Selling DI: Easier Said Than Done

By Cyril Tuohy

Despite a push by the head of the Consumer Federation of America to get advisors to sell more disability insurance, advisors say that selling the coverage is easier said than done.

Earlier this month, the president and CEO of UNUM Group and the executive director of the Consumer Federation of America urged insurance agents and financial advisors to help protect employee incomes by selling more disability insurance.

But was this captain of industry and master of public policy simply ignoring market reality?

Agents say that one obstacle in selling disability insurance is that the coverage is perceived to be more expensive than it really is.

Another issue is that small businesses typically don’t provide employer-sponsored disability insurance coverage. Even when a disability program commands the attention of the business owner, competing priorities for a business’s cash flows means disability coverage sinks to the bottom of the to-do list.

Agents also say that, in the past, insurance carriers sold more disability insurance than people really needed. However, that was also a time when chronic illnesses hadn’t infiltrated the workplace to the degree that they do now.

Group disability insurance is where the bulk of employees are likely to be covered if their respective employers even provide the benefit and if the employee decides to opt in for disability insurance at all. So where do things stand with regard to group disability insurance pricing?

Group disability insurance is relatively inexpensive, cheaper than life insurance and certainly cheaper than primary medical insurance.

In a February analysis of the disability insurance market, U.S. Bureau of Labor Statistics (BLS) economist Kristen Monaco calculated that short-term and long-term disability insurance costs an employer $624 a year for a full-time worker putting in 2,080 hours of work annually.

She also calculates that for private-sector workers, disability insurance costs about 15 cents per hour worked for short-term disability, and another 15 cents per hour worked for long-term disability.

Monaco found that the 30 cents per hour worked to pay for short- and long-term disability insurance to all private-sector workers comes to about 1 percent of total compensation costs.

Monaco also estimates that 51 percent of all workers have no access to disability insurance because the employer has cut benefits in the wake of the financial crisis or has opted not to offer disability insurance in the first place.

Short-term disability plans are intended to replace lost wages for a fixed time period, the median length of which is 26 weeks or six months. Median salary replacement for short-term plans is 60 percent, a rate that has remained the same for many years.

Monaco wrote that among workers covered by a short-term disability plan, 75 percent have a plan with a maximum benefit amount. Among plans with maximum payout provisions, the median amount that a worker would be eligible to receive was $584 in March 2014, she wrote.

Monaco also wrote that among workers covered by a long-term disability insurance plan, 95 percent had plans that cover a fixed percentage of annual earnings and the median amount covered by long-term plans is 60 percent of annual earnings.

Most long-term plans have a maximum amount payable and that the median maximum payout last year was $8,000 per month, she wrote.

Kathy Plummer, director of Product and Market Development for Unum Group, estimates that the price of a group long-term disability program has gone up only by about 12 percent over the past 10 years.

Some plans have gone up by more than 12 percent in 10 years, other plans have gone up by less. “Of course, each policy is going to be different and it depends on the experience of the policy,” Plummer said in an email response to questions from InsuranceNewsNet.

Plummer said that some long-term disability plans offer limited durations of, say, two years, five years or up to age 65 or normal Social Security retirement age. But the more flexibility in a disability plan, the more difficult it is to stay within a tight pricing range.

A lot of choice “is not always the best for employees,” Plummer said. “Numerous studies on how consumers purchase and make buying decisions indicate that having lots of choices can be confusing and actually may cause employees not to purchase as a result.”

Based on 2012 BLS statistics of full-time workers making an average of $48,172 annually, Plummer said that, on average, a fully-funded employer-paid long-term disability plan costs about $230 to $245 a year for a plan that replaces 60 percent of a full-time worker’s salary with an average duration to retirement age.

Voluntary long-term disability plans might cost between $300 to $400 annually depending on plan design, the state and the industry, she also said.

Whether cheap or not, disability insurance premium growth has not been robust for all disability carriers since the financial crisis when employers slashed payrolls, trimmed benefits and shifted a higher portion of medical costs onto employees.

In 2013 short- and long-term disability in-force premium reached $14.1 billion, a 2 percent increase over 2012, according to Gen Re’s 2013 U.S. Group Disability and Group Term Life Survey. The survey covered 34 insurance carriers representing 95 percent of the group disability insurance marketplace.

Certified Financial Planner Robert Wesley Shannon, founder of SJK Financial Planning in Hurst, Texas, in an April interview with InsuranceNewsNet, called selling disability insurance to small-business owners a “complicated sale.”

Selling a disability insurance program demands understanding the needs of the business owner and helping underwriters navigate a thicket of income statements and tax returns. “Not many insurance agents are up to speed with that kind of sale,” he said.

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].