Thursday, March 28, 2024

Succession Planning Strategies And Tactics

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To orchestrate the successful transition of a retail senior insurance practice, much effort will be required in building a comprehensive plan, as well as executing many important details. In this third and final installment of my succession planning series, we’ll discuss the track my buyer laid out for us to run on this year. This applies to any type of insurance business, but mine was primarily Medicare.

Phase I—Documentation

  1. Signed purchase agreement with key terms and conditions.
  2. NIPR report on the seller for all state licenses and carrier appointments.
  3. Carrier-specific Agent of Record (AOR) forms for all active MAPD/PDP accounts.
  4. Assignment of Commissions (AOC) forms for all active Med Supp/Ancillary accounts.
  5. Seller W-9 + voided check for deferred payments (if applicable).
  6. License-Only Agent (LOA) contracting through buyer agency + carrier releases (if applicable).

*Phase I Important Consideration*
You may (should be) thinking, this is a lot of information—it’s true. Let’s re-consider the “Who” focal point of my previous Broker World article—regardless of the offer, you could cost yourself thousands of dollars by making the wrong decision. Dollars of actual currency, time, or relationships—and always be cognizant of the fact that the highest offer isn’t always the best one.

The firm you choose must have a track record of servicing a volume of clients like yours along with the technology and support to execute on the plan. Doubling (or more) the size of an agency by adding your practice is a tough ask for an agent. Wholesale firms’ clients are agents and agencies, not seniors. The experience for both your clients and yourself is important!

Phase II—Processing

  • Tasks for All Active Seller Accounts
    • Completed entity and personal licensing for active states.
    • Completed entity and personal contracting for active carriers.
    • Ready to Sell status for active CMS products.
  • Weekly Follow Up on Carrier
    • AOR processes on CMS accounts.
    • AOC processes on Med Supp/Ancillary accounts.
    • LOA processes on desired retained carriers (if applicable).

*Phase II Important Consideration*
If your buyer doesn’t have the infrastructure to manage these projects, future revenues will not transition correctly. If you have a buyer who is not concerned or focused on these critical details during your due diligence process, you are in for a long and messy transition. When preparation and diligence is taken with these tasks, the entire process should take 90 days or less to complete!

Phase III—Integration

  • Business
    • Websites/numbers/accounts/communication tools should be transitioned.
    • EFT payments should be received as indicated in the purchase agreement.
  • Clients
    • Seller messaging about the transition should be sent via typical communication method(s).
    • Buyer messaging about the transition should be sent via desired new communication method(s).
  • Producing Seller (if applicable)
    • Systems/processes/technology/tools implemented.
    • LOA contracts in place.
    • New biz customer/account/revenue agreements activated.

*Phase III Important Consideration*
Effective. Communication. Is. Key. There must be open, active and regular lines of communication from the beginning of the relationship through all three phases—for the mutual success of buyer/seller/clients. When in doubt, reach out. This will be a process not an event. You will have a partner for months/years to come (whether or not new business is being written). Mutual respect and understanding are imperative to the long term success of this process!

When I sold my book of business (primarily Medicare Supplement, Medicare Advantage and Medicare Part D Prescription Drug clients) one of my fears was that my clients may not stay with my buyer. For that reason, I didn’t telegraph my intention to my clients. In retrospect, I feel that I would have been ahead in letting every client know that, due to my health and age, I was attempting to find the best buyer to succeed as their personal agent—one that would give them the same amount of service. When the announcement was made it left several of my clients confused, thinking that I had somehow abandoned them. However, also taking on the position of LOA (Licensed Only Agent) for the firm that acquired my book of business, I remained licensed in the industry. This last step was a “comfort zone” to many that otherwise felt that I had somehow abandoned them.

If you are a broker thinking about your own succession plan, I encourage you to let me know and I will share some of the steps that led to my final decision on how I selected a buyer, and how the purchase value was developed using data on each of my clients. Every agent’s business is different, but certain elements in any succession plan are essential if you want a smooth and financially prudent transition.

Tech And The Health Space

I’m guessing most of you reading this publication might be expecting something life insurance facing. Well, that simply isn’t the space I cut my teeth in, so I’ll speak to tech and the health space.

It does amaze me how some industries can be very tech-forward and others not so much. I’ve seen quite a bit of advancements in the life insurance arena with some BGAs bringing out their own tech platforms for quoting and enrolling term life insurance and this is great news for that transactional business. For the more complicated sales, paper may still be the way to go; file building, talking to underwriters, setting up the purpose of the coverage is very important.

When it comes to health lines…well it leaves a bit to be desired. Necessity brings innovation and that is exactly what has happened in the Medicare world.

When CMS (Centers for Medicare and Medicaid) decided that agents could no longer access the Medicare website to run prescription drug plans and Medicare Advantage plans, the tech world got busy. It started getting very crowded, noisy, disruptive and competitive for all alike. Fast forward three quick years and you are seeing all kinds of quote/enroll platforms for MA/PD and PDP plans.

For those of you not in this industry, you might be the lone ranger. Everyone quickly realized the potential for renewable, compounding commissions and decided to take a look. That’s when we really started to see the innovations. Some platforms are proprietary meaning you must have carrier contracts with a BGA to have access, some you can buy, and even some you can white label.

What this means to the agents is efficiency for comparing plans that change every year—saved time so you can spend less time with chit chat and more time getting to plans and pricing—and easier access to see and save your clients’ data year after year. This is critical as you could easily have a client base of 100+ and getting to each of them in a short 54-day window can become challenging, especially when keeping up with new mandates facing them this year. Call recording and maintaining that call record for 10 years is required for this selling season so that’s forced more innovation in being able to make this as easy as possible for the agents. And if you don’t understand the importance of this, how about one-third to one-half of your annual production in the Medicare space will be done in a quick 54 days! Efficiency is the name of the game!

In the Medicare industry challenges must be seen as opportunities because there are some, if not a lot, of agents that will give this up due to mandates, so this creates an opportunity to grow your book of business not to mention those retiring agents that need a trusted agent to come in and help serve and take over for the clients.

With the release of this publication we will be almost halfway through AEP (annual election period) so to those of you navigating the sea of Medicare beneficiaries, I applaud you and wish you the best of luck and finish strong!

Happy selling!

Image by Joshua Woroniecki from Pixabay

The First Meeting: Getting To Know You

In last month’s article, entitled Getting Past The Gatekeeper, we talked about how to get past the dutiful secretary or receptionist (gatekeeper), establish contact with the financial advisor or attorney that you have identified as a potential strategic partner, and how to set an appointment in which to discuss a potential partnership.

So, you were successful and now have an appointment with a professional with whom you may or may not determine that a working relationship will be appropriate. What is the next step?

