Michael Cohen

In today’s world of online quotes and direct to consumer marketing, it’s important to be at the top of your game at all times. When it comes to individual disability insurance, it’s no different.

We support many national organizations and their financial advisors at our agency. In doing so, we need to be sure we focus on the three essential parts of underwriting: Medical, occupational, and financial underwriting. Not only do we review these areas, but we search for clues that may help us identify when a case has possible upgrades and possible pitfalls.

While we can obtain the basics needed for a quote, the “make it or break it” part really comes down to the ability to identify the cases that need extra clarification and those that need to be moved to a non-traditional product.

Cases that cause challenges for those that are not experts in disability insurance are the cases that do not hold up to the expectations of the consumer. The expectations of the consumer need to be shaped by the financial advisor who, in turn,should be given some basic knowledge of the three major underwriting areas.

For example, the occupational rate class is essential to the pricing of an individual disability insurance policy. Depending on the company, the occupational class is usually assigned a number and/or letter, such as 5A, 4A, 3A, 2A, A, B, with 5A being the top class and B being the lowest rate class. Each company has their own version of the rate class system but, in general, we tend to see anywhere from five to 10 different occupational classes or variations of classes. Each class may have different pricing and different policy features or definitions that may be associated with the corresponding class. If the wrong occupational class is used in an illustration, most likely the rates will be incorrect and/or certain policy features may not be available. Some advisors have a difficult time at policy delivery when a policy is issued other than applied, so getting the occupational class correct is essential for any disability marketing team. In addition, there can be other aspects of a case that can allow an upgraded occupational rate class when normally a lower rate class would need to be used. For example, some companies may have business owner upgrades where, if the size of the company, length of ownership, income, and other factors are within certain guidelines, a better rate class and/or more coverage may be offered to the client. If the internal wholesaler doesn’t recognize that the better rate class can be used, then the illustration may be priced too high or not have as much benefit as could have been quoted. If there is competition on the case, then it’s possible the client can be shown the exact same company but with lower premiums and/or more benefits. Our DI marketers train on occupational class underwriting and are constantly looking for programs that can allow better occupational classes and/or more benefits.

Financial underwriting can also be crucial in illustrating and quoting disability insurance. Our DI team looks for how much current coverage an advisor’s client may have in force, but it’s important to take it even further at times. For example, if someone is an owner of an S-corporation, and has employer-paid group DI, the financial underwriting may be different depending on the percentage of ownership. If the client owns less than two percent then the financial underwriting will be similar to that of an employee, but if the client owns more than two percent the financial underwriting will be based on the non-passive owner income underwriting rules. The issue and participation rules for individual disability companies will vary based on existing group coverage and if the group coverage may be taxable or not taxable. If the wrong assumptions are used, then the illustration may be incorrect. In addition, knowing and understanding the unearned income rules are important as well, as unearned income may be treated differently depending on the company. Our disability marketing team is constantly monitoring these dynamic and ever changing financial underwriting issues. Of course, a client needs to consult with their tax advisor on any issues involving taxes.

On the surface, health underwriting appears to be intuitive, as how different can it really be from life underwriting? We constantly have advisors telling our team that the client was preferred best for life underwriting, so there should be no need to be concerned about the DI health underwriting. In the individual disability insurance world, insurance companies can line item certain conditions and exclude them from coverage. Exclusions are not typical for traditional life insurance or long term care insurance, but for disability insurance it’s a very common occurrence. It’s important to recognize the conditions that can cause these exclusions to occur, such as mental/nervous conditions, prior health issues that were already resolved, chronic health issues, and muscular skeletal issues.

In summary, when quoting disability insurance, we’d recommend that you use a resource that understands the nuances of disability underwriting. In a game of inches, you need to get the first down in order to score.

Part One: Need Motivates Action

You have the perfect client for disability insurance, but for some reason the client chose not to protect his income. On your way back to the office from the appointment, you review what happened over and over in your head. Here you had a healthy, 40-year-old attorney making about $200,000, with two young children, a spouse who doesn’t work, and no group LTD coverage. You just placed a 20-year term for $2,000,000 and reviewed the disability insurance quote you brought with you to the appointment. You delivered the term insurance and then brought out the DI quote and placed it on the table as you talked about the product. The preferred- plus life insurance premium was about $600 per year and the disability quote was about $3,000 for $7,000 per month of coverage. You explained the coverage like a pro and started to fill out the application when the client suddenly told you he was going to take a pass on the disability insurance. On the way back to the office you think…that didn’t make any sense. What could I have done differently?

