disability-insurance

Disability income (DI) insurance isn’t the sexiest or most lucrative offering in an insurance advisor’s lineup. The policies have a lot of moving parts, clauses and conditions, a lot of clients are already insured and there are no large ticket sales if you’re selling to the average middle class client. But DI is an important part of the puzzle for anyone who makes a point of offering holistic advice.

On the surface there are a lot of inherent challenges to get past when selling DI, but some advisors have built entire practices around the product.

Susan Laufer, owner of Qualified Financial Services in Toronto, began selling DI almost 18 years ago, after nearly 20 years of working as an occupational therapist. In her healthcare career, she also helped set up programs on homecare and assisted devices.

“I felt very strongly that you had to protect yourself in case of disability,” she says. “It was a natural for me because I worked in healthcare and helped people after disability.”

Today, her practice, which initially served young professionals who needed income replacement insurance, serves many of the same clients who now need life products, other living benefits, as well as retirement and estate planning.

There are good reasons to sell DI, but there are also a number of challenges.

Proponents point out that virtually everyone needs income replacement insurance. Mortality statistics suggest the average 25-year-old has a 58% chance of being disabled for longer than 90 days at some point during their lifetime. The likelihood drops slightly as people get older, but the length of time the average person will be disabled increases. A 45-year-old has a 40% chance of being disabled longer than 90 days but the average duration of disability is 3.2 years.

The 45 year old is also likely earning more, has fewer years left to recover from financial setbacks and typically has more obligations than the 25-year-old.

Commonly held

On the downside for advisors, even amid widespread cuts to employer-sponsored benefits, disability insurance is still a widespread offering and many clients are already covered.

Unlike life insurance, where you can buy virtually any amount, subject to underwriter approval, the amount of disability insurance a client can purchase is limited to the amount they earn, and their existing coverage needs to be taken into consideration when making an application for additional coverage.

The hurdles don’t end there.  Underwriting is often more stringent; definitions vary from carrier to carrier; and there are exclusion periods. The proof clients need to provide at the time of a claim can also make the product more difficult to appreciate or understand.

The number of policies that come back with ratings or exclusions can also be a turn-off. Clients can become annoyed or discouraged and advisors can find themselves doing a lot of extra legwork without earning a commission at the end of it all.

“You could do all the work and you won’t get any money. You only get paid if something sells,” says Laufer. “If someone is declined, you for sure don’t get any money. In a lot of cases it’s a much harder sell.”

All of that said, there is a natural market of clients for whom private disability insurance products are an essential part of their larger financial plans: Professionals, such as doctors and dentists, often do not benefit from having employer-sponsored disability benefits.

CEOs or others who receive substantial bonuses that aren’t covered by group insurance can also top up their benefits by purchasing a private plan.

Business owners, particularly those in the process of setting up employer-sponsored benefits for their staff, are also often amenable to having a discussion about opting out of the group disability coverage in favour of their own private plans.

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LTCI #1

So – to structure a presentation – first get the client to accept that there WILL be a problem after that 2 year regular occupation period – and barring your client being almost a total vegetable there WILL BE. Also note that carriers tend to be VERY theoretical and not really look at the real situation of a claimant. I was working with a young lady whose father was disabled due to a SEVERE back problem (They had to rebuild his kitchen in order to raise the shelves so he could use them). He was paid for the first two years with no problem After two years though, they assessed that he could work as a file clerk (a “reasonable” job based on his previous occupation as a “handyman” at a school. One minor issue though. Many file cabinets have multiple drawers. He would have little problem accessing the top drawers but there was no way he could get to the lower ones. Remember – and this is NOT a criticism; it is the role of group insurance – it is designed to discriminate against higher earners. Unless the company is large enough to justify “classes” of employees – the people earning the larger dollars will have HUGE problems collecting long term.

So – get the client to agree to a 2 year Waiting Period. Using a client earning $75,000/year and using one carrier’s numbers – he would be allowed $4,100/month NON-TAXABLE. If he took a 2 year elimination period (and taking into account the 10% discount for “group offset”) a 40 year old non-smoking male Occupational Class 4A would pay $96.54/month for a top level contract including the Guaranteed Insurability Rider.I would then adjust the coverage amount down if that was outside his budget – the objective being to get him to agree to purchase whatever amount fits his budget – since the GI rider will allow him to increase his coverage should he ever lose his group – and without concern for health OR OCCUPATION changes. So the client says “I want this much coverage and I am prepared to pay that much for it”

So – he has bought. NOW I point out the weaknesses in this approach. What happens if he loses his group – and the coverage for that first two year period? What happens if his disability is not serious enough (try early cancer or early MS) to qualify for payments under the group plan? For purposes of this part, I will use the original amounts to illustrate how I would solve THOSE issues.

I can bring the elimination period down from 730 to 90 days and the premium will only increase from $96.54 to $122.63. So for $26/mth the client potentially has easier access to $88,000 of additional benefits. Let’s say he had agreed to a $75/mth premium rather than $96.54. I would then have adjusted the $4,100 benefit to $3,000 and to keep to that level of cost – I would go to $2,500 after 90 days

Friday, Nov 25, 2011 at 9:41 am Reply

LTCI #1

Also – if you know how to handle them – exclusions and ratings should rarely be a problem. “Rating” – this is the best possible “non-standard” offer – you have high blood pressure – or are overweight (and God the tables are GENEROUS – if you get rated for weight you are HEAVY) but you are covered for EVERYTHING! Exclusion? I have always had a back exclusion – due to SEVERE scoliosis caused by polio as a child. Two possibilities – “I am NEVER disabled by my back – why are you excluding it?” If you are never disabled (I MIGHT have missed two weeks in 44 YEARS due to my back) then WHY DO YOU CARE if it is excluded? “That is why I am buying the policy” – then how can you expect the insurer to cover it? One – or two (or rarely even 3) conditions excluded? Look at everything else which remains covered.

Thursday, Nov 24, 2011 at 3:54 pm Reply

LTCI #1

OH MY. I think someone needs to help you a bit. Let’s start by saying that the industry has been able to effectively ignore group LTD for many years – via Group Offsets. Why would someone purchase individual when they have Group DI? OH BOY! I can go on for HOURS – but let me just start by saying that no reputable advisor would accept his/her client having 100% of their life insurance as group – and they willingly walk away if a client has 100% of his LTD as group. That response is TOTALLY the reverse of the correct one – and I will expand on that if you want. Now – let’s take some “minor” issues – group almost always has a limited “regular occupation” definition (limited to 2 years) so you can always start the sale process with a 2 year waiting period on the individual plan. Remember that jurisprudence says that a job which will give the disabled individual 50% of what he was earning fits the “reasonable definition” requirement (unless the group plan has a higher ceiling). How many people can live on half their income? Also group almost never covers “partial” disabilities (read early stages of cancer or MS or recovery after a heart attack – or ALMOST ANY DISABILITY if your job is largely knowledge and communication based. This is also a HUGE problem for any business owner or other individuals motivated to try to work. Check definitions of “injury” – “directly and independently of illness or all other causes” invites refusal of a claim resulting from a car accident CAUSED BY A HEART ATTACK!

All of that is MINOR – the big problem is we can no longer count on our jobs or our benefits! GOD I AM ANXIOUS TO START WRITING COLUMNS FOR YOU!

Thursday, Nov 24, 2011 at 3:47 pm Reply