Prior to your first meeting with any professional partner, it is imperative that you learn as much as possible about the individual that started the firm and whether that person is the same person that now runs the successful enterprise. Reviewing websites, LinkedIn, Facebook, and other social media platforms is an excellent starting point.

With this information in hand, you are now prepared for the first meeting with your potential new partner. Just as with the home interview, we want to get that person talking to us by asking open ended questions after conducting the necessary warm up and small talk. Topics for warm up can often be gleaned during the social media review.

Because we noted for them while setting the appointment that we are potentially in the position of referring clients to them, it is imperative that we find out exactly what kind of client they desire. We can do this by asking them to describe their ideal client, their average client, and the very client that they avoid. Ask them to share the actual demographics of these various client profiles. Taking notes while they are talking communicates that you are serious about wanting to bring them the desired client and is less for you to remember in the future. It also communicates that they are also auditioning for the role of your partner!

After we talk about the demographics of their typical client, we want to do an even deeper dive with them and their practice to ascertain the degree of success enjoyed by this potential partner. Some questions to help you get started:

  • When was the business started?
  • Why was the business started?
  • How was the capital acquired or was it built on sweat equity?
  • What differentiates this business from the competition?
  • What prompted him/her to own his/her own business?
  • What will their company look like in five years if all goes as planned?
  • If five years from now they look back to gauge their success, what transpired for them to have achieved this success?

You need to get a sense of their value system and what they admire. A few questions that you can use include:

  • How would they capture the essence of the “why” they are doing what they are doing?
  • Assess how passionate they are about their business.
  • You can directly ask them about ethics and integrity by sharing your own feelings about these topics and see how they react. An emphasis on primarily serving the needs of the client is always a friendly conversation starter.

Once you get a feel for how the operation runs and what makes it thrive, you can start positioning how your services can help them retain clients and grow their core business.

  • Would they welcome an additional income stream? College tuition for their children? Additional retirement for themselves? That vacation cottage or fishing boat that they have always dreamed about. It is good to find a motivating factor just as we do with our producers.
  • How important do they think long term care insurance is to their clients’ wellbeing?
  • Are they aware of the risk that they themselves face if they do not recommend long term care insurance as another facet of protection to the financial well-being of their client and their family.

Learn as much about them as possible on the first visit. Determine whether you can envision yourself working closely and for long hours with this individual. If not, do not proceed! Do you initially trust or have a good feeling about this person or firm? Remember, you are not desperate and that there are many other professional partner offices that would love to offer senior services that address long term care and Medicare/Medicaid issues and welcome your assistance in doing so with their clients.

Some questions you need to ask about the clients and households serviced:

  • Do they have the requisite health and wealth for your products?
  • Do their clients have discretionary income not only for the initial purchase, but subsequent premiums?
  • How many families/households does the professional currently serve?
  • How many families/households would they like to serve in the future?
  • How do they envision growing their practice to reach these goals?
  • How can you and the services you can bring to the table help in achieving these goals?

Other questions to ask the prospect on the first visit:

  • Have they ever known anyone who has needed any type of long term care? Particularly in their own family! If so, ask the usual “What was that like for you?” type of questions to get them talking about it.
  • Do they themselves own a long term care policy? Why or why not?
  • Is it important to them that their clients work with a highly skilled and trained long term care specialist?
  • Is it important to them to maintain the appearance of independence and objectivity in working with a long term care advocate? (Note: being a broker representing multiple companies is usually preferred rather than the appearance they are working for a captive one company agent.)
  • Does he have goals like ours for their clients? (Wanting them to have quality care later in life, have a written plan and transfer the financial risk to an insurance company, to maintain their independence and control, avoid government programs like Medicaid, have professional assistance in planning and managing care and to have the peace of mind that comes with a plan.)
  • (We will discuss commission sharing in a later article)
  • Does he understand and want additional residual income coming in when he retires?
  • Does he realize this income, called insurance renewals, will either increase the value of the firm or he can exclude the insurance renewals from the eventual sale of their business and keep it for part of his retirement income?
  • Does the owner perceive any liability if he/she does not offer long term care planning to their clients from the clients or their family circle?
  • Will the owner reinforce and help us manage the process with the firm’s employees? If it is a larger firm, it is critical that the owner/principal agrees to a policy of Endorse and Enforce.
  • How many employees does he have, and does he have a marketing department?
  • Do they perform client reviews now? If so, have him explain the process to you.

Remember you want to integrate your service into his and not disrupt their core business. If there is sufficient reason to believe that this is potentially a strong match, and that a working relationship can be established, set up the second meeting.

Take A-ways:

  • The first meeting is critical and is all about finding out about them and not you.
  • The focus that you convey must remain on building their primary business and not selling LTCI.
  • You are of immense value to them–is your proposed partner of equal worth to you?

Following The Journey Of Family Caregivers: Findings From A Survey Of Home-Based Caregivers

For each of us who are now, have been, or will be a family caregiver, the choices we make and the challenges we face will always be somewhat unique. Yet there are lessons to be learned from the similarities and differences in the experiences family caregivers have, the choices they make, and the decisions they might have made under different circumstances.

That is why three organizations—CLTC, Home Instead and Homethrive—came together to sponsor a survey designed to explore the journey that family caregivers experience when they are supporting a loved one who needs care at home. Specifically, the sponsors were interested in understanding whether and how individuals made the decision to bring paid in-home care into the mix and how their experience differed from those who relied exclusively on family care. Additionally, the survey compares the experience of individuals who are juggling employment and family caregiving from those who are no longer working full or part time. Finally, the survey was designed to shed some light on whether being a caregiver has an impact on one’s mindset about planning ahead for their own future long term care needs.

Methodology
The survey was designed by ET Consulting, LLC, in collaboration with the sponsors. It was delivered using an on-line survey platform and took an average of 12 minutes to complete, with a 100 percent completion rate among respondents who qualified and began the survey. In total, 400 family caregivers were surveyed. Respondents were pre-screened to fit the participant criteria:

  • Current or previous (recently) family caregiver.
  • Caring for family member in a home-based setting.
  • By design, half the sample (200) included individuals who had used or were using paid home care providers and half who were not/had not.
  • The sample included a mix on all other demographic characteristics.

Findings
Caregiver Characteristics. Most respondents were caring for a parent or grandparent (64 percent), but the next largest share were providing care to a spouse or partner (14 percent). This was the current or more recent caregiving experience that respondents used as the basis for their responses on the survey. While in a few cases, the care recipient might be living with the family caregiver, the majority of the time (68 percent), the care recipient was living in their own home.

More than half of the caregivers who used paid in-home help relied upon a home health aide. The next most popular choice for in-home care was a CNA (35 percent). Just under one-third (28 percent) reported hiring what we call an independent provider—this could be someone who does in-home care work as their job but doesn’t work for an agency, or a family member or friend who is being paid to provide care.