There are four basic objections in a buying decision, for really any product—insurance, cars, washing machines, and even your next meal: Need, Price, Confidence, Hurry. Walk through your decision process on buying a pair of pants. Price: Does the price justify the cost of the pants? If you really like them and they are the perfect fit and not too expensive, then sure. Need: You lost weight and none of your pants fit you…you need some new pants. Confidence: You pick up a pair of Levi’s pre-shrunk, probably confident they will hold up better than the no name brand that is on the discount rack. Hurry: You need new pants and you found the ones you like. If you put them back, someone else may buy them. Now, create a scenario where one of these items outweighs the others. For example, you fly off to a business meeting and the airline loses your luggage and you have important meetings the next two days. Now need and hurry may outweigh price and confidence. Another example is if you rented a car and on the way back to the airport you need to fill it up with gas, but there’s so much traffic you don’t want to stop because you may miss your flight. You know the car rental company is going to charge you extra to replace the gas, but you need to make your flight and are willing to pay the higher gas price so that you have peace of mind that you’ll make your flight.

Let’s get back to insurance. Need motivates action. Never start with the illustration of a disability product and never throw a spreadsheet in front of a client. Of course, you’ll get to the case design and premium, but first you need to learn about the client’s needs. Start with asking questions and listening. Ask your client, “What is the longest vacation you’ve taken in the last five years?” Most likely your client will say two weeks or less. Your reaction, “That sounds like a nice vacation, why didn’t you extend it or take another week or two?” More likely your client will say, “Well I had to get back to work.” Which leads you to say, “Walk me through what would happen if you couldn’t get back to work due to an extended sickness or couldn’t work again due to an accident.” Concentrate on the need and plan. Have your client visualize a bridge and on that bridge is all their monthly obligations: Mortgage, food, education, cars, utility bills—essentially the monthly budget. Now visualize what is holding up that bridge…the client’s paycheck.

What is the value of the paycheck? Well that’s obvious, right? $200,000 per year. Nope. For your client age 40 making $200,000 per year…and say he continues to make at least that much the next 25 years…that’s a value of $5,000,000 of earnings over the next 25 years. Would you insure a machine that would produce $5,000,000?

Let’s say that your client indicates that he has a couple million in savings and investments and therefore doesn’t need disability insurance. We are seeing more applications on older clients than we’ve seen in the past. Think about it: Interest rates are so low these days that it’s difficult for a fixed income client to survive on the proceeds of their investments. You may say, “But my client has averaged six percent with my investment strategies.” Then you have to ask yourself, what is the risk profile of a client who may never work again? Usually a working, young “risk-taker” client, that goes on to become disabled, changes to a fixed income “risk-averse” client. Therefore, even clients with a higher net worth need some disability insurance.

We’ll finish by asking you a question. If a client can no longer work, becoming completely disabled, then that client becomes similar to a client who is retiring. How many of your clients have gone from “needing to work” to “working for pleasure?” We are guessing not too many. Most of these “needing to work” clients need disability insurance in some form.

One of the most intriguing markets within the individual disability insurance landscape is the Guaranteed Standard Issue (GSI) marketplace. This marketplace is vast and has various applications based on the insurance company, occupation, and existing coverage. In addition, there are different ways to approach this market depending on whether the case will be mandatory enrollment or a voluntary enrollment.

While there can be various reasons to recommend GSI disability insurance, one of the most popular is to supplement group disability insurance. To many producers in our industry, group disability is known as long term disability or LTD, while an individual disability policy is known as IDI. When an advisor is quoting group disability insurance (LTD), it’s not unusual to have multiple classes of employees. Take for example an accounting firm of 40 employees comprised of five partners, 15 accountants and 20 support staff. When setting up the LTD plan the advisor may recommend the firm cover 60 percent of the employees’ income up to a maximum payout of $10,000 per month. So, everyone would have a benefit of 60 percent to a cap of $10,000 per month. This means that if any one of the employees or accountants has an income greater than $200,000, then that individual would have a maximum of $10,000 per month of coverage, but their income percentage ratio would be much less than the 60 percent. For example, if each of the non-partner accountants were making $400,000, their percentage of coverage would be as follows: $400,000 of annual income equals $33,333 of monthly income; $10,000/$33,333 = 30 percent income replacement. Let’s expand on our example and look at the partners. If each partner also makes $400,000, and has a $250,000 non-passive dividend income passed through to them at the end of the year, each partner is making $650,000 of total earned income. $650,000 per year equals $54,167 of monthly income. So, the income replacement percentage is even lower at 18.67 percent ($10,000/$54,167= 18.67 percent).

Let’s take even a closer look at this example. The accounting firm is owned by the five partners, who typically would also be the accountants with the most clients. In addition, there are 15 more accountants who work with the firm’s clients and conduct the accounting work that needs to get done. The rest of the firm provides important customer support functions, but typically are not the skilled professionals who drive revenue to the firm. Yet, based on the nature of the group plan maximum monthly benefit limit cap, the percentage of income replacement for the primary revenue generators is about 19 percent to 30 percent. It may be possible to increase the group cap to a higher amount, but there is only so much a group company typically is willing to offer. Therefore, at a certain LTD monthly maximum cap, there will be a number of high-income earners who will not be able to participate to the same income replacement percentage as the other employees.

