IDI 101 Introduction to Individual Disability Insurance

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IDI 101Introduction to Individual Disability
Insurance
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Part I Disability Income (DI) Insurance
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Why Disability Income Protection?

• Your clients need it!
• During the course of your career, you are three
  and a half times more likely to be injured and
  need disability coverage than you are to die and
  need life insurance (Source Health Insurance
  Association of America, 2000.)
• Most people have savings to cover less than six
  months of expenses (Source Business Almanac,
  1997)

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Why Disability Income Protection?

• Your clients need it!
• - Effect on the client Income lost through
  disability is 2 times as great as auto accident
  losses and 3 times as great as fire losses
  (Source Field Guide 2001)
• - Effect on the family 48 of all home
  foreclosures are the result of disability
  (Source Housing and Home Finance Agency of the
  U.S. Government, 1998)

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Why Disability Income Protection?

• Your clients need it!
• - Effect on small business/employment Employees
  who miss work because of injuries or illnesses
  are out an average of 17.1 weeks (Source The
  Gallup Organization CIGNA Integrated Care, 1998)
• - Effect on society Production time lost to
  off-the-job injuries totaled about 160 million
  days, costing the nation at least 159 billion in
  1999 (Source Injury Facts 2000, National Safety
  Council)

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What are your Dreams and Priorities?
Successful Financial Strategy
Pass on Personal and Business Assets
Estate Distribution
- Retirement Plans - Personal Investments -
Savings - Business Ownership
Accumulation
Risk Management
Auto/Home
Life
Health
Property
Insurance
Insurance
Insurance
Insurance
Foundation
Disability Income Insurance
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Are You Protecting the Right Assets?
Potential Earnings to Age 65 (with 5 percent
annual salary increase)
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Are You Protecting the Right Assets?

• In a 1999 survey, 34 of respondents ages 25-60
  had disability insurance, compared to
• 86 for health insurance
• 45 for whole life insurance
• 43 for term life insurance
• (Source Public Opinion Disability Insurance
  (survey of 500 adults), Health Insurance
  Association of America, Public Opinion
  Strategies, 2000)

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Chances of a Disability
What is the chance of having at least one
long-term disability which lasts for three months
or longer before reaching age 65?
Source CIDB Disability Tables CSO
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Chances of a Disability
What is the chance of being disabled for life if
the disability has lasted at least three months?
Source CIDB Disability Tables CSO
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Chances of a Disability

• Approximately 30 of all people 35 65 will
  suffer a disability for at least 90 days, and
  about one in seven can expect to become disabled
  for five years or more. (Source Health Insurance
  Association of America The New York Times,
  February, 2000)
• Someone is injured in a disabling accident every
  2 seconds. (Source Injury Facts, National Safety
  Council, 1999 edition)

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Types of Disability Income Insurance

• Guaranteed Renewable a policy in which coverage
  is guaranteed to a specified age as long as
  premiums are paid. The premium could be changed
  by an insurer for a certain class of individuals
• Non-cancelable with up-to-date payments, the
  insurer cannot cancel the policy, increase the
  premium, or add any provisions or restrictions
• Non-cancelable/Guaranteed Renewable a policy
  which cannot be changed or canceled except for
  non-payment of premiums nor can the policy
  premiums be increased before age 65, regardless
  of changes in income, occupation or health
• Conditionally Renewable policy renewable
  contingent upon proof of medical insurability

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Understanding the Basics

• Benefit Period - how long benefits will be paid
• (X years, to age 65/67/70)
• Elimination Period - how long the insured waits
  before benefits begin (typically anywhere from 30
  days 1 year)
• Benefit Amount - the monthly benefit payable
  under a total disability (based on age,
  employment, salary, policy design, etc.)
• Occupation Class - risk class affecting benefits
  and premium (the more physical the job,
  generally the greater the risk)

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Common Definitions of Total Disability

• Cornerstone of the DI policy providers
  definition determines under what circumstances
  the client receives benefits
• Pure or True Own Occupation (referred to as Own
  Occ or Reg Occ)
• Individual cannot perform substantial/material
  duties of his/her regular occupation
• Own Occupation benefits typically to X years or
  to age 65/67/70
• Modified Own Occupation
• Individual cannot perform the substantial and
  material duties of his/her regular occupation and
  is NOT WORKING in any other occupation

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Any Reasonable/Gainful Occupation

• Usually a qualifier after a 24 or 36 month Own
  Occupation period
• Defined as any occupation which the insured is
  reasonably suited by education, training or
  experience
• May include an income qualifier of 50 or 60 of
  predisability earnings

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Common Definition of Residual Disability

• Able to work but demonstrated loss of income and
  usually a loss of time or duties
• Percent of income lost equals percent of income
  paid
• Ex. a 60 loss of income with a 5,000 monthly
  benefit will result in a 3,000 monthly benefit
• Partial Disability - 50 of benefit payable for 6
  or 12 months