Over 60 percent of the families using paid in-home care found that caregiver from an agency, while 25 percent said they hired the caregiver directly on their own. The top three referral sources for finding paid in-home care were: Word of mouth (34 percent), physician referral (32 percent) or recommendation from a hospital discharge planner (24 percent).

Caregiver Tasks and Challenges. We asked family caregivers about the type of care they most often provided, the challenges they typically faced and what tasks were most difficult for them.

Type of Help Caregivers Typically Provide
Nearly all family caregivers say they are “always” or “often” providing emotional support (80 percent). The other most frequently provided tasks (67 percent) are: Transportation, housekeeping, meal preparation, and making care decisions.

What Tasks do Caregivers Find Most Difficult?
Paying for care (58 percent), providing ADL support (56 percent) and making care-related decisions (46 percent) were cited by nearly half or more of the family caregivers as very or somewhat difficult tasks, compared with the other activities they support. It is interesting to note that, while bringing in paid home care support or care management guidance would certainly address two of these challenges, they may not work for those who also struggle with paying for care.

Caregiver Challenges Most Frequently Encountered
Just about one-third of family caregivers cite getting emotional support, worrying about their workplace responsibilities, and coordinating care needs with the care recipient’s doctor and other providers as the challenges they encounter most frequently.

Using Paid Home Care. Given these challenges and concerns, it is not surprising that many families include a paid homecare provider—a home health aide, CNA or independent provider—to help with some aspect of their caregiving role.

Why Family Caregivers Turn to Paid In-Home Help
The families that chose to use paid in-home care were motivated largely by feeling burnt out (70 percent), concerned with keeping their job or being able to perform better at work (69 percent) and wanting to maintain their relationship with their loved one rather than primarily being their caregiver (69 percent). When asked to identify the single most important reason they sought out paid in-home care, the top responses were:

  • Feeling they lacked the expertise to provide the care needed (18 percent);
  • Feeling burnt out (15 percent); or,
  • Keeping their attention on their job (15 percent).

But using paid in-home care also comes with some challenges, most notably:

  • Cost (20 percent);
  • Having workers who don’t show up at the last minute (20 percent); and,
  • Stress that can come from having a “stranger” in the home (15 percent).

Not Using Paid Home Care. Surprisingly, the most important reason people gave for not using paid home care did not have anything to do with cost; rather over one-fourth of family caregivers who chose to not use paid home care said they did so because they felt it was their responsibility to provide care (27 percent). Also important to the decision not to rely on paid help was resistance from their loved one about bringing a “stranger” into the home (14 percent). Cost was also a factor (14 percent).

At the same time, those going without paid care acknowledge there would have been advantages if they’d had paid help at home. They would have had:

  • More time to relax and enjoy life (48 percent);
  • Help dealing with the emotional stress of caregiving (44 percent); and the physical strain (39 percent); and,
  • A better ability to maintain their own health and well-being (30 percent).

Despite seeing the advantages of using paid help, nearly three-fourths of the respondents who did not use paid help said they are either not sure or say they would not do anything differently if there is a next time. This speaks to the power of the feeling of family responsibility—as well as the cost issue and the challenge of finding qualified direct care workers.

Does Caregiving Influence Planning? Prior research suggests that individuals who had a close family member or friend who has needed long term care are more likely to buy long term care insurance. So, we wanted to know if being a hands-on caregiver also raised people’s awareness of the importance of planning ahead for a time when they might need care. For the most part, the answer was yes.

But it is important to note that the type of future planning we asked about included some seemingly easier tasks—talking to family about care needs and preferences—as well as options that are a bigger “ask” such as buying long term care coverage. It is also important to acknowledge that actions speak louder than words so it remains to be seen whether these planning intents will come to light once the caregiving experience is in the rear-view mirror.

For those that said caregiving did not make them feel differently about wanting to or being able to plan ahead for their own care needs, almost 30 percent said it was just too difficult to even think about it and 25 percent believe that there isn’t a planning option they can afford. The rest aren’t even sure what planning options there might be or how to get started with the process. So, this tells us there are important educational opportunities.

Working Caregivers. Caregivers who are also maintaining employment are significantly more likely than non-working caregivers to use paid in-home care (56 percent vs 41 percent). They are also more likely to say they would use paid home care if they found themselves in another caregiving situation in the future (34 percent vs 15 percent). In addition to these differences, we looked across all the variables to identify in what ways working caregivers were statistically significantly different than caregivers who were not working outside the home at the time they were providing family care.

Working caregivers are more likely than non-employed caregivers to:

  • Be male;
  • Have young children at home;
  • Have higher levels of education, income and assets;
  • Be caring for a parent or grandparent, rather than for a spouse;
  • Be using paid home care out of concern for their job;
  • More likely to have hired an independent caregiver on their own;
  • Say they would use paid home care the next time; and,
  • Say they were influenced by the caregiving experience to plan for their own future care needs.

There weren’t any other differences in terms of the caregiving tasks and challenges they faced or other demographic differences.

Conclusion
Our survey identified both the intensity of the bond between the family caregiver and the individual for whom they are caring—a bond that often leads them to take on tasks for which they are not emotionally or physically prepared to handle and at a cost to their own health and well-being. There are financial, logistical and deeply personal reasons why family caregivers do not turn to paid caregivers or care managers to provide some of the help they could use and need.

Family caregivers all expressed the desire for help with identifying and vetting care providers, determining whether their loved ones are eligible for different programs and benefits that might pay for care, coordinating with care providers, and help with supportive logistics such as transportation, meals, home safety and more. Helping families identify services and supports that can offer this type of help and enable them to afford these services is critical.

In fact, a growing number of employers do offer an employee support benefit to family caregivers at the workplace—whether they are caring for an elder or a child with a disability. Homethrive is an example of one of many such programs. The employer pays a per employee per month fee and any of its employees can use the web-based resource to access the type of care coordination and care support services they need.

As a society, we need to do more to meet the needs of family caregivers, especially as the number of individuals needing care continues to grow and the number of family caregivers available to support them declines.

The State Of Long Term Care Insurance

What is the state of long term care insurance? It’s hard to say. The need for this unique protection is growing as our citizens age but, in my opinion, discussion about long term care has diminished. The insurance industry has failed to provide a long term care solution which is being accepted by the public.

However, changes are happening, and we may shortly see a rebirth of this product. Let’s first examine the reasons for the lessening of our conversation about long term care. Then let’s look at the potential for future growth.

The Reasons
First, the long term care insurance industry made some critical errors in pricing the product a generation ago. It assumed that the high interest rates of the last part of the twentieth century would continue into the twenty-first, but interest rates have moderated. It assumed that lapse rates would be six or seven percent, similar to the life insurance industry, but they have been one percent. It assumed an insufficient utilization factor of the insurance, as claims turned out to be higher and of longer duration than projected.