Individual disability insurance (IDI) may be able to bridge the gap and provide additional coverage on top of the group coverage. Yet, if any one of these primary revenue earners has any underwriting issues, they may not be able to obtain the additional coverage. Some IDI companies will offer coverage on a Guaranteed Standard Issue basis (GSI) if there are enough lives. The greater number of eligible lives, the higher the monthly benefit an IDI company will typically issue. If you look at the accounting firm example, there may be an IDI company that would be willing to issue up to a 75 percent replacement ratio, not to exceed $10,000 of Guaranteed Standard Issue coverage, assuming all 15 accountants participated in the offering. In this example, these important revenue earners would have a plan of $10,000 per month of group coverage and then $10,000 of individual coverage. Therefore, the income replacement ratio has been greatly improved. Depending on the IDI company, and the size and occupation of the group, it may be possible to offer even more coverage on the GSI offering—such as adding additional monthly benefits for catastrophic disabilities and cost of living riders.

There are many factors to consider when contemplating offering a GSI plan in addition to LTD group coverage. Items to discuss with your case designer include, but are not limited to: Mandatory versus voluntary GSI plans, employer-paid versus employee-paid programs, the occupation or mix of occupations contemplating coverage, available riders, bundled discounts and the availability of customized programs. 

One of the cornerstones of financial planning is creating a plan that makes use of the client contributing money to some type of account that may or may not make use of some type of qualified plan. There are many different types of qualified plans that an advisor can design in the course of planning. While each planner may have a different preference for various types of plans, one thing that they all have in common is that there need to be deposits or contributions made. When a client is working, the approach is fairly obvious regardless of the plan. The challenge for the planner is if the client can’t work due to an injury or sickness.

By now we hope you are reviewing with your clients their game plan if the client can’t work and is disabled due to an extended sickness, extended recovery time from a disabling accident, or complete lack of recovery. When buying regular disability insurance, the client can obtain a policy that can provide a monthly income. In most cases, the disability insurance monthly benefit will help your client pay for some, but rarely all, their expenses. This is especially true with health insurance having large deductibles and copays, not to mention the increase in most clients’ monthly expenses in general. A client who doesn’t have a personal disability insurance policy, or plan to address this issue, can be a liability to themselves and the planner.

I’m sure many of you have had conversations with clients that, in order for them to reach their financial planning goals, they need to save more money! Even for your wealthy, cash flow heavy clients, what would happen to their plan if their income stopped due to an extended sickness or injury? When cash flow stops, almost all clients go into financial lockdown and re-evaluate their budgets.

In financial planning, knowing when and how a client wants to retire is an essential part of the planning process. Does the discussion extend into how a client is going to fund the retirement plan if the person gets disabled and can’t work? There are a few companies that have a product that can help to support the plan you developed.

There are different names for the product, but essentially the goal of this type of DI product is to work above and beyond the regular individual disability insurance. This product’s main function is to not provide current income to the disabled client, but to replace, supplement, or create monthly deposits into a dedicated account that can be used at a certain future retirement age. Since the products may vary based on the company, it’s important to work with the company or MGA on the details of how the product may work.

One popular product in the market will deposit up to $4,500 per month (over $50,00 a year) into a special account that can be invested. When the disabled client turns age 65 or age 67, the funds would be available to the disabled client. If a client is no longer disabled for a certain period of time before the end of the benefit period, or there are certain hardships, there may be the availability to have the funds released earlier. Of course, please read the specimen contract and review the details with the company or MGA. Also of note is that the monthly deposits are typically put into a non-qualified account by the insurance company. The tax treatment of these policies and benefits should be reviewed as well by the planner and the tax advisor.

Another feature of these policies is that there can be more flexibility in the participation limits. In some cases this policy can be obtained without the company taking into account the individual disability insurance limits. This means that if you have a client who has already purchased all the traditional individual disability insurance, they may still be able to obtain this additional policy.

If you work in the retirement planning marketplace, this is a disability product that may be an essential part of planning for your clients. Ask yourself, “If my client can’t work, will the financial plan I developed still be able to be fulfilled?” Most likely the answer will be no, and that’s why these products have been developed. What insurance products have you recommended in the plans you developed for your client?

In planning, one of the most overlooked product needs is key-person disability insurance. The product need is as significant as key-person life insurance, but doesn’t get sold as often. The reason would appear to be a lack of awareness as opposed to a lack of need. The amount of key-person life insurance applications we see are far greater than the key-person DI applications, yet the need is very similar. In addition, the rate of disabilities (morbidity rates) far outweigh the mortality rates for almost all classes and segments that you can stratify of working adults. The majority of smaller type businesses have a few “key” go-to people who support the business and are the drivers of growth. Think about most of your clients who own and operate a business. This can be a professional firm, manufacturing firm, service firm or retail sales firm. They’re all going to have a few key employees.