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Predisability Earnings

• Predisability earnings is a factor in determining
  the amount of residual disability benefit
• For individuals, based on income tax returns

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Predisability Earnings

• For businesses, calculated by gross income less
  business expenses
• Highest monthly average for any 12 consecutive
  months of the last 24 months, or the highest 24
  consecutive months (2 years) of the previous five
  calendar years
• Based on a cash or accrual basis
• Indexed on a simple or compounded basis depending
  on the insurance company

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Common Optional Riders

• Automatic Increase Benefits
• Catastrophic Benefits
• Cost of Living Benefits
• Future Insurability Benefits

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Automatic Increase Benefits

• Increases monthly benefit without re-qualifying
  medically
• Exercisable annually
• Usually has an annual increase cap
• Usually exercisable for five years then new
  qualification is needed
• Increases may be compounded or simple

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Catastrophic Benefits

• Generally, two qualifying definitions
• 2 of 5 Activities of Daily Living (ADLs) or
• Presumptive disability with loss of speech,
  hearing in both ears, sight in both eyes or the
  loss of use of any two limbs
• Benefits may increase monthly benefit

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Cost of Living Benefits

• Increase the monthly benefit on each anniversary
• date during the disability
• Can be compounded or simple
• May have an overall cap of two times the monthly
  benefit

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Future Insurability Benefits

• Allows benefits to be increased without
  re-qualifying medically
• Option dates typically can be annually,
  bi-annually or every third anniversary date
• Usually expires between age 51 and 55
• Sometimes has a cap of total benefits

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Common Definition of Accidents and Illnesses

• Accidents
• Directly and independently of all other causes
• Caused by an accidental event
• Accidental bodily injury
• Illness
• Illness commences after the effective date of the
  policy
• Illness manifests itself after the effective date
  of the policy

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Underwriting
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Occupation Classes

• Insuring duties not job titles
• Income level
• Factors affect costs and benefit amounts
• What is your clients day like?
• If any manual duties, what are they and what
  percent of time do they represent?
• Do they have ownership?
• How many employees?

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Medical Underwriting

• Common Concerns
• Musculoskeletal
• Mental/Nervous/Drug/Alcohol
• Stress and anxiety counseling
• Diabetes
• Blood pressure and cholesterol
• Attending Physician Statements
• Blood and Urinalysis

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Financial Underwriting

• Clients net income after business expenses
• Complete the income history including bonus and
  pension contributions
• Include signed tax returns with all schedules for
  business owners
• Unearned income

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Group Long-Term Disability (LTD) Insurance
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Group LTD Myth vs. Facts

• Myth - Its cheaper because its group
• Typically more conservative benefits (often
  caps)
• Group disability after-tax take-home payments
  approximately 40-45 of pre-disability income!
• Pre-existing condition limitations
• Usually shorter insurance duration
• Premiums and benefits can be modified
• Plans can be canceled by employer and not
  portable by employee

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Why Supplement Group LTD with Individual DI
Policies

• Group LTD
• Benefits may be too low
• Benefits are typically taxable
• Rates may not be guaranteed
• Policies usually not portable
• Usually conservative definitions
• Bonus and Pension benefits may not be covered

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Group vs. Individual DI

• Advantages of Group LTD
• Guaranteed issue with minimum participation
  requirement (75 or 25)
• Inexpensive, higher participation
• Advantages of Individual DI
• Portable with discounts
• Can be direct billed to employees
• Can be used to supplement Group LTD, including
  coverage of bonus and commission compensation

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Tax Considerations for Insured

• If Premiums are paid by the Employer,
• Then Benefits are considered taxable income
• If Premiums are paid with Employees pre-tax
  dollars, Then Benefits are considered taxable
  income
• If Premiums are paid with Employees after-tax
  dollars, Then Benefits are received income
  tax-free

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Target Prospects

• The client understands the need compelling
  statistics/high odds general population largely
  underserved, but awareness is growing!
• Everything rides on their ability to earn an
  income
• Age 30 to 45
• Premium at 2 or less of gross income
• Healthy

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Key Policy Differentiators to Look For

• Noncancelable/Guaranteed renewable one or both?
  Standard or additional fee?
• Own Occupation vs. Any Occupation protection
• Definitions of disability (total, residual,
  catastrophic)
• Base policy structure whats included? Base vs.
  Social Insurance Substitute?

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Key Policy Differentiators to Look For

• Premium factors issue age, occupation class,
  benefit and occupation periods, plus cost, cause
  and effects of riders and benefit options (cost
  of living adjustments, etc.)
• Partial, Residual and Loss of income Disability
• Length of Waiting Period
• Length of Benefits

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Key Policy Differentiators to Look For

• Future Increase Options additional fee or free?
  