These assumptions resulted in a severe underpricing of the product, and this led to large rate increases which are still occurring. The design of the product should probably have mirrored health insurance where the initial premium would have been low and small annual rate increases would be assumed. This structure would have given the product more initial pricing appeal and acceptable pricing flexibility.

Many agents were encouraged by the representations of a major carrier which boasted of no previous rate increases, and assured their prospects that rates would therefore hopefully not increase over time. This turned out to be misleading and incorrect.

The result was income losses for the carriers and a public relations disaster. Over a hundred insurance carriers exited the industry, and some even went bankrupt. The industry was considered to be untrustworthy and more concerned with its own profits than the welfare of its policyholders. Today’s rates are considered to be too expensive and still unreliable. Overlooked are the billions of dollars paid out in claims and the many stories of people whose assets have been protected.

Second, the overall social and political environment has discouraged people from thinking about their long term care needs. These issues have become uppermost in our minds. The main current motivation of many Americans is just trying to pay their bills and reducing their debt. For them, the future will have to wait for a calmer and more prosperous period.

Finally, the cost of long term care protection has become so high that, thus far, federal and state governments have been unable to provide a solution. Many bills to cover the costs of care have been introduced, and there has been some helpful legislation around the edges including the creation of public-private Partnership policies. The legislation which came closest to providing a significant long term care solution was the federal Class Act ten years ago, but it failed for lack of funding. Many bills have been introduced each Congressional session since, but have gone nowhere.

Meanwhile, the insurance industry has attempted to find solutions other than traditional long term care, sales of which are five percent of what they were fifteen years ago. Hybrid life and annuity/long term care insurance policies have provided an expensive but useful solution to two different needs at the same time. At least 30 percent of life insurance policies now have long term care riders or chronic illness riders. These products have resulted in increased sales, although in many instances, a chronic illness rider is bought as a nice extra to a life insurance policy and not as an important component. These new products could cause a revival of public interest in long term care solutions, but most people cannot afford their cost.

The Potential
Now let’s discuss the potential for future growth. The cost of long term care has become too high for either private insurance or any government to provide a solution for the vast majority of Americans. There needs to be a true public/private partnership which could share the cost, now well into the hundreds of billions of dollars annually. We now have a fresh example of how this public/private partnership could evolve.

Last year, the State of Washington passed the Washington LTC Trust Act and established the Washington Cares Fund. This mandatory program, now slated to begin on July 1, 2023, imposes a .58 percent payroll tax for all adult W–2 employees in Washington State. This would pay for some long term care services for a short period, increase the long term care conversation, and encourage citizens to purchase wrap-around private long term care insurance

The only way to permanently opt-out of the payroll tax was to have other long term care insurance in force by November 1, 2021. Washingtonians do not pay income tax and rebelled against the idea of being taxed. About one-seventh of the eligible population, almost 500,000 people, suddenly bought private long term care insurance, and many others couldn’t buy it because carriers were overwhelmed and ceased sales.

However, many people only bought private long term care insurance in order to opt-out of the tax, not to buy long term care protection, thinking they could lapse their policies early in 2022. It now appears that the State will amend the Act to include some recertification of policies, and a lapse will lead to an imposition of the tax.

The combination of a public and a private long term care insurance program is very complex and contains a number of imperfections. Nevertheless, the Washington LTC Trust Act appears to be on its path with some revisions to implementation. If it works, it will save the State many millions of Medicaid dollars and provide at least a partial long term care solution to its citizens. It will become more popular over time as people receive its benefits and augment their coverage with wrap-around private insurance.

Twelve other states are now considering programs similar to Washington State’s, including the large states of California, New York and Illinois. California has created a Long Term Care Insurance Task Force which is directed to report its recommendations to the Governor and the Legislature by the end of the year.

Thus far, it appears that the California Task Force will recommend an opt-out provision similar to that of Washington’s, allowing opt-out only before enactment of the bill. If this occurs, I believe that as was the case in Washington, there will be a new gold rush in California…to buy long term care insurance and opt-out of the tax. The Task Force still has to wrestle in 2023 with the high-cost issues, sensitive in a State with such high taxes as it is. It will probably have to cut the cost of the current recommendations by as much as half in order to have a plan which would be politically acceptable. Passage by the Legislature and signature by the Governor are still many months away, but in my opinion, passage is likely.

If either California, New York or Illinois pass an act similar to that in Washington, major changes will occur. Other states will do the same. There will be large efforts to educate the public and much conversation about long term care will ensue. Carriers will design new wrap-around policies, and long term care sales will increase dramatically.

This change is not going to happen overnight. Legislation will take time. Carriers may be slow to adjust. It may take several years before the long term care insurance industry becomes a significant part of our conversation. However, the potential for major growth exists. The seeds for change are beginning to germinate. Stay tuned!

What May Be The Repercussions Of The Washington Cares Fund?

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Washington State’s “Washington Cares Fund” (WCF; Revised Code of Washington 50B.04) imposes an uncapped 0.58 percent employee-paid payroll tax ($580 for each $100,000) to fund a $36,500 lifetime pool (intended to inflate, beginning in 2027, according to the Washington consumer price index) for long term care received in WA by vested taxed employees. To qualify, a claimant must require help with at least three activities of daily living. The WCF website lists 11 such activities, one of which is cognitive functioning. In private LTCI, cognitive functioning is a separate trigger, sufficient to justify a LTCI benefit rather than accounting for only one of three required ADL deficiencies.

The bill was signed by Governor Inslee on May 10, 2019, but people who purchased qualifying private stand-alone or combination LTCI by November 1, 2021 could file to be exempt from the tax permanently. As of June 13, 2022,* the state of WA had received 478,173 applications for exemption, approximately 1/8 of the employed population. (*The private LTCI had to be purchased by November 1, 2021, but the exemption request can be filed as late as the end of 2022.)

The repercussions of WCF will be watched closely. When working to get the law passed, proponents expressed confidence that WCF would stimulate a significantly increased future market for private LTCI because WCF would educate consumers regarding their need for LTCI. As WCF is clearly insufficient coverage, consumers would be motivated to supplement WCF coverage. However, the following factors make it questionable that the market will be positively stimulated in the (near) future. (Note: some of these aspects may still be subject to change):

  • Confusion. Even outside WA, most advisors and consumers consider LTCI to be a confusing product and difficult sale. It is hard for people to remember the triggers and which providers’ services are covered. Selling private LTCI to complement WCF is much more complicated. WCF uses different triggers than the HIPAA-defined triggers used by private LTCI and pays different providers. To the degree that it is hard to remember trigger definitions and provider qualifications, it becomes much more difficult when faced with conflicting definitions.