Using a bell curve appraisal management system to evaluate the types of employees who work in a firm, there tends to be a general pattern that appears. The breakdown tends to fall under three categories: High performers, average or satisfactory performers, and your non-performers. Everyone can have their own criteria of categories, but you should get a general idea. Typically, firms find that the high performers make up about 20 percent or so of the firm, while 70 percent fall into the satisfactory range, and 10 percent tend to be your non-performers. What makes the high performers so good? These tend to be the leaders in the organization. These are the drivers who make that business unique or special. Most business owners can identify those top employees who make their firm so successful.

Ask your business owner clients: Who are the top people in your business who would be the hardest to replace? Who in the firm has special talents? Who in the firm brings in the most business? Who in the firm do you most regret taking an extended vacation? These are all key people to the business. Of course, some may be more key than others, but these 20 percent are usually the core of most small businesses. The more niche the business or industry, the longer it tends to take to find a replacement and the longer it can take to train someone for that unique position.

So now, what would happen if one of these key employees would go on an extended leave due to an injury or sickness, or never come back to work? The whole firm can be affected in morale, income, productivity and net profit to the owners. A key-person DI policy can help provide needed funds to the business that can help offset various types of expenses, some that can be obvious and some not so obvious. Funds to:

• Help offset costs associated with recruiting a new employee, especially if the industry or business is very niche. The cost of an executive search agency can be exorbitant. In addition, signing bonuses, moving costs, and other recruiting costs may need to be incurred in order to find that “right” person.
• Help pay for overtime or bonuses that need to be paid to other employees who have to do additional job duties besides their own.
• Help offset some of the dedicated fixed expenses or infrastructure expenses that the key person required to perform their job, such as secretaries, office space, car leases, and other fixed expenses.
• Help offset the cost of lost or spoiled inventory that couldn’t be sold due to the key person’s absence.
• Help offset the lost revenue of clients who were served by the key employee and no longer seek the services of the firm since the loss of the key employee.
• Help protect the owners from lost net income due to any or all of the above expenses and risks.

Also, with some carriers, it may be possible to insure the owners, assuming that they own 50 percent or less of the company. Therefore, if there are multiple owners of a smaller percentage, such as a law firm or CPA firm, it may be possible to insure the key owners as well. Of course, depending on the company, there can be various underwriting requirements and other criteria needed to obtain a policy. So the next time you are working with clients who own a business, be sure to take a deeper look at key-person disability insurance.

It’s imperative to understand the definition of total disability and how it can relate to a client’s current occupation. Disability policies come in all different shapes, sizes, and definitions, so you always need to read your client’s policy or the proposal you may be showing. Even better, read the specimen contract of the policy you are proposing. We would like to give you a brief overview of some of the more common definitions of total disability that we’ve seen throughout the years.

Definition of Occupation: It’s important to recognize that for most companies, when defining occupation in terms of a disability contract, the definition of occupation may be more generic in nature for some companies and contracts. For example, someone who teaches high school math may not be seen as a high school “math teacher,” but just as a teacher. Someone who sells cars or mattresses may not be considered a car salesperson or mattress salesperson, but just a salesperson. These are important distinctions that tie into definitions of total disability in DI and LTD policies.

Definition of disability: With many insurance companies there are different definitions of disability along with the naming of these definitions. Please note that this is intended to be a more generic view of many of these definitions. We’d urge you to obtain clarification on whatever product you may be presenting. We’ll be using some generic names of these definitions to help illustrate these differences, so please consult the company you are presenting to clarify the definition(s). In addition, each company may vary in what definitions are offered based on state, product, and occupational rate class.

In general, we’ve seen five different definitions of total disability, but as stated above, companies can differ in the names and definitions. Most would appear to adhere to something similar to the following: Suitability, Own Occupation—not engaged, Own Occupation, Specialty Own Occupation, and Transitional Own Occupation. Sometimes companies will label the last four as just “Own Occupation” so it’s important to read the definition that is being quoted and presented to your client. Please note some companies also require a loss of income in addition to the inability to be able to work. These definitions and riders may determine if and how a claim gets paid, so it’s important to know and recognize the differences.

The Suitability definition: Many times this is defined as the insured being unable to perform the material and substantial duties of the insured’s occupation and not having the ability to perform another occupation that the insured is suitable for based on their prior education, background, experience, and (sometimes) prior income. At times, this definition can be restrictive because the insuring company has more flexibility to contemplate if an insured has the ability to work and if that work would be suitable for the insured to perform. We’ve often seen this definition in policies designed for higher risk occupations, but we’ve seen some variation on a wide range of policies as well.

