IDI 101 Introduction to Individual Disability Insurance

1. IDI 101Introduction to Individual Disability Insurance

2. Part I ~ Disability Income (DI) Insurance

3. Why Disability Income Protection? • Your clients need it! During the course of your career, you are three and a half times more likely to be injured and need disability coverage than you are to die and need life insurance (Source: Health Insurance Association of America, 2000.) Most people have savings to cover less than six months of expenses (Source: Business Almanac, 1997)

4. Why Disability Income Protection? • Your clients need it! - Effect on the client: Income lost through disability is 2 times as great as auto accident losses and 3 times as great as fire losses (Source: Field Guide 2001) - Effect on the family: 48% of all home foreclosures are the result of disability (Source: Housing and Home Finance Agency of the U.S. Government, 1998)

5. Why Disability Income Protection? • Your clients need it! • - Effect on small business/employment: Employees who miss work because of injuries or illnesses are out an average of 17.1 weeks (Source: The Gallup Organization; CIGNA Integrated Care, 1998) • - Effect on society: Production time lost to off-the-job injuries totaled about 160 million days, costing the nation at least $159 billion in 1999 (Source: Injury Facts 2000, National Safety Council)

6. Successful Financial Strategy What are your Dreams and Priorities? Pass on Personal and Business Assets Estate Distribution - Retirement Plans - Personal Investments - Savings - Business Ownership Accumulation Risk Management Auto/Home Life Health Property Insurance Insurance Insurance Insurance Foundation Disability Income Insurance

7. Are You Protecting the Right Assets? Potential Earnings to Age 65 (with 5 percent annual salary increase)

8. Are You Protecting the Right Assets? In a 1999 survey, 34% of respondents ages 25-60 had disability insurance, compared to: • 86% for health insurance • 45% for whole life insurance • 43% for term life insurance (Source: Public Opinion: Disability Insurance (survey of 500 adults), Health Insurance Association of America, Public Opinion Strategies, 2000)

9. Chances of a Disability What is the chance of having at least one long-term disability which lasts for three months or longer before reaching age 65? • Source: CIDB Disability Tables; CSO

10. Chances of a Disability What is the chance of being disabled for life if the disability has lasted at least three months? Source: CIDB Disability Tables; CSO

11. Chances of a Disability • Approximately 30% of all people 35 – 65 will suffer a disability for at least 90 days, and about one in seven can expect to become disabled for five years or more. (Source: Health Insurance Association of America; The New York Times, February, 2000) • Someone is injured in a disabling accident every 2 seconds. (Source: Injury Facts, National Safety Council, 1999 edition)

12. Types of Disability Income Insurance • Guaranteed Renewable: a policy in which coverage is guaranteed to a specified age as long as premiums are paid. The premium could be changed by an insurer for a certain class of individuals • Non-cancelable: with up-to-date payments, the insurer cannot cancel the policy, increase the premium, or add any provisions or restrictions • Non-cancelable/Guaranteed Renewable: a policy which cannot be changed or canceled except for non-payment of premiums – nor can the policy premiums be increased before age 65, regardless of changes in income, occupation or health • Conditionally Renewable: policy renewable contingent upon proof of medical insurability

13. Understanding the Basics • Benefit Period - how long benefits will be paid (X years, to age 65/67/70) • Elimination Period - how long the insured waits before benefits begin (typically anywhere from 30 days – 1 year) • Benefit Amount - the monthly benefit payable under a total disability (based on age, employment, salary, policy design, etc.) • Occupation Class - risk class affecting benefits and premium (the more “physical” the job, generally the greater the risk)

14. Common Definitions of Total Disability • Cornerstone of the DI policy ~ provider’s definition determines under what circumstances the client receives benefits • Pure or True “Own Occupation” (referred to as Own Occ or Reg Occ) • Individual cannot perform substantial/material duties of his/her regular occupation • “Own Occupation” benefits typically to X years or to age 65/67/70 • Modified Own Occupation • Individual cannot perform the substantial and material duties of his/her regular occupation and is NOT WORKING in any other occupation