It is also hard to complement WA-only coverage with national coverage. People who expect to relocate out of WA are more likely to be interested in private LTCI. For them, there is no coverage to complement.

In addition to these major difficulties, there are other complexities. For example, WCF has no daily or monthly maximum nor does it qualify for the state Partnership program.

  • Dried-Up Stream of Sales. Because Washingtonians wanted to be exempt from the WCF tax, the industry sold more than 90 times as many WA policies with LTCI features in 2021 than in 2020. Because of the avalanche of 2021 sales, demand is likely to be greatly muted for the next several years.

However, a lot of buyers purchased coverage that was less robust than typical previous sales in WA or 2021 sales in other states, so there will be a market to supplement or replace small policies that were purchased. Unhealthy individuals are more likely to want to add to their existing LTCI, likely resulting in a higher decline rate. Such sales require more effort but generate lower-than-average commissions.

Rather than devoting disproportionate attention to WA’s small, unattractive LTCI market, insurers, brokers, employers, and others might sit on the sidelines for an extended period.

  • Lack of Perceived Need. Many Washingtonians seem likely to think they need no additional coverage. Unfortunately, rather than educate Washingtonians regarding the value of supplemental coverage, the state promotes WCF with messages such as “We no longer have to worry about how we will afford long term care as we age.”

Even those Washingtonians who understand the limitations of WCF coverage may presume the WCF program will be enhanced by the time they might need care, hence not feel motivated to purchase private insurance.

  • Denigration of the Private LTCI industry. In addition to suggesting that WCF is all the coverage Washingtonians need, WA officials spread inaccurate and misleading comments denigrating private LTCI. If I failed to mention this issue, I would be intentionally suppressing relevant information. I can substantiate this statement, but I don’t want to dwell on this negative point.

Even if WA officials change their tune, a negative impression has been planted in the minds of many current Washingtonians and the inaccurate and misleading information is likely to continue to be quoted and found in internet searches.

  • Financial advisor hesitance. For several reasons, advisors are reluctant to stray from their areas of expertise. Because of the complications introduced by WCF, financial advisors seem more likely to be hesitant to raise the issue of LTCI with their clients.

The reduced likelihood of a sale also discourages what may be fruitless discussion, and more work for less compensation is not very motivating.

Furthermore, disclosures will be more confusing. Advisors might err or clients might misunderstand or forget what they were told. The resultant increased risk of personal liability for errors or omissions will also discourage some advisors.

Employers and employee benefit managers also seem less likely to be interested. Thus, much of the private LTCI industry might sit on the sidelines for at least several years.

  • Increased Total Cost. WCF intends to increase benefits, if possible, according to the WA CPI (consumer price index). Historically, the cost of long term care services have increased faster than the CPI. WCF is projected to cover about three months of nursing home care, probably less in some circumstances and over time. The likely shortfall is exacerbated because the CPI factor does not get applied in the first three years of the program and because the initial intended CPI adjustment was delayed 18 months when program implementation was delayed.

As more than 90 percent of LTCI-related policies have a 90-day elimination period (EP), people might conceptually view WCF as covering the elimination period. That’s not accurate, particularly as WCF covers more than 90 days of home care and ALF care. But people want simplifying sound bites. So, the nursing home coverage might cause WCF to be seen as covering the private insurance elimination period.

The combined cost for LTCI (WCF plus private insurance) will increase significantly compared to prior to WCF for two reasons:

  • Buyers are forced to have a zero-day elimination period which increases the price (but provides additional value).
  • People who can afford private LTCI tend to be healthy high-earners, who are overcharged for WCF coverage to subsidize less affluent and less healthy Washingtonians.

The market is not likely to respond favorably to the high combined cost. Opting for 180-day EPs is not likely to release the price pressure because the industry traditionally has not lowered prices very much for a 180-day or longer EP compared to a 90-day EP. Longer EPs make insurer results more volatile. A 180-day EP also increases volatility (risk) for the consumer, particularly if they receive long term care services outside WA.

It appears that the WCF is going to be primary coverage, so insurers won’t have to pay benefits for services covered by the WCF. That is appropriate and suggests that insurers might be able to lower premiums. Alas:

  • To the degree that WCF benefits cover services during the insurer’s EP, there is no cost savings for the insurers. Au contraire, there could be a negative impact because long term care costs are usually lower when the insured bears some of the risk. With a diluted elimination period, the later costs (covered by private LTCI) could be higher.
  • If claimants are not in Washington, there are no savings.
  • If claimants are cognitively impaired but don’t satisfy WCF’s criteria, there are no savings. (In private LTCI, cognitive impairment is sufficient to qualify for claims.)

For the above reasons, WCF seems likely to shrink future LTCI sales significantly, particularly stand-alone LTCI sales.

Future sales may migrate heavily toward life insurance or annuities with LTCI features. The life insurance or annuity side of the contract is less confusing and guarantees a pay-out. Because the life/annuity portion predominates, less attention is given to the LTCI elements, which in some cases are incidental additional features. The guaranteed pay-out also causes the buyer to be less concerned about the details regarding LTCI.

A key question relative to the value of LTCI is “How much coverage will insureds have when they need care, which is not likely to occur until they are in their 80s?” The 2021 private LTCI sales in WA were less likely to include automatic compound benefit increases. In addition to providing less coverage up-front, the shortfall is likely to increase over time. Some policies have rights to “future purchase options” (FPOs) to try to maintain the purchasing power of the benefits. I wonder if anyone will compare the future election rate of FPOs on 2021 WA sales to typical industry FPO election rates.

Other Jurisdictions
In addition to its impact on future LTCI sales in WA, WCF has encouraged other states to consider state-run LTCI programs. In California, a task force is exploring creation of a state LTCI program. Most observers think a CA-run program is nearly certain. The task force has expressed interest in a program with stronger benefits than WCF. New York (SB 9082), MN (HF 4461) and Pennsylvania (House 2779) have bills. If readers are aware of activity in other jurisdictions, I’d like to be informed.

Before discussing ways in which those programs may differ from WCF, I must poke fun at myself. I told my friends at Milliman that I thought they had overstated the impact of exemptions from the WCF. My argument was that the insurance industry is not very effective in leveraging such opportunities. I was incorrect because I did not appreciate the deluge of demand that WCF created from individuals and employers. I’ve never seen anything like it in my 50 years in the industry. As of June 13, 2022, WA had received 478,173 applications for exemption, which was equivalent to 13.6 percent of WA’s non-farm population. Because people with exemptions are heavily weighted to high earners and young people (who would have paid into the fund many years; or paid fewer years, then left WA without benefits), the cost of the exemptions may exceed Milliman’s estimates.