Own Occupation—not engaged: In addition to the definition above, we’ve seen this definition used as a base definition for various contracts. It’s usually defined as: Due to an accident or sickness, can the insured perform the material and substantial duties of their occupation and is not engaged in any occupation for wage or profit. This is a typical definition in many contracts designed for higher income earners. This may be added by rider to enhance the base definition on some individual and group contracts. The problem is that some professionals and companies label this definition as their Own Occupation definition as well. Since there is not uniformity in the industry, labels can cause some confusion.

Own Occupation: This is the classic definition that may allow the insured to work in another occupation and still be able to collect from the disability policy. The definition tends to read something similar to: Due to a sickness or injury, the insured is unable to perform the material and substantial duties of his or her own occupation. This is why understanding how the insurance company defines occupation is important. For example, consider a high-end retail shoe salesperson who can no longer sell shoes due to a back and knee injury. So, he gets a new job working in a high-end men’s suit store, selling suits. Can this person go on claim and be paid as being totally disabled? Many, if not most, companies would not consider a retail salesperson going from shoe sales to suit sales as someone who is totally disabled as the person is still in retail sales. A better example of this definition in practice would be a dentist who develops progressive MS and can no longer practice dentistry. Now the dentist becomes a licensed social worker counseling people who have medical issues like MS. While we can’t speculate on any individual claim, in general, this most likely would be a claim in which the person could no longer perform their occupation as defined by the insurance company, but could still perform work in another occupation. This person should be able to collect total disability benefits with out integrating the income from the new occupation.

Specialty Own Occupation: Depending on the company, this definition would typically expand on the definition above, recognizing specific medical and dental specialties as a policyholder’s occupation. Some companies even recognize classes of attorneys, such as trial attorneys. Some of these highly trained professionals may desire a disability product that would have a definition of total disability that would read something similar to: Unable to perform the material and substantial duties of your occupation at the time of claim. If your occupation is a board certified recognized specialty, then the company will recognize that specialty as your occupation. For example, a board certified surgeon can no longer operate due to a severe back injury and retrains to become a psychiatrist. Even though this person is still a practicing physician, the specialty own occupation definition may still allow the insured to qualify for benefits under the total disability specialty own occupation provision. You would want to check with the insurance company regarding the contract and whether the proposal you’re showing your professional client is covered in their specialty.

Transitional Own Occupation: This is a hybrid definition we do not see too often. It usually will combine an own occupation definition with an own occupation—not engaged definition. For example, let’s consider a client who becomes disabled, no longer able to work in her career as a real estate agent. So, she becomes a computer consultant. With the Transitional Own Occupation definition, she may be allowed to keep her computer consulting income from being integrated until her income reaches a certain percentage of her pre-disability income. When the income from the new occupation exceeds the policy’s income threshold then the person is no longer eligible for claim. Again, there may be variations of Transitional Own Occupation.

A word about residual. We’ve been addressing total disability definitions. We would always recommend a residual definition be put on the policy, assuming it’s an available rider. A residual rider may allow for more flexibility when an insured does not qualify for a total disability claim.

While this information may seem daunting at first, most companies only have a few definitions to learn. In addition, an experienced MGA may be able to offer you assistance with training and case design recommendations. So what’s in your policy?

May is Disability Insurance Awareness Month and by reading this you have now been made aware that DIAM is here. So, what is your action plan? Do you have one? Most likely not, so where does one even start?

Step 1: Get inspired! Read and educate yourself so that you can inspire your clients to take action. The Council for Disability Awareness has some great independent facts, figures, stories and a plethora of material to inspire. Their website is www.disabilitycanhappen.org. America’s Disability Counter is fascinating as much as it is scary—to watch the numbers change before your eyes. Each flip of the numbers represents more disabilities statistically occurring. Did you know that, at the beginning of April, over 1 million working-age Americans will have experienced a disabling injury or illness this year? Visit the site today and see what number the counter has hit. These disabled individuals may have a long road ahead of them. Hopefully they had a financial planner like you who checked all boxes of the plan and made sure their client had the opportunity to buy disability insurance. Also, go to www.lifehappens.org and check out their Real Life Stories videos. Watch as many videos as you can and hear the anguish of the people who have become disabled. Many of them had advisors who helped them secure disability insurance before they had a claim.

Step 2: Take action to insure yourself. If you work for a company that gives you group disability insurance (LTD), have it reviewed by an experienced disability insurance focused MGA. It’s always very generous for an employer to provide group LTD, but these policies have many limitations, including benefits being taxable, and have caps on the benefits. If you are independent and do not have group LTD, then you want to take action and buy your own policy. Those who own can recommend to their clients with conviction the need for coverage. In addition, when you personally go through the application and approval process, you can better share your experience with your client. When a client asks you, “Do you own disability insurance?” what’s going to be your answer?