15. Any Reasonable/Gainful Occupation • Usually a “qualifier” after a 24 or 36 month Own Occupation period • Defined as any occupation which the insured is reasonably suited by education, training or experience • May include an income qualifier of 50% or 60% of predisability earnings

16. Common Definition of Residual Disability • Able to work but demonstrated loss of income and usually a loss of time or duties • Percent of income lost equals percent of income paid • Ex.: a 60% loss of income with a $5,000 monthly benefit will result in a $3,000 monthly benefit • Partial Disability - 50% of benefit payable for 6 or 12 months

17. Predisability Earnings • Predisability earnings is a factor in determining the amount of residual disability benefit • For individuals, based on income tax returns

18. Predisability Earnings • For businesses, calculated by gross income less business expenses • Highest monthly average for any 12 consecutive months of the last 24 months, or the highest 24 consecutive months (2 years) of the previous five calendar years • Based on a cash or accrual basis • Indexed on a simple or compounded basis depending on the insurance company

19. Common Optional Riders • Automatic Increase Benefits • Catastrophic Benefits • Cost of Living Benefits • Future Insurability Benefits

20. Automatic Increase Benefits • Increases monthly benefit without re-qualifying medically • Exercisable annually • Usually has an annual increase cap • Usually exercisable for five years then new qualification is needed • Increases may be compounded or simple

21. Catastrophic Benefits • Generally, two qualifying definitions • 2 of 5 Activities of Daily Living (ADL’s) or • Presumptive disability with loss of speech, hearing in both ears, sight in both eyes or the loss of use of any two limbs • Benefits may increase monthly benefit

22. Cost of Living Benefits • Increase the monthly benefit on each anniversary date during the disability • Can be compounded or simple • May have an overall cap of two times the monthly benefit

23. Future Insurability Benefits • Allows benefits to be increased without re-qualifying medically • Option dates typically can be annually, bi-annually or every third anniversary date • Usually expires between age 51 and 55 • Sometimes has a cap of total benefits

24. Common Definition of Accidents and Illnesses • Accidents • Directly and independently of all other causes • Caused by an accidental event • Accidental bodily injury • Illness • Illness commences after the effective date of the policy • Illness manifests itself after the effective date of the policy

25. Underwriting

26. Occupation Classes • Insuring duties not job titles • Income level • Factors affect costs and benefit amounts • What is your client’s day like? • If any manual duties, what are they and what percent of time do they represent? • Do they have ownership? • How many employees?

27. Medical Underwriting • Common Concerns • Musculoskeletal • Mental/Nervous/Drug/Alcohol • Stress and anxiety counseling • Diabetes • Blood pressure and cholesterol • Attending Physician Statements • Blood and Urinalysis

28. Financial Underwriting • Client’s net income after business expenses • Complete the income history including bonus and pension contributions • Include signed tax returns with all schedules for business owners • Unearned income

29. Group Long-Term Disability (LTD) Insurance

30. Group LTD – Myth vs. Facts • Myth - “It’s cheaper because it’s group” • Typically more conservative benefits (often % caps) • Group disability after-tax take-home payments = approximately 40-45% of pre-disability income! • Pre-existing condition limitations • Usually shorter insurance duration • Premiums and benefits can be modified • Plans can be canceled by employer and not “portable” by employee

31. Why Supplement Group LTD with Individual DI Policies Group LTD • Benefits may be too low • Benefits are typically taxable • Rates may not be guaranteed • Policies usually not portable • Usually conservative definitions • Bonus and Pension benefits may not be covered

32. Group vs. Individual DI • Advantages of Group LTD • Guaranteed issue with minimum participation requirement (75% or 25%) • Inexpensive, higher participation • Advantages of Individual DI • Portable with discounts • Can be direct billed to employees • Can be used to supplement Group LTD, including coverage of bonus and commission compensation

33. Tax Considerations for Insured • If Premiums are paid by the Employer, Then Benefits are considered taxable income • If Premiums are paid with Employee’s pre-tax dollars, Then Benefits are considered taxable income • If Premiums are paid with Employee’s after-tax dollars, Then Benefits are received income tax-free

34. Target Prospects • The client understands the need – compelling statistics/high odds; general population largely underserved, but awareness is growing! • Everything rides on their ability to earn an income • Age 30 to 45 • Premium at 2% or less of gross income • Healthy

35. Key Policy Differentiators to Look For • Noncancelable/Guaranteed renewable – one or both? Standard or additional fee? • Own Occupation vs. Any Occupation protection • Definitions of disability (total, residual, catastrophic) • Base policy structure – what’s included? Base vs. Social Insurance Substitute?

