Fissures In Disability Insurance Coverage Detected

By Cyril Tuohy

InsuranceNewsNet

With all the attention paid to health insurance reform, the coming retirement income squeeze and astronomical costs associated with long-term care, securing income protection through disability coverage barely registers.

It’s as if disability insurance has become the industry’s forgotten stepchild. Yet ignoring that coverage may come back to haunt consumers who give it no heed, according to experts cited in a new report seeking to raise awareness about the importance of disability insurance.

“It’s not something the employee is looking out for and it’s not something the employer is looking to highlight,” said Scott Maker, senior vice president of government affairs for Unum.

But it’s time that attitude changes, according to the Advisory Council on Employee Welfare and Pension Benefit Plans. The council's report, “Managing Disability Risks in an Environment of Individual Responsibility,” was recently delivered to former U.S. Labor Secretary Hilda L. Solis.

The report concludes that access to long-term disability benefits is important because workers are more likely to suffer from disability during their working lives. Because of gaps in disability insurance coverage, 68 percent of workers will not have enough protection to provide an adequate living if they are unable to work.

“Despite the importance of this type of coverage, most workers are unfamiliar with it,” Stephen J. Mitchell, senior vice president of integrated underwriting for Unum, said in prepared testimony to the Advisory Council.

Exerting further pressure on disability claims is a progressively graying workforce, and older workers remaining on the job longer in order to be able to afford retirement, Maker explained. The erosion of defined contribution plans and the likelihood of developing a disability due to chronic illness have conspired to raise the risk that far more people are likely to file a disability claim than they realize.

One out of four of today’s 20-year-olds will become disabled before reaching age 67, and one in seven workers can expect to be disabled for five years or longer, according to disability statistics kept by the Social Security Administration.

In fact, the bulk of disability claims, as many as 90 percent, are related to chronic conditions like musculoskeletal disorders, nervous system disorders, cardiovascular complications and cancer, not to on-the-job injuries, according to the Council for Disability Awareness.

Combined with the “fragility of most American families,” exemplified by the paycheck-to-paycheck cycle and razor-thin savings to which many households are accustomed, “it’s a bad combination if people find themselves unable to work,” Maker said in an interview with InsuranceNewsNet.

Under defined benefit programs, workers accrue benefits when on disability and workers could rely on company-paid insurance to provide 100 percent income protection, which is why many workers often didn’t pay much attention to the coverage, Maker said.

Under defined contribution plans, however, long-term disability coverage isn’t integrated into the plan, and income protection is voluntary. The employee is free to sign up under group long-term disability or decline coverage.

David Stapleton, director of the policy think tank Mathematica Policy Research, said the nation’s disability income safety net is failing. In 1989, the mean income of households headed by working-age people with disability was 63 percent of that for working-age households. By 2009, that figure had dropped to 52 percent, he testified.

The report concludes that the government should embark on an awareness campaign to educate people on the need for disability coverage. “Further outreach to plan sponsors is also needed addressing key issues with regard to the design of disability benefit plans to replace income while minimizing the likelihood of derailing retirement income savings,” the report concluded.

Selling disability insurance, however, may be even more challenging than analyzing the shortcomings of the coverage. Disability insurance agents, for example, often cite prospects who think of themselves as bulletproof and believe that disabilities won’t befall them.

A joint Consumer Federation of America-Unum survey conducted last year found that many employees don’t understand the reasons for disability that result in time away from work, underestimate the extent to which workers will miss work, and know little about group disability insurance.

Yet, when the role of disability insurance is explained to them, employees changed their tune. Seventy-six percent said it is a good idea for employers to automatically enroll employees in a disability insurance program, the survey found.

Cyril Tuohy is a writer living in Pennsylvania. He has covered the financial services industry for more than 15 years. He has also written about food, restaurants and travel. He can be reached at Cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.