Traditional individual disability insurance has become a “flat market,” with no new growth in distribution or number of consumers. The primary markets are the professions of doctor, dentist and attorney. Selling the need for disability insurance remains the biggest hurdle for all other occupations. The true market for disability insurance remains untapped.
Product development, pricing, underwriting and claims have remained fairly consistent over the past decades, with little innovation except in underwriting with guarantee issue for mandatory and voluntary cases of individual policies sold in a group environment above the current LTD.
Traditional disability is complicated to sell and buy. Occupation classifications, underwriting income and medical history, and the nuances of definitions available make traditional disability sales a specialty that few agents desire to pursue.
I would like to expand the current traditional disability arena by suggesting a participating disability insurance product built for the untapped market. My theory is based on my experiences as an agent focused on disability insurance sales, as a wholesaler focused on helping other agents sell disability insurance, and as a product development officer in the home office environment with six different disability products in four different companies.
Drawing on those 34 years of experience, I propose combining participating whole life insurance and group long term disability to create a new product for disability insurance that this industry needs in order to expand the untapped market.
Participating Disability Insurance (PDI) can also be called Personal Disability Income because of its unique “ownership” feature that allows an insured to own part of the benefits while investing in future income earning capability.
PDI is a simple disability insurance product. There are no occupation classes to contend with in determining the appropriate premium. There is no defined benefit period to choose. There are no riders or options. There are no concerns about existing disability benefits from group LTD or individual policies in force. Simplicity, at time of underwriting, allows the complexities of income, occupation and other existing benefits to appear only at the time of disability claim (if there is one). If there is not a disability claim, then a full refund of premiums paid is due at the end of the contract period upon the termination of the PDI policy.
The definition of disability is straightforward: your occupation definition for total disability, with an income loss required for total or partial disability. Loss of income translates into a percentage loss, and that percentage is applied to the maximum amount payable at 60 percent. Coverage can be layered on top of group LTD and individual disability insurance to fill the gap at 60 percent of take-home income. There is no fixed monthly benefit because PDI is drawn from a pool of benefits during disability. This pool is the face amount, similar to life insurance, but paid on a monthly basis to a maximum of 60 percent of earnings at the time of disability. That is why there is no fixed benefit period for PDI—the face amount being drawn from coordinates with other disability benefits, if there are other disability benefits, to equal the 60 percent maximum.
Another simplicity feature of PDI is the lack of occupation classifications to determine premiums. All occupations have the same premium per age and gender. The occupation underwriting is at time of claim, just as the income and other disability benefits are underwritten at time of claim. The occupation classes are three: green, yellow and red. Green occupations are those least likely to go on disability because of morbidity tables (5A, 4A, 4P). Yellow is the next in line for morbidity expectations (3A, 3P, 2A). Red is the highest morbidity risk expectations (2P, A, B). How a claim works is that a green risk draws from face amount dollar for dollar, but the surrender value is reduced only one-third of each surrender value dollar per each dollar of claim. Yellow reduces the face amount dollar for dollar, but the surrender value by two-thirds for each surrender value dollar of claim. Red would be dollar for dollar of face amount and surrender value during claim. How this is accomplished is that the surrender value becomes exposed only in the later years of the policy, and when it does become exposed it is only then that the surrender value becomes the first line of defense during a disability claim. A green claim would utilize only a third of a dollar of exposed surrender value for each dollar needed and get the balance of that dollar from the face amount. Yellow would be two-thirds of a dollar from exposed surrender value and the other third from the face amount for each dollar of claim. Red would be dollar for dollar from the exposed surrender value until it was exhausted, then from the face amount of insurance.
Now that we have set the foundation of PDI with the definition of disability, how the occupation and income are underwritten at time of claim, and the purpose of the surrender value during claim and when there is no claim, we now can set the framework of how PDI works as a participating disability insurance policy.
PDI gains its ability to participate through the use of dividends based on the loss ratio. Loss ratio becomes the key factor for the stability of the morbidity expectations. Loss ratio stability within a target range spins off an annual dividend (over payment of premium) which is a non-taxable event that purchases a paid up addition. These small paid up policies accumulate within the original face amount creating ownership of a face amount to be utilized as a lump sum when disability is deemed terminal or at death. Ownership, paid up additions, loss ratio driven dividends—all are unique to disability insurance and will attract consumers and producers.
These paid up additions within the face amount create a reduction of the original face amount in direct coordination with the internal growth of the paid up addition face amount. This reduction in original face amount generates additional excess premium to create larger dividends and more face amount of paid up additions. Each paid up addition also contains some surrender value. This protected surrender value within the paid up additions will grow until it equals the paid up addition face amount before becoming “exposed.” Exposed surrender value is when the paid up addition face amount matures and is “surrendered” to become exposed surrender value. This growth of face amount internally through paid up additions and this maturation of paid up additions to become exposed surrender value is called Di-Phasing and is balanced to keep the original face amount intact. Obviously the use of paid up additions face amount during claim eliminates the protected surrender value from becoming exposed.
PDI allows for all occupations to have the same premium and return 100 percent of the premium back to the insured at the end of the policy period if there are no disability claims. PDI allows for the occupation classification differences in morbidity to be subject to claim dollars instead of premiums. PDI creates an ownership of paid up additions that do not need further premiums and grow within the original face amount to be utilized, if need be, for a lump sum payment during a terminal disability. PDI protects surrender value within the paid up addition until the surrender value becomes exposed at the maturation of the paid up addition (endows) and becomes pure surrender value. Since the original face amount remains intact, the premiums during the later years all go toward exposed surrender value to reach 100 percent of premiums paid by the end of the PDI contract period.
The disability insurance market needs growth from innovation that is simple enough to attract consumers as well as distribution.
