insurance. Today, that number has dwindled to approximately 25. But the product is just as important as ever.
Why offer disability insurance?
No one believes they will become sick or disabled and unable to work until it happens. Without disability protection, most clients’ financial plans will fail. Advisors are doing clients a disservice if they don’t offer disability insurance options, and they even leave themselves open to litigation if an uninformed client should suffer a disability.
A study by The Hartford found that one-third of Americans will find themselves disabled for at least 90 days during their working years. In another study on disability, in The Journal of American Society of CLU &CHFC, the Society of Actuaries reported that individuals are 3 times as likely to suffer a disability during their work life as they are to die. Yet, people are generally more likely to own a life insurance policy than a disability policy.
Technology has also changed the landscape. In the past, heart disease, cancer and strokes used to kill most Americans. Now the medical field is good at saving lives, leaving many who face these illnesses with a disability and the need for disability insurance. Eventually, many are able to return to work.
When talking with clients about disability insurance, advisors must consider occupational risk, true income and general health conditions. Income has to be enough to support the benefit the client is applying for and can be tricky to determine when dealing with individuals who are self-employed. In these situations, advisors need to do careful fact-finding to ascertain the amount clients take out of the business for themselves versus what is shown on their tax returns as total revenue. This will determine the amount of coverage the client is eligible to purchase.
If clients say they have disability insurance through a group policy, this should not be the end of the conversation. It is important to find out what their existing policies cover, because group insurance policies don’t tend to have the same features as individual policies, and they often leave gaps in coverage.
Group policies may, for example, compensate clients for the loss of only 60% of their salary. Many group plans have monthly benefit caps, so a client might not have what they think they have when using the straight 60% calculation. Additionally, if a company pays for employees’ disability coverage, the employees are liable for income tax on any benefits they receive from the company’s plan, which creates an even greater benefit limitation and uncovered risk exposure.
If an advisor is able to clearly define the limitations of group disability insurance and the importance of proper protection, it is much easier for clients to accept the additional cost of increased coverage. As a general rule, the annual premium of a comprehensive individual disability plan should average 1% to 3% of a client’s annual income. When a client understands the total income dollars at risk, a $2,000 dollar annual premium doesn’t look so bad for insuring a multi-million dollar asset.
Clients may also say they can fall back on Social Security. But according to the Social Security Handbook, 70% of all Social Security disability claims are rejected on the first try, creating a tremendous backlog. As a result, clients must be prepared to wait a long time for Social Security disability benefits.
Plan design basics
How a disability will unfold, no one knows. When designing a disability plan for a client, don’t sacrifice the amount of coverage for the length of coverage. Create a plan that will get the job done for a client by understanding the appropriate benefit period. The real-risk period is the first 5 years of a disability. After that, the chances are high that the majority of clients will be back to work, adapted to some other type of work or dead.
Advisors can also add value by bringing clarity to policy options and the associated costs. Without critical riders, many disability insurance policies pay all or nothing, but what the client really needs is something between the two. Residual disability fills in all the gray areas, because it is a longer-term partial benefit that will pay some of the income lost if an insured’s time at work or job duties suffer along with having lost a portion of earnings.
On the other hand, the catastrophic disability benefit option pays out additional benefits if individuals have lost 2 of 6 basic daily living functions. The list of functions includes dressing, toileting, transferring, bathing, continence and eating. Additionally, cognitive impairment qualifies for this benefit in and of itself.
Disability programs are complicated, but there are disability specialists that partner with advisors to assure that everything is done professionally and correctly.
A good disability specialist becomes an extension of the advisor’s office and can give important advice on the strengths and weaknesses of different disability providers and products. Disability specialists usually operate in the form of brokerage general agencies that specialize exclusively in disability income insurance. Another good place to start is by networking through the local chapters of the National Association of Insurance and Financial Advisors.
Different providers have different strengths. Many focus on the white-collar worker making $75,000 plus annually, but there are providers who focus on clients in many salary ranges encompassing the middle-market. Disability insurance can be designed to fit most clients and occupations, and a specialist can help find the right provider to do it.
A final word
Compensation can be lucrative for advisors who take the time and effort to recommend the right program for each client. By helping clients with the right disability plan that protects their overall financial security for the long term, advisors give clients one more reason to rely on them and their financial guidance.