Other state programs will differ from WCF in terms of exemptions.

  1. To avoid the problem WA experienced, other states will have a much stricter window for exemptions. For example, the NY bill says an individual can qualify for an exemption only if they purchased LTCI prior to January 1 of the year the bill is signed.
  2. The WCF law does not require people to keep their private LTCI in place after they receive their permanent exemption. Other states are likely to close this loophole.
  3. Other states might be more selective as to which policies would qualify for exemption. For example, they might require that the policy qualify for §7702(B). (Washington allowed policies with §101(g) provisions to qualify.) It is less likely, but possible that they might require a compound benefit increase feature.

I expect other states to allow exemptions for people with private LTCI for the following reasons:

  1. It is the right thing to do. Government should encourage citizens to take personal responsibility and reward them for having done so.
  2. By backdating the date that the policy must have been purchased in order to qualify for exemption and by requiring on-going certification, the states avoid giving a tax break to people “gaming” the system.
  3. By allowing exemption, proponents of a state program reduce political opposition to their intended program.
  4. A lot of people who have bought LTCI in the past are retired. It costs nothing to give them an exemption because they wouldn’t be eligible for the program anyway.
  5. Many other people with private LTCI are close to retirement. It might save the state program to allow them to be exempt because they would pay the state LTCI tax for only a few years.

Other jurisdictions may differ from Washington in other respects as well, such as triggers, total coverage, compounding, benefits, vesting, etc.

Hopefully, other jurisdictions will involve the insurance industry in discussions about all aspects of a state-run LTCI program throughout the development process. Such involvement should include front-end salespeople as well as insurance company home office personnel. It should include careful consideration of the insurance industry’s comments, not just token participation.

Increased complexity if multiple states have different programs. Will insurers be interested in complementing state programs if those programs vary by jurisdiction? Will financial advisors consider such complexity worth their effort? Will employers and employee benefit advisors consider LTCI programs if they must vary by employee resident state? What will happen to individuals who move from one state to another? Will inconsistencies increase pressure for a uniform national program? Will consumers, employers, advisors and insurers sit on the sidelines in what they might view as a turbulent market with a questionable future?

Might the history of the state Partnership programs serve as an example? The industry largely spurned the state Partnership programs until DRA 2005 established national standards.

Conclusion: I have no crystal ball to predict the future. Even the WCF itself may change. It will be interesting to see what actually develops.

What Does The Inflation Reduction Act Mean For PDP?

Mutual of Omaha Rx’s mission is to empower our customers to improve their health by providing affordable, safe, and dependable prescription drug coverage through innovation and collaboration with trusted organizations.

The recently passed Inflation Reduction Act (IRA) makes some key changes to PDP with the goal of keeping member costs low. These changes are phased in over the next several years, and they will start impacting members in 2023. The following are the biggest changes that will impact members. All of this is of course dependent on no additional regulatory changes—so I’ll add, as a caveat, “Never say never!”

Insulins—After a few years of the optional Part D Senior Savings Model, starting in 2023 all plans will cap member cost sharing for insulins at $35 for a one month supply.

Vaccines—Members will no longer have any cost sharing for vaccines. This includes the important shingles vaccine.

Member out of pocket spend—The current Part D structure has benefit phases that determine what a member pays. When members reach the catastrophic phase, their cost share generally drops to a five percent coinsurance.

This out of pocket for the catastrophic phase will be removed over the next few years. First, in 2024 the benefit phases will still be in place, but the member cost share in the catastrophic phase will be eliminated, meaning members will not have to pay out of pocket to fill drugs if they get into the catastrophic phase.

Then, in 2025, there will be a deeper Part D redesign with changes to the phasing and a proper maximum out of pocket amount.

PDP premium stabilization—Affordability is key to the Part D space, and there is a provision that limits the premium increase plans can take year over year starting in 2024. The mechanics are a bit complex, but this should be a levelizing force that keeps PDP a compelling and affordable product for members.

Drug negotiation—Beginning in 2026, the Federal government will begin negotiating drug prices with drug manufacturers. The list of drugs to be negotiated grows each year and eventually will include Part B and Part D drugs, meaning costs should be reduced in original Medicare as well as Part D.

Takeaway—This year, as you’re helping members review their Part D coverage, be sure to understand the 2023 benefit changes of insulin cost sharing caps and no vaccine cost sharing. Also make sure to continue annual reviews with members as additional changes are phased in. And happy AEP!

Advising Plan Sponsors On Third Party Administrators

Administering health and welfare, pensions, 401k and annuities funds is a complex and challenging task. These plans are governed by various federal laws which frequently change, requiring plan sponsors to remain vigilant and up to date on their compliance requirements. For the self-insured, single-employer, multi-employer and Taft-Hartley plans that do not have personnel with adequate experience and knowledge of employee benefit plan administration and regulations, a viable option is to outsource this function to a Third Party Administrator (TPA). For brokers, being able to guide their clients in understanding the role and value of a TPA, and how to select one, is a service that positions them as trusted, knowledgeable advisors.

TPA Overview
Some believe the TPA industry was established with the codification of the 1947 Taft-Hartley Act, also known as the Labor Management Relations Act. This legislation primarily restricted the activities and power of labor unions, prohibiting certain practices and requiring their disclosure of financial and political activities. Today, IBISWorld estimates that there are 129,348 TPAs and insurance claims adjusters in the United States; a 0.4 percent increase over 2021 figures. From 2017 to 2022 the industry has achieved this 0.4 percent annual growth rate with continued growth projected.

Simply stated, a TPA works on behalf of a fund providing oversight and management of its pension, 401k and annuity plans as well as health and welfare plans including health, dental, disability and paid family leave claims processing. Many also provide other related services such as payroll auditing, medical stop loss and medical care and utilization management. Depending on the plan sponsor and the contracted service, the TPA will provide a customized offering.

For example, a TPA contracted for its pension, 401k and annuity plan administration will maintain records of participant benefits, eligibility and payment history; maintain full financial records; process pension and 401k applications in compliance with fund benefit rules; work with plan professionals; process annuity plan distributions and loan applications; assist in preparing government filings; and prepare and issue 1099s as well as administer fiduciary liability and fidelity bond insurance. Additionally, the TPA’s role will extend to attending and reporting at trustee meetings; assisting with annual audits; managing billing, collection and reconciliation of monthly employer contributions or withdrawal liability payments; data maintenance; and delinquency and standard reporting. Other functions include handling plan member inquiries, managing appeals, maintaining plan records, and providing the general administration, coordination and communications with plan professionals such as the accountant, auditor, attorney and actuary.

