Sales of individual guaranteed renewable disability insurance policies have been holding up well during the recession, and are expected to grow at an attractive clip. Higher-income individuals are also buying bigger-ticket policies.
Over the past four years, sales of individual guaranteed renewable coverage grew at an annual rate of 5 percent to $211 million in 2008,according to according to insurance trade group LIMRA. Sales of group coverage, as well as non-cancelable individual coverage, declined in the first quarter, but remained up about 10 percent over the same period.
Karen Terry, manager of individual product research at LIMRA, believes more will get disability coverage as the economy improves. There are big opportunities because it is a concentrated market with few carriers and products. “There has been success in niche markets, such as multi-life,” she says. Multi-life coverage enables people to purchase individual disability coverage to supplement group coverage. Meanwhile, disability insurance premiums increased 3 percent on guaranteed renewable policies in the first quarter of 2009, according to LIMRA, Windsor, Conn.
A “guaranteed renewable” policy is a lower-cost policy that can’t be canceled by the insurance company as long as premiums are paid. Premiums can be raised, however, for an entire class of policyholders. By contrast, non-cancelable coverage is more costly because it can’t be canceled and the premiums are guaranteed not to increase.
The market for disability insurance is huge. Some 110 million Americans lack long-term disability insurance coverage, according to the National Association of Insurance Commissioners, Kansas City, MO. Yet one of five to seven persons could become disabled due to illness or injury over the next one to five years, according to a new study called, “The Impact of Disability.” The study was conducted by Milliman, a New York based actuarial consulting firm, and sponsored by The Life and Health Insurance Foundation for Education and American’s Health Insurance Plans.
Almost one-third of workers say they would have a difficult time supporting themselves in the event of disability in the current job market, according to the study. And 74 percent say they would face financial problems after six months of a disability. Consumer concerns over their livelihoods have increased the awareness of the need for income protection.
Meanwhile, sales commissions are attractive for disability insurance. Depending on the insurance company, the agency and the broker-dealer, a producer can get about 45 percent to 70 percent of premiums paid over the first few years of a group policy and trailing commissions of 17.5 percent. On the individual side, first-year commissions can run to 100 percent. Renewal commissions from years 2 though 10 are around 17.5 percent. After that, trailing commissions run about 5 percent.
Terry says middle-age individuals are typically the biggest buyers of coverage. Premiums, on average, run about $2,000 annually for individual non-cancelable coverage and $600 for guaranteed renewable coverage. But there may be a growing market for young professionals. In April, Berkshire Life expanded eligibility for a program that allows soon-to-be professionals to obtain individual disability coverage based on future earnings. Their monthly income protection benefit can range from some $1,000 for certain graduate school student categories to as much as $7,500 for qualifying first-year medical and dental students.
“A good connection with these young professionals can lead to sales of disability, life insurance and investment management services,” Berkshire Life’s Gottfried says.
Although there is a large need for coverage, disability insurance isn’t an easy sale. People resist because they believe disability can’t happen to them. They also think that workers compensation or social security disability protection is sufficient. But the Milliman study suggests it is difficult to qualify for worker’s comp or social security benefits. Workers’ compensation insurance is limited to disabilities that occur on the job, but a vast majority (90 percent) occurs outside the workplace. Meanwhile, in recent years, only about 45 percent of initial applications for social security benefits have been approved, and the average monthly benefit, $1,062, is barely above the poverty level.
Disability insurance expert, Matthew Tassey, past chairman of the Life and Health Insurance Foundation for Education, Portland, ME, stresses the importance of examining the financial strength of the insurance company, the nature of products on the shelf as well as finding a knowledgeable wholesaler. “It is a different sale than a life insurance sale,” he says. “Coverage is limited to 60 percent of a person’s income. It is based on a person’s age, occupation and ability to work,”
There are several factors to consider when evaluating disability insurance policies for clients. For one thing, if a client obtains coverage via an employer, typically, the coverage is not portable. Also, taxes are owed on any disability income. By contrast, individual disability coverage is purchased with pretax dollars so disability income is not taxed.
Other points to consider:
· Disability insurance typically covers 40 percent to 60 percent of individual’s earnings at the time of purchase. Coverage ranges from five years to age 65.
· Policyholders have a choice of waiting 30 days, 90 days or six months after a disability to receive income protection. Premiums differ accordingly.
· Some policies pay if a policyholder is unable to perform duties of his or her own occupation. Others pay only if the policyholder can’t work at any occupation for which he or she is reasonably qualified. Some polices only cover disability for an accident--not illness.
· Evaluate whether a policy covers a total or partial disability.
· Determine if a policy offers “residual benefits,” which lets a policyholder collect partial benefits if the disability limits work to part-time.
· Determine if the policy offers inflation protection so benefits will increase over time.
· Analyze whether it’s best to get guaranteed renewable or non-cancelable coverage.