RISKY BUSINESS: LACK OF LONG-TERM DISABILITY COVERAGE [Rough Notes]

A disability can destroy family finances, but a Sun Life survey shows that many employees decline LTD coverage

If you knew that you were three times more likely to experience a long-term disability before age 65 than you were to die, you'd waste no time signing up for the long-term disability coverage offered at your workplace-or would you?

According to a study released in May by Sun Life Financial, Inc., the answer is "Probably not."

The survey was conducted for Sun Life by Kelton Research, which surveyed more than 2,000 full-time workers across the country to gauge their attitudes and choices with respect to the purchase of long-term disability insurance at the workplace.

According to the report, 61% of the workers surveyed did not purchase long-term disability insurance that was offered to them at their workplace. Most of these workers who refused the coverage did not have long-term disability coverage elsewhere. What factors account for this apparent disinterest in buying a product that safeguards a family's income from the potentially devastating impact of a long-term disability?

The title of the survey report aptly frames the issue: "Will workers in America hope to dodge the bullet, remain blind to the risks, or simply hide? Perceptions, misconceptions, and best practices about long-term disability."

The survey results suggest that a significant proportion of the American workforce remains unprepared for the shifttoward voluntary benefits, in which employers are giving workers the responsibility for deciding whether to buy benefits like life, disability, dental, and vision insurance. The study report cites a 2011 LIMRA survey finding that almost one-third of employers are considering offering employees voluntary benefits to replace existing benefits that are paid entirely or in part by the employer.

Although most voluntary products are offered at group rates, employees still are bearing an increased share of the cost of benefits. And to make appropriate choices for themselves and their families, workers must understand the key features of each product: scope of coverage, limits, exclusions, deductibles, co-pays, and age restrictions, to name a few.

For employees who are accustomed to just signing forms to enroll in their company's group health and life insurance plans, mastering the details of voluntary products can be a daunting challenge. Most American workers have adjusted to the shiftfrom traditional pension plans to 401(k) retirement plans, but the world of voluntary benefits is still uncharted territory for many employees, and the Sun Life study suggests that this lack of familiarity is a key factor in the decision not to purchase group longterm disability.

"We must educate the U.S. work force to understand the financial risks of long-term disability and learn best practices to mitigate their risks," says Robert E. Klein Jr., Sun Life's vice president of voluntary benefits.

To underscore the point, Klein cites the "barbecue test," which the study report uses to illustrate the odds that a given couple will experience a serious disability during their working years.

"If 10 couples gather for a barbecue, at least three of them likely will have a partner who experiences a disability lasting one year or longer before age 65," Klein says. According to Sun Life's estimate, that's almost three times as likely to happen as dying, yet most employees decline the opportunity to purchase group LTD on either a voluntary or supplemental basis.

Gambler, mole, or ostrich?

Employees who decline to buy voluntary group long-term disability coverage, the study report says, fall into three categories:

The Gambler doesn't think the risk of a disability justifies the cost of premiums.

The Mole hasn't considered the issue and so remains "blind" to the risks and solutions.

The Ostrich finds the thought of disability too unpleasant to face and simply ignores the risk.

In the wake of the 2008 financial meltdown, the collapse of the residential real estate market, and cuts in working hours, pay, and benefits, many American families are struggling to stay afloat financially. Exacerbating these challenges are skyrocketing college costs, tighter consumer lending standards, and the looming threat of a double-dip recession.

In light of these harsh realities, it's understandable from a shortterm perspective that many workers are choosing to go without long-term disability insurance, even when it's available from their employer at group rates. With household budgets already strained, the coverage may look like a pricey extra rather than a vital form of protection. As the Sun Life study shows, however, the decision to "save" money today can have a devastating impact on family finances if a wage earner becomes seriously disabled.

Citing a number of studies, the report states: "In the United States, medical problems contribute to 62% of all personal bankruptcies and 50% of all foreclosures."

The report continues: "The financial risk for a worker disabled for one year without the protection of disability insurance would be the loss of a year's salary. Almost half (48%) of our surveyed workers concluded that losing one year's salary would seriously impact their retirement."