TPAs providing health, dental, paid family leave and disability claims processing are responsible for the complete administration and processing of these claims and their accurate adjudication in compliance with benefit rules. Detailed claims reporting is also provided along with a medical management partner for the clinical review and analysis of high dollar claims. As part of the claims processing service, the TPA will also respond to member inquiries regarding their eligibility and claims status, along with providing member-friendly communications designed to promote responsible benefits utilization.

Plan sponsors who enter into a TPA agreement for health and welfare fund administration can expect a focus on due diligence, fiscal prudence, and the fund’s fiduciary responsibilities. Towards achieving these objectives, and as with pension, 401k and annuity administration services, the TPA maintains records of employer contributions and participants’ benefits, eligibility and payment history, as well as full financial records. The TPA will assist with annual reports; distribution of Summary Annual Reports; attend and report at trustee meetings; assist in the preparation of government filings; administer fiduciary liability and fidelity bond insurance; manage appeals; maintain records; and provide for the general administration, coordination and communications with other plan/fund professionals.

In all of these service areas, the TPA strives to help plan sponsors meet their fiduciary responsibilities, maintain regulatory compliance, optimize their benefits administration, achieve more cost-efficient benefit programs, and support a positive employee/plan member experience.

TPA Selection Criteria

  • Brokers advising their clients on the selection of a TPA should focus on several key criteria. Besides seeking out a TPA that has years of experience and a proven track record serving your client’s business/plan model (i.e., self-insured, single-employer, multi-employer, Taft-Hartley plan), seek out a TPA that has:
  • A highly qualified and credentialed team of experienced benefits administrators, claims analysts, finance and eligibility processors, and payroll auditors;
  • A broad portfolio of solutions which, in addition to pension and annuity administration; health, dental and disability claims processing; and health and welfare fund administration; includes medical stop loss coverage, payroll auditing and medical care and utilization management;
  • Experience working with a broad network of HMOs, PPOs, and other managed care providers;
  • Advanced information technologies designed to support employee benefits administration processes;
  • The willingness to be flexible and customize services to meet each client’s needs;
  • A strong focus on regulatory compliance, fiduciary responsibility, and risk mitigation;
  • Stringent quality controls backed by regular performance benchmarking; and,
  • High standards of customer service including courteous, responsive customer service representatives to address both plan sponsors and members inquiries promptly as well as plan participants’ education via online information and/or live/virtual seminars to raise awareness of how their benefit decisions and health and lifestyle choices influence a plan’s fiscal condition.

The TPA’s Value Proposition
In addition to helping address tasks for which many organizations are not qualified to perform, TPAs deliver a strong value proposition across the entire employee benefits continuum. For funds, alleviating a cumbersome burden and replacing it with a seamless, high quality plan administrator cannot be underestimated. Neither can the financial benefits received when potential litigation and related fines for non-compliance are reduced, health plan utilization optimized, and employee retention improved for lower recruitment costs. Plan members gain a competent, fully-engaged resource to address their questions, protect their benefits, and facilitate their claim payments.

For brokers and other benefit consultants, TPAs deliver both soft and hard benefits. There is the peace of mind gained in knowing they have steered a client to a reliable, valuable resource to manage a complex area of their operations, and the enhanced client trust and loyalty that elicits. There are also the financial opportunities that can stem from aligning with a reputable TPA, which can refer clients to the broker or consultant. Additionally, through the TPA relationship, brokers and consultants can gain greater insight into their clients’ claims history which can be leveraged to present other products such as voluntary benefits, to help shift benefit costs from plan sponsors to members, and medical stop loss to address high medical claims.

When discussing a TPA with a client, it is important that brokers and consultants also remind their clients that they still must recognize their fiduciary and recordkeeping responsibilities. An agreement with a TPA does not constitute a plan sponsors’ complete abdication of their responsibilities in accordance with government regulations including those imposed by the IRS.

Succession Planning Retirement Solutions

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As I approached the time when I thought it would be nice to retire, I discovered a lot about my hard-earned insurance book of business. First and foremost, if I didn’t have a succession plan in place, and happened to die or become incapacitated before handing over my business to someone else, the insurance firms would keep all of my residual income. Yep, none of it would go to my estate.

Major alert—get something in place for my heirs before I was no longer here to make that happen!

I had a small insurance agency specializing in Medicare aged clients. It earned a good income annually just from the residual income. Each year I used mainly referrals and direct mail to bring on new clients, and that ongoing effort replaced any lost income due to the death of my clients or those that got swayed by the Joe Namath and Dyn-O-Mite type television commercials. I was comfortable; however, I was growing old like my client base. It was time to let loose and finally enjoy the fruits of my labor.

Options that I considered

  1. Turn the business over to one of my family members. Sounds easy, but they were not listed as a selling agent on the business already sold, so they would not share in any income from my clients that I had already contracted in the event of my death. And did they share the passion for the business that I had learned to love? No!
  2. Bring aboard an experienced agent and let that individual work the business; but again, my book of business was not transferable unless my existing clients were somehow re-written using the agent that I had brought aboard to run the business.
  3. Do an outright sell of my book of business to a firm that had experience in acquiring small agency businesses, thereby giving up any future income stream and paying taxes on the entire book of business sold, or using a Good Will graduated income stream and stretching my payments over several years rather than receiving a lump sum one-time payment.
  4. Continue on with my agency, but turn the servicing of my clients over to another firm by paying a servicing fee, and at the same time giving this firm full ownership of my agency for a predetermined price in the event of my death.

When you reach my age, and have the above options to consider, the logical approach is normally the fourth option. It would allow me to continue operating my business while the other firm does the necessary service work while getting the clients used to the new service, and simply paying that firm to administer my existing and any future book of business. It also would permit a guaranteed payment to my estate in the event I ever wanted to let go and fully retire. Finding the right firm to do this, and one that you can trust, is the real challenge.

The solution I finally chose was an outright sale of my book of business, payable over several years to control the taxation issue, and at the same time becoming a Licensed Only Agent (LOA) for the acquiring firm. I chose this option after receiving five proposals. It also was my choice when it came to electing a firm that I felt would service my clients with utmost integrity. It offered a solid source of income over the next few years so that I could enjoy my retirement when still able to enjoy the fruits of my labor. And, becoming a LOA meant that I could continue selling new clients and know that any new client would be serviced with the same amount of professionalism that my other clients would be receiving. And, as the LOA, receiving any new client regular sales commissions and renewals on those new clients. Lastly, my estate was guaranteed the monthly income in the event of my death.

New industry challenges
My timing was excellent, as Medicare just announced several new 2022 provisions that can and will impact those of us in this industry. The foremost change is now a requirement that any telephone call to a client or prospective client needs to also be accompanied with a recorded conversation. And that conversation needs to be archived for no less than 10 years!