Step 3: Learn the basics of pre-qualifying a client. While every client who is still in their working years is a candidate for disability insurance, there are some who are better than others. There may be products and case design options for almost every client. The marketplace for disability insurance is vast and spans from traditional product to surplus lines products. With that being said, there tends to be a sweet spot that we see more often.

Income: The higher the income, the more expenses and obligations your clients may have committed themselves to uphold. If they can no longer work, what is their strategy to keep their and/or their family’s lifestyle? Have you talked to these clients about how they would want their portfolio managed if they were incapacitated? If you had to work with your client’s spouse or family due to your client’s disability, what would be your client’s wishes? Has this been discussed? What positions would they want you to sell in order to pay for daily living expenses?

Occupation: Many times, a client’s occupation will give him direct or indirect exposure to individuals who have experienced medical issues and disabilities. These clients have many times seen the devastating effects that a disability can have on people and their families. Occupations such as physicians, dentists, nurses, pharmacists, chiropractors, podiatrists, psychologists, hospital administration, and lawyers just to name a few, experience helping people every day who have been disabled from sickness or accidents. Many times these professionals have seen the devastating effects of disabilities and want to protect themselves.

Health: While money pays the premiums, a person’s good health is what allows them to obtain traditional disability insurance.

Believe in yourself. It’s not about the sale, but about awareness and education. You are here to solve a financial problem your client has developed. Ask yourself: “What is the longest vacation you’ve ever taken?” Most likely it was less than two weeks, as you had to get back to work. This is the same for your clients. So, what is your disability insurance action plan for DIAM?

“An investment in knowledge pays the best interest.”-Benjamin Franklin

We’ve recently been asked about association group coverage and wanted to touch base on some features to make note.

Why is it that some association group disability plans can be priced less than individual disability plans? Sometimes the price difference can be significant, so how can this occur? In fact, some association group plans insure the same highly sought-after occupational classes that individual disability insurance companies seek out. We are not talking about association discounts on individual plans, we are referring to plans that are developed for an association that use a group chassis.

If the occupations are similar or the same, then the morbidity rate would be similar as well. So, if the morbidity rates are similar, how can the group association plan charge substantially less premium? Typically, the contract would need to have provisions that may have an impact on policy pricing. Along with this, one of the questions people forever ask, is just how much should disability insurance cost? So, let’s look at some of those provisions that may influence product pricing. (Note-the association group marketplace is dynamic, and policies will vary from company to company, so please ask your client to obtain a specimen contract to be reviewed.)

Termination
Individual: Most individual plans are guaranteed renewable to a certain age, usually age 65. The company that underwrites the individual plan can’t cancel the policy and may even have provisions so the client can keep the policy past age 65.

Group: Most group plans have provisions that allow the insurance company to cancel the plan. Why is this important? If a client’s association group DI coverage were cancelled, they would need to obtain a new policy. There are medical conditions that may still allow a professional to work but may make them uninsurable for an individual plan’s underwriting. For example, an individual with treated cancer or heart disease may still be able to work but may be uninsurable or postponed. In addition, as one gets older, the premiums for individual coverage tend to be more expensive. The pricing of today’s individual DI product would most likely be significantly less expensive than a similar product ten years from now.

Rate Guarantees
Individual: Many individual plans are purchased with a provision called noncancelable, guaranteed renewable. The expansion of the guaranteed renewable clause can cause some confusion from a policy that is just “guaranteed renewable.” Essentially the “noncancelable” prevents the company from changing policy provisions, including the premiums, without the policyholder’s permission. Typically this provision will expire at a certain age, usually age 65.

Group: Many group coverage certificates will have variable rates that can change based on age, so as a client gets older their rate will increase assuming the plan has not been cancelled. In addition, many group contracts are built with provisions that allow the company to change the pricing of the actual product. Having certainty of pricing is of great value, especially over a 10 year, 20 year, or even a longer time period.

Association membership requirements
Most association group plans require that the certificate holder maintains their membership in the association. It’s important that the cost of the association and future increases in association dues be considered when a cost comparison is made between plans. Some associations have additional membership requirements that may need to be maintained in order to renew membership. In addition, some members may not always be socially, politically, or culturally aligned with their association, but dropping their membership would nullify their disability coverage. The association member must be aware of the various factors involved when their disability insurance is entangled with a membership requirement. Disability insurance can be someone’s most important insurance protection. To have that protection wrapped up and dependent on association membership can possibly become detrimental in the future. While premiums allow someone to pay for an individual disability policy, someone’s health and financials allow them to pass underwriting and to obtain an individually underwritten policy. If a client decides in the future that association coverage wasn’t a good match for them, it’s possible that their medical or financial underwriting may prevent them from obtaining an individual policy issued today. In addition, we never know what products may be available in the future, but we do know what is available today.

Policy provisions
We’ll touch on a few of the basic points that are important for someone who is considering buying an association group disability plan.

