DI Sales Hobbled By Cost Misperceptions

By Cyril Tuohy

A pair of executives said that the disability insurance industry and financial advisors must do a better job of educating small business owners and workers about the value of long-term disability (LTD) insurance, which suffers from misconceptions about cost.

Richard P. McKenney, president and CEO of Unum Group, said in a conference call that small employers need to grasp the value of disability coverage and the financial implications for businesses not offering disability coverage.

“The ability to earn a living — our income — is the most valuable asset we have, and protecting that asset is increasingly important,” McKenney said. “Small employers can play a significant role in helping their employees insure against some very real risks to their financial stability.”

The call coincided with the release of findings from a survey of 504 benefits decision-makers working for companies with between 10 and 99 employees.

The April survey, conducted by Matthew Greenwald & Associates on behalf of Unum Group and the Consumer Federation of America (CFA), was released Monday. Executives at Unum and the CFA held a conference call to announce the results.

One of the survey’s most striking findings was the bifurcation between employers who offer LTD and those who don’t.

When asked why their companies did not offer LTD, 64 percent of the decision-maker respondents said it was because LTD was too expensive. Among employers that offer LTD, 86 percent of decision-makers said employees value and appreciate the benefit.

“In general, group disability insurance serves the interests of small employers and their employees,” Stephen Brobeck, executive director of the CFA, said in a news release. “By making this insurance available, employers help protect the personal income needed by consumers.”

LTD typically replaces 60 percent of lost income due to a disability. In 2012, nearly one in three U.S. workers were offered employer-sponsored group LTD, according to the Bureau of Labor Statistics.

Despite being offered LTD, many employees decline the coverage. Separate U.S. government surveys show that many of today’s young adults will become disabled at some point during their working lives due to illness.

Disability claims payments in 2013 came to $9.8 billion, an increase of 1.6 percent over 2012, and 56 percent of the 150,000 new disability claimants were women, according to data by the Council For Disability Awareness.

The survey also found that employers who do not offer LTD assume the cost of offering the coverage is higher than it really is.

Of the employers offering LTD, respondents said that the median price range of LTD was between $20 and $29 a month, while among those respondents with employers that did not offer LTD, the median price range of LTD was assumed to be between $30 and $39 a month, the survey found.

Group LTD is much cheaper than individual LTD.

While experts have often been flummoxed by the inability — or unwillingness — of so many people to insure their incomes, disability insurance agents say demands on a business’s cash flow make it difficult to pay for disability coverage.

Robert Wesley Shannon, a certified financial planner (CFP) and a disability insurance expert in Hurst, Texas, said that the perception that LTD is higher than is really is, isn’t a happenstance of coincidence.

Years ago, insurance agents sold as much disability insurance as they could and carriers weren’t shy about advertising how much disability coverage they underwrote.

During disability insurance seminars, it wasn’t unusual for agents to talk about disability premiums costing as much as 5 percent of salary, “but nobody would take a 5 percent pay cut.”

“That’s why it’s perceived to be expensive and agents often don’t do a needs analysis, that’s my theory,” he said.

For employees, giving up as much as 5 percent of income for a lifetime LTD policy loaded with bells and whistles — gold-plated coverage, no doubt — meant many employees were overinsured for protection for which many never completely took advantage.

Disability was sold as, “Why would you not want anything less than the maximum disability income benefit,” Shannon said in an interview with InsuranceNewsNet.

He said that over time employees found they could go without income for 90 days or more, or could rely on their spouse’s income until they returned to work, or only needed to replace 25 percent or 30 percent of income to carry them until they returned to work full time.

Sometimes, business owners only needed their LTD policy to last five years, or until the owner retired and sold the business. “I think a good plan can be structured with 1 percent or 2 percent of income,” Shannon said.

Unlike life insurance, LTD insurance may never pay. An expensive life insurance policy will always pay off in the end through the death benefit, even if the policyholder doesn’t benefit.

But with disability insurance, similar to long-term care insurance, the policyholders don’t benefit unless they become disabled.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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 [email protected].