Disability Income (DI) insurance products can provide income when you are sick or hurt and suffer a loss of ability to earn an income. DI is important coverage for those who rely on earned income to achieve their dreams and goals. The following three steps will help you understand why people buy DI, where you can to learn the most about DI, and how to get the premium into the buying range.
Step 1: Help a qualified prospect understand the consequences of not having DI
Does the client have a financial plan? If yes, what provisions have been made for income to continue after earned income stops or is reduced due to illness or injury. If no financial plan, you have opportunity to help develop one, or at least verify the existence of a basic foundation of asset protection to include Health Insurance, Property and Casualty Insurance, and Life Insurance.
The CA client who will understand the need for DI and buy a policy from you, is one who has Health Insurance to pay unforeseen hospital and doctor bills, has family and/or other loved ones and Life Insurance to replace income at death, owns a home and has Homeowners Insurance, and has earnings over $60,000 per year. The DI client is a person who is driven with a purpose in life. The DI client will be loved by others and have unconditional love for others. The DI client will understand:
- Limitations of government programs.
- You can't always get coverage later and it will cost more.
- Even a one year disability could wipe out significant savings.
- The average annual premium for DI is only 1-3 percent of earned income.
You may find that some clients already have sufficient invested assets to create a steady flow of income. These clients are not prospects for DI Insurance, but they may consider Long Term Care Insurance (LTCI) if the retirement plan would have difficulty sustaining a $20,000 per month debit in 25 years (projected average nursing facility cost at 5% inflation). Even with sufficient assets, wealthy clients may choose to own LTCI because the possibility of a chronic illness or cognitive impairment is so high if you live to life expectancy. LTCI plans can also provide care coordination and rate negotiation while buying you time to decide which assets may need liquidation.
Clients in CA with incomes under $60,000 are more difficult to motivate to buy DI because a large percentage of their monthly income is already insured by the State and Federal government.
"A disabled 40-year-old (born in 1965) with current earnings of $50,000 would receive an estimated $1,440 per month in Social Security Disability benefits (not including any benefits for a spouse and children) in year-2006 dollars" Source: Social Security Administration Website, Quick Calculator, January 2006.
The weekly maximum payment in CA for Workers Compensation Benefits, January 2005, was $840.00 at 66.67% of wages. Source: U.S. Department of Labor, Office of Workers' Compensation Programs, Benefits for Permanent Total Disability Provided by Workers Compensation Statutes in the U.S., effective January 1, 2005.
CA State Disability pays up to $840.00 per week, at the rate of 55% of average weekly earnings. Source: VPA, Inc, www.VPAinc.com Effective January 1, 2006.
Small business owners may have opted out of Workers Compensation and State Disability and may have a reduced income and increased deductible business expenses to reduce taxes. Incomes over $30,000 will be insurable and Business Overhead Expense (BOE) DI may be a good option to reimburse those deductible business expenses and keep the business open while the client recovers. Insurers will now issue up to $30,000 per month with guaranteed rates renewable to age 65. BOE is the lowest premium DI product, and the premium is tax deductible as a business expense.
Business owners in general are the most desirable DI clients. Some insurers will upgrade the occupational class of successful business owners thereby giving them a lower rate. It is time to take another look at DI for this segment. They may be surprised how inexpensive DI is today.
Whether your client is a successful business owner or a successful key employee, the DI client (buyer) is someone who understands the burden put on a family when income ceases or is reduced, they know it happens, they understand that it could happen to them, and they care enough to do something about it.
Step 2: Educate Yourself
Understanding DI products doesn't have to be difficult or time consuming. There aren't that many products and there are many similarities among them. A Brokerage GA with multiple carriers, who specializes in DI can provide product comparisons and help you understand the important features of the recommended DI product.
In addition to working with a BGA, the next best practice is to acquire sample policies, read them, and pay particular attention to the definitions of Total Disability and Residual Disability. The policy is the product you are selling - you should know it and if possible own it.
Most DI carriers and BGAs can also provide you with both educational training presentations and client sales presentations to use so everyone is comfortable with the DI products and what they can do.
If you want to become a DI expert, The American College, National Assocation of Insurance and Financial Advisors (NAIFA), Life Underwriter Training Council (LUTC), America's Health Insurance Plans (AHIP), National Underwriter, International DI Society, and the National Association of Health Underwriters (NAHU) all offer courses.
Step 3: Be Willing to Recommend Reduced Benefits to Lower Cost
Baby Boomers, the 76 million people born between 1946 and 1964 (U.S. Census Bureau), are such a huge demographic group that their needs are always a dominant concern in our businesses. Twenty years ago the oldest Boomer was 42 and the youngest was 24, and long benefit periods with cost of living increases and guaranteed rates were de rigueur, because most Boomers could be expected to hold their DI insurance policies for over 30 years. Today the youngest of the group will work just another 20 years or so, and many are entering their peak earning years with potential income still in the millions. This is good news for DI insurance sales because we now can find more successful, purpose driven, caring people with incomes well above the social insurance safety net.
The challenge we encounter today is that a policy for a 50-year-old costs more than three times as much as the same policy for a 30-year-old. Fortunately, DI insurance policies are structured to be flexible. There is a base benefit plus riders for optional benefits, and various elimination period (EP) choices, as well as benefit period (BP) choices. The EP is like a deductible; it is the period of time you must self insure before benefits are payable. The BP is how long the monthly benefit can be paid once eligible for the monthly benefit.
Longer EPs lower the premium. Shorter BPs lower the premium. The 90 day EP has become the standard because of the higher pricing and/or lack of availability of the 30 or 60 day EPs, and the minimal savings when extending the EP beyond 90 days. To age 65, 5 year, or 2 year BPs are typical. The Lifetime BP is no longer available in CA. Cost of Living (COLA) riders, Residual/Recovery Benefit Riders, Own Occupation Riders, and even Non-Cancelable Riders are some of the optional features that are removable to lower the cost of the coverage.
Many advisors are unaware that the DI COLA does not work like the LTC COLA. The LTC COLA increases the benefit every policy year. The DI COLA only increases the benefit after one entire year of compensable disability. Using a guarantee of insurability provision to keep increasing the DI benefit as earned income increases, will be more beneficial for most clients.
Removal of COLA: 20-25% savings.
The Non-Cancelable provision guarantees the premium to the end of the guaranteed renewable period, but with only 10-20 years before the client turns age 65 or retires, there is not a lot of time for the DI insurer to file for a rate increase and have it approved, especially if the carrier has a low loss ratio and has underwritten conservatively over the years by using blood, urine, medical exams, attending physician statements, and tax returns for larger policies.
Removal of Non-Cancelable provision: 20-25% savings.
If a long term (90-day) disability has lasted two years, it will probably continue longer...even for life (JHA Disability Fact Book, 2006), however, the average duration of the entire claim block across participating carriers was 30 months for long term disabilities (JHA, 2004 Disability Rate Study & Risk Management Survey).
Reduction of BP from "to age 65" to "5 years": 10-15% savings.
The Residual Rider is probably the most important provision on a DI insurance policy. I never recommend removing it. Too many people return to work and have to work harder to get their income back up to pre-disability level. The Residual provision allows the insured client to collect a benefit while working if still suffering an income loss due to their disability.
Selling DI insurance is not brain surgery. Whether you want to sell DI for the first time or want to increase DI sales; remember to keep it simple by knowing: who is a prospect, who to call for product and training, and how to get the price into the buying range.
Jack B. Schmitz, CLU, ChFC, CASL