Total disability requirements during the elimination period: We tend to find this provision in some association group plans. It’s rare to find this in an individual plan, but we’ve seen it a few times here and there. This provision requires that, during the elimination period, the individual must be totally disabled. To become eligible for monthly benefits they can’t be working at all for the full 90 days or 180 days of the elimination period. Remember, if someone were going to the office a couple of days a week, they usually would not be considered totally disabled but rather partially or residually disabled. Most of the comprehensive individual disability plans will allow the elimination period to be satisfied with either a total or partial/residual disability claim. This provision raises the bar on who can or can’t qualify for a disability claim. Disabilities come in all shapes, sizes, durations, severities, and affect people differently. This one provision in an association group plan can restrict many individuals from qualifying for a disability claim that otherwise may have been covered under an individual policy. We can’t stress enough how limiting this provision can be for those who are unaware of its ability to be a barrier to a seemingly obvious claim.

Reduction of benefit based on current income: Again, we tend to find this provision in some association group plans. It’s rare to find this in an individual plan, but we’ve seen it a few times. The provision, usually called a Relation of Earnings clause, indicates that, at the time of claim, the policy will not pay more than what an individual earned the last year or two years depending on the contract. This means that the group member may be paying an annual premium that allows them to obtain a benefit only up to a certain amount of coverage. In fact, they may have qualified for that full amount based on their earnings at the time the application was submitted and the certificate issued. Fast forward years later and now the individual may be earning a lot less than they did when the certificate was purchased. At claim time, that individual may not be paid the full benefit if the benefit were to exceed their more recent income.

There are other provisions that may or may not be applicable that should be reviewed as well, such as: Changes in the definition of disability as the claim proceeds; mandatory rehabilitation provisions; integration of other income such as social security, workers compensation from somewhere like Scotti Insurance, retirement benefits, and pass-through income received as a result of being a partial or full business owner; soft tissue and self-reported ailment exclusions or benefit period restrictions; and mental nervous benefit limitations.

The value received is the value perceived. Skilled professionals are sought out due to their knowledge of certain professions. For the most part, analysis of a group association disability policy and the analysis of important provisions is not part of the training, education, and background of most skilled professionals. If someone knew they were going to be in a car crash, how many airbags would they want installed in their car? Would someone buy a car with no seat belts in order to save money? How large of a safety net would one want if they were an acrobat, how narrow or wide? When purchasing a product that may be someone’s financial lifeline, seek out the most comprehensive disability policy possible! The wider the net, the more comprehensive the policy, the more it can have the ability to catch the wide variety of disabilities that can occur.

The proverbial “Nest Egg” is defined as being a sum of money saved for the future. Let’s put a pin in that thought and move to some basics of financial planning and the role of disability insurance.

There are many facets to a financial plan, but one of the basic pillars is a focus on retirement planning: When, where, how, and in what style. Once the retirement framework is structured, the planner can take into account the client’s budget, savings, investment objectives, and risk tolerance. Where does disability insurance play into the overall planning process? Let’s break into the budget part of the plan.
If you breakdown a typical client’s budget, you’ll easily see that most clients require between $5,000 to $10,000 per month in order to just maintain their standard of living. If a planner uses a basic assumption that an investment portfolio can earn four percent after taxes (about six percent taxable), then the Nest Egg needed to produce a monthly income to replace the monthly budget is: 12 x (monthly budget/four percent).

Therefore, just on these basic assumptions, in order to replace a monthly budget of $5,000 per month, your client would need about $1.5 million of investable assets. If your client’s budget is $10,000 per month, then they’ll need about $3 million of investable assets. A planner can use more assumptions and formulas to better pinpoint the amount of assets needed, but using these basic amounts you can see the amount needed for the majority of clients is well over $1.5 million of working, investable assets.

So, if the Nest Egg goal is to grow one’s investable assets to $1.5 to $3 million, then how does disability insurance protect the Nest Egg? Let’s look at what occurs when one gets disabled. Their income stops, so the assumption is that no income is coming into the household.

If the monthly expenses for your client are, say, $7,500 per month, then that money has to come from somewhere or the expenses have to be reduced. For most people, there are fixed monthly expenses and variable monthly expenses/discretionary expenses. Usually the fixed expenses, such as mortgage/rent, utilities, insurance, and others, are more difficult to change. While the discretionary expenses may be more flexible to change, cutting back on these expenses can cause a change of lifestyle for the family. Nonetheless, the $7,500 per month, or $90,000 per year would need to come out of savings…and the contributions that were being made to savings would now stop.

Let’s continue with the same client and assume they have a gross income of $15,000 per month or $180,000 per year. Therefore, depending on the tax rate, the client’s after-tax income would be about $9,000 per month. So, if their monthly expenses are $7,500, then there could be about $1,500 per month or about $18,000 per year to invest and save. If a client were able to maintain this scenario for 10 years then, with a zero earnings rate, they would have saved $180,000. If they earned six percent per year then their Nest Egg would be about $250,000 after 10 years.