Many employees turn down longterm disability coverage but place high importance on having dental and life insurance. The report puts this choice in stark perspective:

"A worker has a strong probability within a given year of experiencing a dental issue, which without dental insurance might cost an estimated $600. In contrast, although disability occurs less frequently, for a worker earning a salary of $50,000 without long-term disability insurance, the estimated financial loss from a oneyear disability is far greater: $50,000."

Comparing the risk of dying to the risk of disability, the report notes: "Although the financial loss to a family from dying is normally far greater than from a one-year disability, the probability of someone suffering a oneyear disability is nearly three times as likely as dying."

Klein suggests that employees who place a higher value on dental insurance than on LTD may be basing their decision on the perceived tangibility of the dental product. "People go to the dentist every six months to have their teeth checked and cleaned, or to have a cavity filled, so they think it makes sense to have dental insurance because they use it routinely," Klein observes. "If they didn't have the coverage, they might pay $500 or $600 a year for dental services. With disability, even though going without coverage is putting so much more at risk in terms of dollar value, the chance of becoming disabled seems remote to many people."

Among the respondents who declined to purchase long-term disability insurance, the survey shows that many based their decision on misconceptions about the coverage, the elimination period, the availability of Social Security Disability Insurance (SSDI), and how long after a disability their group health insurance will remain in force before they must switch to COBRA and pay the full premium.

Access and education

"For me, there are two key takeaways from the survey," Klein remarks. "First is the issue of access. Many employers don't offer long-term disability coverage on either a voluntary or supplementary basis. Second, among the employees who do have access, many don't see the value of the coverage."

These findings, Klein says, present challenges for insurers like Sun Life. "How do we reach employers and help them understand that access is important? And for employers that do offer access, how can we do a better job of educating employees about the risks of long-term disability and the value of the product in dollars?"

Because the employer decides what voluntary group products to offer, Klein says, "The employer can play a big role as the access point. Some employers may not realize that they don't have to pay for the products and think they can't afford to offer them. That's one reason so many workers don't have access to long-term disability insurance. We explain the concept of voluntary benefits, where the employee pays for the product and the employer serves as the access point. The employer isn't financing the benefits; it's facilitating the purchase of products by employees," Klein says. He notes another advantage for the employer: "A robust benefits package that includes voluntary long-term disability insurance is a powerful tool for attracting and retaining good employees.

For employees, Klein observes, access to voluntary group benefits has a number of important advantages. "First, group-based products are less expensive than individual products. Second, it's easier to qualify for the coverages because, in most cases, the products are offered on a guaranteed issue or simplified issue basis. If you apply for long-term disability insurance on your own, you're going to be fully underwritten," Klein says.

As noted earlier, most employees have become comfortable with the 401(k) retirement plans that have replaced many traditional pension plans, and they feel more confident about choosing the investment options that meet their needs. They can meet with plan representatives at work and obtain information online, by phone, or in printed materials that are distributed at work.

In the same way, Klein points out, voluntary products are available and accessible at work, and premiums can be paid via payroll deduction. As with their 401(k) plan, employees can use resources provided by the insurer to help them make informed choices.

Support for brokers

At Sun Life, Klein explains, "We're a third-party distribution company, so we work through brokers. We have a large, strong force of group representatives that is experienced in selling both traditional and voluntary products, including long-term and short-term disability. To bolster our efforts to educate our brokers about voluntary benefits, we've assembled a specialist voluntary sales force," Klein says. "We now have 17 external and six internal salespeople who spend every day helping our brokers become knowledgeable about our portfolio of voluntary products. These representatives are available to accompany the broker in making a presentation to an employer."

In June, Sun Life introduced a suite of short-term and long-term voluntary group disability products that allow employees to select either a dollar amount or a percentage of salary to replace a portion of income in case of disability, and to choose the elimination period that meets their needs.

Klein and his colleagues on the Sun Life management team clearly believe that for group voluntary benefits, the future is now, especially when it comes to long-term disability. With its multi-front initiative, the insurer seems determined to turn those gamblers, moles, and ostriches into educated buyers of vital protection for their families.

"We must educate the U.S. work force to understand the financial risks of long-term disability and learn best practices to mitigate their risks."

-Robert E. Klein Jr.

Vice President of Voluntary Benefits Sun Life Financial

By Elisabeth Boone, CPCU