36. Key Policy Differentiators to Look For • Premium factors – issue age, occupation class, benefit and occupation periods, plus cost, cause and effects of riders and benefit options (cost of living adjustments, etc.) • Partial, Residual and Loss of income Disability • Length of Waiting Period • Length of Benefits

37. Key Policy Differentiators to Look For • Future Increase Options – additional fee or free? Used in combination? • Inflation Protection • Premiums waived during disability • Rehabilitation benefit • Discounts – are they stackable? Are there caps? Any discount for mental/nervous riders?

38. Part II ~ Overhead Expense Insurance

39. How Does Overhead Expense Insurance Work? • This is a business expense reimbursement policy • Your client purchases a maximum aggregate benefit and is reimbursed for covered expenses until maximum is exhausted or he/she is no longer disabled • Some companies limit the total number of months benefits will be payable

40. Common Definitions of Disability • Total Disability (i.e. “Own Occupation” ) • Unable to perform substantial/material duties of regular occupation • Residual Disability • Able to work but not to full capacity, resulting in loss of net income • Benefits cover loss of net income up to benefit maximums • Loss of Net Income is the amount by which monthly gross income is less than covered overhead expenses • Recurrent Disability • Full or partial benefit paid for specified number of months (often 6) or up to aggregate amount if previous disability returns and results in total disability

41. Some Generally Covered Expenses • Deductible business expenses incurred while disabled • utilities • rent • insurance • taxes • office expenses • salaries for administrative employees who do not generate income for the business or share the same profession as the disabled owner (employee salaries in same profession typically by rider)

42. Tax Considerations for Insured • Premiums are deductible (Revenue Ruling 55-264) • Benefits received are taxable • Business receives write off for expenses incurred • Taxation a wash

43. Unique Differentiators to Look For • Carry forward provision – allows reserves of any unused monthly benefit to be retained for future use, up to aggregate amount • Recovery Benefit – provides a percentage of benefit if no longer disabled but continue to sustain a loss of net income due to the prior disability

44. Part III ~ Disability Buy-Out Insurance

45. How Does Disability Buy-Out Insurance Work? • Reimburses the nondisabled stockholder(s) or entity to buy out the disabled stockholder (individual policies on all partners/owners)

46. How Does the Policy Pay? • Definition of disability • Total disability only • Own Occ as long as you are not working in the company • 12, 18 or 24-month waiting period • After disability definition is met, benefit will be paid once elimination period is satisfied or a Buy-Out expense is incurred • Payouts can usually be made in a lump sum, monthly funding or a combination of the two

47. Advantages for the Disabled Owner • Assures a definite price and buyer under mutually agreed upon terms • No need for the firm to worry about the firm’s ability to meet the buy-out commitment • Family members can place their efforts on meeting the needs of the disabled owner rather than protecting the business • Provides extra cash to help meet the needs that a disabling condition can generate

48. Advantages to the Active Business Owner(s) • Assures they have funding for their buy-sell agreement to buy-out the disabled owner for a predetermined price at a pre-arranged time after disability strikes • Customers, creditors and employees are assured of business continuity • Active owner(s) retain control of the business rather than the disabled owner’s family members • Competitors cannot buy the disabled owner’s business interest in the firm and force out the active owners

49. Tax Considerations for Insured • Premiums are not tax deductible, which means benefits are received income tax-free (Revenue Ruling 66-262) • May be a taxable event when the buy-out is executed by the entity

50. Part IV ~ Selling IDI