If this client had a disability and didn’t have disability insurance, then their savings would be their source of funds. It doesn’t take too much math to figure out the numbers will just not work. Someone can’t have $7,500 of expenses per month, or $90,000 per year, and savings of only $250,000. This person and the family would have to make some serious changes, or they would have a lot of financial challenges. On the other hand, if this person had $7500 per month in disability insurance and therefore had $7,500 coming in each and every month of a qualifying disability, then the Nest Egg could possibly be preserved (in the simplest of examples).

How many clients do you have who don’t have disability insurance? Make sure you have an inventory of insurance products your client has obtained. Review this inventory on a routine basis and make sure your client understands why disability insurance protects current and future lifestyles. Some clients spend more time planning their next vacation than their financial future. Educate your clients that disability insurance is one of the pillars of financial planning.

We know that business owners have unique planning needs that require a financial advisor to be familiar with additional products and concepts. One of those concepts is succession planning and how to plan for the death of a business owner. Life insurance is typically used for that purpose and the concept is relatively straight forward. The clients’ business attorney needs to be involved so that the documents are prepared correctly and that the structure of the buyout is determined. Most properly drafted buy-sell agreements, partnership agreements or operating agreements will have some type of provision that describes what is to occur if a partner also becomes disabled. There are various parts of the planning aspects of business buyout agreements and analysis, such as: Structure, Valuation, Definitions, and Need. For the purpose of this article, we want to really focus on the need. While it may appear obvious, we want to take a deeper dive into the need for the actual agreement to have a well written disability provision and subsequently the necessity to fund the agreement as well.

Why is the agreement needed? When a business partner passes away, it’s obvious that the person is no longer able to work. Assuming there was a constantly reviewed and updated buy-sell agreement set up ahead of time, then the process usually will go fairly smoothly. When a business partner becomes disabled it can be a different, more strained, situation as the partner may still be able to have some strong opinions about how the business is operating and the compensation or distributions that should be owed to him or her.

Let’s look at some examples of how this can be challenging for the business partners. Take a law firm, accounting firm, or some other professional firm. One of the partners is diagnosed with a high stage cancer, one that with treatment the person can live a few years and, in some cases, beat it all together. Now let’s add that this is a senior partner with 35 percent ownership of the firm. The partners are compensated in three ways: A regular salary, end of the year bonus, and a passthrough dividend at the end of the year where the profits are split up. Let’s revisit the partner that is fighting cancer. Let’s say he’s been out for most of the year due to his treatments, recovery and more treatments. He checks in when possible, but the other partners, while very sympathetic to his condition, have taken on more of his work and responsibilities. The partners even had to hire an additional assistant to help with some of the administrative tasks the disabled partner was responsible for as part of his duties. The disabled partner was coming in one, maybe two, days per week, but has been too weak to stay all day, and it eventually comes to a point when he doesn’t come in for weeks or months. The firm has sick days, vacation days, and a basic group LTD that pays up to $5,000 a month and he is now on claim.

When the year end comes along, the existing partners take additional bonuses to make up for the extra work and there are no dividends paid. The disabled partner cries foul, as he feels the existing partners took all the profits that he should have been allowed to share in and paid it out as bonuses instead. The existing partner calls his attorney to see what can be done. Since there was no buy-sell agreement or an agreement that spells out what occurs if a partner is disabled, there may be very little the disabled partner can do except take legal action.

Let’s take another scenario of a business partner that doesn’t come back to work but refuses to relinquish ownership in the company. The other partner(s) need to still do more work and adjust the workload due to the absence. The other partner(s) have even offered to buy out the existing partner, but to no avail. The ailing partner refuses to sell in hopes of returning…even after years of being completely disabled. Now his spouse has been asking for copies of the income statements, bank statements, and annual financials so that their accountant can analyze the books. The disabled partner is causing more work and expense for the firm with all the additional requests and inquiries. If they had a properly structured a buy-sell agreement with a disability buyout provision, this type of scenario could have been avoided.

Once the buyout or partnership agreement is set up and there is a disability buyout provision, then the planning conversation is whether to fund the agreement with a disability buyout policy or to payout the buyout via operating business income. As we said initially, there are many different styles and types of agreements with various corresponding types of policies to help fund them. The financial strain of an unfunded buyout agreement can be devastating to the business. The business may need to get a loan to satisfy the obligations of the agreement. It’s possible that the working partners may need to use their own savings to satisfy the obligation as well. Without a properly funded buyout agreement there can be hardship for the business and the partners.

The road to disability buyout insurance policies first starts with a properly structured buy-sell agreement. Once your client has the agreement, you should ask for a copy so that you can work with your disability insurance MGA or company to see how funding the agreement with disability buyout insurance could be an option.