• Used in combination?
• Inflation Protection
• Premiums waived during disability
• Rehabilitation benefit
• Discounts are they stackable? Are there caps?
• Any discount for mental/nervous riders?

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Part II Overhead Expense Insurance
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How Does Overhead Expense Insurance Work?

• This is a business expense reimbursement policy
• Your client purchases a maximum aggregate benefit
  and is reimbursed for covered expenses until
  maximum is exhausted or he/she is no longer
  disabled
• Some companies limit the total number of months
  benefits will be payable

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Common Definitions of Disability

• Total Disability (i.e. Own Occupation )
• Unable to perform substantial/material duties of
  regular occupation
• Residual Disability
• Able to work but not to full capacity, resulting
  in loss of net income
• Benefits cover loss of net income up to benefit
  maximums
• Loss of Net Income is the amount by which monthly
  gross income is less than covered overhead
  expenses
• Recurrent Disability
• Full or partial benefit paid for specified number
  of months (often 6) or up to aggregate amount if
  previous disability returns and results in total
  disability

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Some Generally Covered Expenses

• Deductible business expenses incurred while
  disabled
• utilities
• rent
• insurance
• taxes
• office expenses
• salaries for administrative employees who do not
  generate income for the business or share the
  same profession as the disabled owner (employee
  salaries in same profession typically by rider)

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Tax Considerations for Insured

• Premiums are deductible (Revenue Ruling 55-264)
• Benefits received are taxable
• Business receives write off for expenses incurred
• Taxation a wash

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Unique Differentiators to Look For

• Carry forward provision allows reserves of any
  unused monthly benefit to be retained for future
  use, up to aggregate amount
• Recovery Benefit provides a percentage of
  benefit if no longer disabled but continue to
  sustain a loss of net income due to the prior
  disability

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Part III Disability Buy-Out Insurance
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How Does Disability Buy-Out Insurance Work?

• Reimburses the nondisabled stockholder(s) or
  entity to buy out the disabled stockholder
  (individual policies on all partners/owners)

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How Does the Policy Pay?

• Definition of disability
• Total disability only
• Own Occ as long as you are not working in the
  company
• 12, 18 or 24-month waiting period
• After disability definition is met, benefit will
  be paid once elimination period is satisfied or a
  Buy-Out expense is incurred
• Payouts can usually be made in a lump sum,
  monthly funding or a combination of the two

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Advantages for the Disabled Owner

• Assures a definite price and buyer under mutually
  agreed upon terms
• No need for the firm to worry about the firms
  ability to meet the buy-out commitment
• Family members can place their efforts on meeting
  the needs of the disabled owner rather than
  protecting the business
• Provides extra cash to help meet the needs that a
  disabling condition can generate

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Advantages to the Active Business Owner(s)

• Assures they have funding for their buy-sell
  agreement to buy-out the disabled owner for a
  predetermined price at a pre-arranged time after
  disability strikes
• Customers, creditors and employees are assured of
  business continuity
• Active owner(s) retain control of the business
  rather than the disabled owners family members
• Competitors cannot buy the disabled owners
  business interest in the firm and force out the
  active owners

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Tax Considerations for Insured

• Premiums are not tax deductible, which means
  benefits are received income tax-free (Revenue
  Ruling 66-262)
• May be a taxable event when the buy-out is
  executed by the entity

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Part IV Selling IDI
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Selling Individual Disability Insurance

• Take the Common Sense Approach Review
  statistics citing high odds of disability and
  potential financial devastation
• Sell the benefits A source of income when needed
  most
• Sell the value What price for peace of mind?
  Just
• 1-3 of annual income today to protect future
  earnings.
• Sell the flexibility Note options available to
  customize for individual needs

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Does Opportunity Exist?

• In 2002, approximately 4 million individual DI
  policies were issued or in-force in America.
  (LIMRA, 2002 IDI Issues and In-Force Survey)
• According to LIMRA, 10 of U.S. households have
  an annual income of 75-100,000. This
  upper-middle market is considered a forgotten
  target market yet as a group places more
  emphasis on protecting family income due to death
  or disability than does the traditional middle
  market. (LIMRA, 2003)

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Does Opportunity Exist?

• According to the U.S. census, there are
  105,480,101 total households. (U.S. Census, 2000)
  If so, then 10 10.5 million households in the
  upper-middle market.
• According to LIMRA, only 25 of this forgotten
  market has long-term disability income insurance
  which means 75 or nearly 8 million
  upper-middle households do not! IF there was
  only ONE adult in these nearly 8 million
  households, that could mean 8 million potential
  DI customers!

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Thank You
Principal Life Insurance Company Des Moines, IA
50392 Approval 641092005