Keep Long-Term Disability From Derailing Retirement

A new concept known as group long-term disability insurance just might give agents a solid, revenue-generating product to add to their arsenal.

The new insurance offering is meant to protect employees by maintaining their retirement contributions while they are off work due to a disability. According to the Employee Retirement Income Security Act, employees on long-term disability and no longer on the company payroll are barred from contributing to their 401(k) retirement accounts.

For those employees who spend years away from work, their retirement accounts and retirement readiness are severely affected, Larry Walters said. He is the founder and owner of Diversified Growth Solutions, a Phoenix-based actuarial marketing and consulting business.

Walters is co-presenting a session today at the LIMRA 2016 Retirement Industry Conference in Boston. He and Andrew Peterson, senior staff fellow at the Society of Actuaries (SOA), will discuss “Mind the Gap: Disability Risk in a Defined Contribution World.”

“Literally, under a defined contribution plan, when you become disabled, so does your plan accumulation,” Walters said. “If you never recover, your retirement plan - should you live to normal retirement age - is going to be hair-cutted dramatically.”

The conference, hosted by LIMRA LOMA Secure Retirement Institute and the SOA, will focus on the latest market research, product development trends and innovative approaches to address the top challenges facing retirees and the industry as a whole.

Missed the Boat

One in four 20-year-old workers will end up on long-term disability before they hit retirement age, according to the Council for Disability Awareness.

A 40-year-old worker with a $100,000 salary will lose $73,700 of retirement income if he or she spends one year on long-term disability, Walters said. That figure climbs to nearly $211,000 if they are out of work for three years.

Pension Advisory Group in Richmond, Texas, and Pro Financial Services in Chicago, Ill., are offering what they call Retirement Income Assurance Policy (RIAP). The financial giant Lloyd’s of London is the insurer for the product, said Walters, a consultant to Pension Advisory Group.

The need for group long-term disability insurance can be traced to development of the Employee Retirement Income Security Act of 1974 (ERISA). The federal law set minimum standards for most voluntarily established retirement and health plans in private industry.

But the plans did not account for continued saving while employees were off on long-term disability, Walters said.

“We missed it,” he said of the oversight. “People’s retirement plans should not be disadvantaged in any untoward way from a disability that is not in their control.”

The RIAP policy includes a market-rate annuity held in a bank custodial account on behalf of the individual until he or she reaches age 65. If the worker becomes disabled, the annuity pays a stream of income to them at retirement to fill in the DC plan gap.

Under this plan, if a person passes away before reaching the normal retirement age, his or her family receives the benefits.

Sales Opportunity

Disability insurance has been a tough sell for agents. And a disability retirement insurance product might not seem like an attractive option, but Walters said some aspects will make it an appealing for agents and employers.

Cost, for one.

“That Lloyd’s gave us volume-based pricing at the front end of the process makes it economical,” he said. “In most of the accounts we’ve worked on, this would be the least expensive employee benefit that (employers) would provide.”

For agents, it’s an opportunity to sell a significant benefit to major corporate clients. And once a benefit is on the books, it likely becomes a permanent part of the company culture, Walters said.

“It wouldn’t make a difference if defined contribution plans weren’t so prevalent,” he added. “But they’re everywhere. From the employer retention and recruiting and rewarding aspect, it’s important.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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