That new requirement will undoubtedly provide the incentive for many Medicare insurance agents to consider their own succession plan—if not an outright retirement! Sure, there will be agents that will forget, or refuse to do the recorded conversations, or fail to properly secure those conversations for the required 10 years. However, if they ever get audited it could mean forfeiting their residual income, fines, loss of their insurance license or penalties.

No, it is best to plan ahead when it comes to succession of the business. It’s best for you, the agent, your heirs, and certainly is best for your clients. In my case, due to my age, the sale of the business worked best. For other agents, letting a solid service firm work the client base is a great solution as you are not giving up control of your business—only letting another service firm perform the necessary functions to keep your clients informed and satisfied. In doing so, it also frees up your time to focus on obtaining new clients. And, perhaps most importantly for you, it assures your heirs that in the event you become disabled, die, or fail to qualify on your annual certification exams, that all your hard-earned residual income will not vanish.

If you are in a similar situation and are considering your succession options, feel free to contact me. I will give you my experience in more detail and why I made the decision to work with the firm that I eventually selected.

There is an entire addendum type article that can be written on the structuring of any sale, including the valuation of the book of business, what needs to be included in the written succession plan, how payment can be received for the ultimate tax advantage, etc. Those topics will follow.

You owe it to your clients so they are not left dangling when you are no longer around to service their needs. You owe it to your spouse or other family members, as they will lose the income stream of your book of business unless you plan ahead. You owe it to yourself so that you can finally enjoy the fruits of your efforts.

Good luck, and good planning!

Layering Benefits To Effectively Safeguard Income

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Common sense and assumption based on experience in the life and health insurance industry have led me to the realization, which I’m certain most of you have witnessed and will wholeheartedly agree upon, that most clients and hopeful prospects—most, not all—are in no way proactive when it comes to their insurance needs. No matter how financially savvy a consumer believes they are, many tend to aim for a path of least resistance and lowest cost when it comes to the contemplation of purchasing insurance even though they may recognize that a claimable “event” could spell utter disaster from an economic standpoint. And in no industry sector is that more clear and relevant than with income protection—disability insurance.

Without financially protecting one’s paycheck, men and women stand to lose their single most vital source of economic freedom. Regularly-earned income provides for the necessities of one’s lifestyle and of one’s family—it allows for food, shelter, utilities, transportation, education, healthcare as well as the other numerous bills and costs the average American encounters on a daily basis. Income also provides for the luxuries and niceties that we often take for granted like vacations, entertainment and recreation costs. Unfortunately, most Americans making up today’s workforce are insufficiently covered by some, if any, form of income protection insurance.

It’s inherently natural to disbelieve in one’s own morbidity and physical demise, yet statistics show that a healthy person is at least three times more susceptible to disablement from accident or sickness than to death during their career. Disability insurance is quite often overlooked or simply an afterthought, and that needs to change in this country.

The U.S. Department of Labor and DI experts throughout the country have maintained for decades that a working American should have at least 65 percent of his/her income insured in the hopes of providing for one’s family during a period of total disablement. Some high-limit DI carriers, in certain cases, are now participating with coverage up to 75 percent of one’s income if any in-force benefits happen to be taxable to better allow for more substantial income protection.

Disability insurance is a necessity, and having less than 65 percent of income insured isn’t prudent nor viable financially if and when a disablement occurs. Insurance is all about preparation for the unknown and planning for the worst case scenario. A vast majority of Americans, even the wealthy, fail to maintain significant savings and liquid assets in cases of emergencies like unforeseen disablement. Retirement programs are certainly gaining a stronger foothold among the masses—more people in this country are planning for their futures after retirement, but they are severely lacking in protection for the here and now during their working careers.

Underinsurance provides a false sense of security for which you don’t want to be responsible. As an advisor you owe it to your clientele to get them appropriately insured to high-limit DI levels so they can economically care for themselves and their families if they were to suffer a short or long term impairment. You are not selling them just another redundant piece of paper. You are providing them with financial freedom from potential disaster.

The disability insurance needs obviously vary from client to client depending upon occupation, age, income and lifestyle. In my experience, many prospective clients require a layering approach to DI protection with the employment of multiple insurance policies over varying platforms. Income protection isn’t black and white. There typically isn’t one simple solution, no one formula for success. By nature and historical limitations of the market, one DI policy or one product just isn’t going to cut it. There are actually multiple levels of disability insurance, and all can be extremely important to your clients.

The first level or layer is group insurance, better known as LTD (long term disability). Many U.S. employers provide small layers of mandatory or voluntary guaranteed-issue group LTD benefits. Since the carriers of such plans offer terms on a guaranteed basis, underwriter guidelines commonly limit benefits to 50 to 60 percent of income with usual caps of $5,000 to $15,000 per month. For the majority of blue-collar workers and governmental employees, employer-sponsored group insurance combined with state disability benefits provides acceptable income replacement coverage. But most of the workforce in this country are employed by small business owners, are self-employed or are independent contractors. In these instances, group disability insurance is oftentimes not available or isn’t sufficient on its own.

The second layer of income protection is IDI (individual disability insurance). Those without group DI or without a sufficient level of group DI can seek individual disability insurance from a handful of large, reputable U.S. carriers. These insurers employ individual underwriting and morbidity analysis to provide prospects with policies similar in comprehension to group LTD certificates. Most Americans can find acceptable levels of disability coverage from a combination of group and standalone individual benefit sources.

However, there are many income-earners in this country that have salaries in ranges that cannot be effectively covered by group and/or standard individual disability policies. That brings us to a third layer of DI. Most in the white-collar market as well as physicians and dentists, and many in the rapidly-expanding grey-collar market have annual earnings that can hardly be insured by such a combination of group insurance and a single, traditional disability income policy.

Consider an executive making $300,000 per year. Is a group LTD plan providing 60 percent of income up to $10,000 per month going to allow enough protection to maintain that person’s lifestyle or the lifestyles and financial needs of their spouse and children? Families with a high net worth require more insurance than most, as their average expense ratio is significantly higher than an average household.

The third tier consists of high-limit DI and is only accessible through the Surplus Lines market and specialty carriers like Lloyd’s of London which specializes in providing income protection above the usual disability benefit limitations of most U.S. carriers. High-limit or “excess” disability insurance is readily available on a fully-underwritten, individual basis as well as for groups large and small on a multi-life guaranteed-issue basis.

For moderate to high-net-worth individuals, the risks of underinsurance can prove to be severe and financially disastrous. Your clients need to understand the importance of the varying layers of income protection and, with your guidance, properly tier and layer supplemental benefits on top of existing group and/or individual policies. Safeguarding 50 percent of one’s income is not enough. Safeguarding 60 percent of one’s income is not enough. The multi-layer benefit approach to disability insurance will successfully fill the subtle and blatant gaps in your clients’ risk exposure.

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