Individual Disability Income Insurance: Overcoming Individual Disability Income Insurance Objections

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1 Individual Disability Income Insurance: Overcoming Individual Disability Income Insurance Objections Rick Cordaro, DIA, LUTCF Disability Income Regional Vice President This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. The accuracy of the information is not guaranteed and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is not a marketing opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. 1

2 How to achieve financial security Income is the financial foundation 2

3 OBJECTION IT WON T HAPPEN TO ME I EXPECT TO STAY HEALTHY. Times Are Different Now Source: National Underwriter, May 2002; The JHA Disability Fact Book 2003/2004 Edition Need for Disability Insurance 3

4 Chances of Disability What are the chances of having at least one disability lasting three months or longer before reaching age 65? Age Probability 30 51% 35 48% 45 40% 50 34% Source: Commissioner s Individual Disability Tables, CSO OBJECTION WHY WOULD I NEED DISABILITY INCOME COVERAGE? 4

5 Are You Protecting the Right Assets? Potential Earnings to Age 65 (with 5 percent annual salary increase) Annual Income Age $50,000 $100,000 $150, $4,516,000 $9,032,000 $13,548, $3,322,000 $6,644,000 $9,966, $2,386,000 $4,773,000 $7,159, $1,653,000 $3,307,000 $4,960,000 If your client became too sick or hurt to work, they have a lot to lose Current standard of living Insurability Future earnings Their home Credit rating Retirement savings and other assets Peace of mind 5

6 Statistics to help explain 48% of all home foreclosures are due to a serious medical problem. 1 Harvard University report reveals that nearly half of the 1.5 million bankruptcies studied were due to an inability to pay for medical expenses. 2 1 National Underwriter, May Health Affairs, February 2, 2005 OBJECTION I WOULD HAVE TO BE TOTALLY DISABLED TO RECEIVE BENEFITS. 6

7 Residual and Transitional Coverage Residual (or Partial)* Requires a loss of income and usually a loss of time or duties Pays benefit proportionate to loss of income. Transitional* Totally disabled from current occupation, but working in another occupation Pays up to 100% of earnings or the maximum benefit *May require an additional cost Catastrophic Benefits Coverage Pays a benefit in addition to current benefit if your client is catastrophically disabled: Can t perform two or more Activities of Daily Living Cognitively impaired Presumptively disabled $5,000/month Individual Disability Income coverage with and $8,000/month benefit for catastrophic = $13,000/month potential benefit 7

8 OBJECTION MY FINANCIAL NEEDS CHANGE SO FAST, WHAT POLICY COULD KEEP UP?. Keeping Up Future Purchase Options Future Increase Options Cost Of Living Rider Adjustable Policies These riders may require an additional cost 8

9 OBJECTION WOULD I EVEN HAVE A DISABILITY THAT WOULD BE COVERED? Breakdown (by percentage of claims) of some typical reasons an individual may become disabled 9

10 Sample disability claims Principal Life Adjustable Disability Insurance Claims as of June 30, The above is for illustration purposes only and is not intended as an inclusive representation of all claims. OBJECTION I HAVE ENOUGH DISABILITY COVERAGE THROUGH MY EMPLOYER. 10

11 Can your client survive on a 60% pay cut? Group Long-Term Disability insurance is a good start, but could you or your client s survive on a 60% pay cut? Chart based on $5,000 gross monthly income ($60,000 annually), with 60% Group Long Term Disability program, assuming a 30% tax bracket for Federal, State and FICA. Considerations: Group LTD insurance Benefit provisions within the policy are typically conservative Reverse discrimination for key employees (cap on benefits may be too low for higher-paid employees) Policy is usually not portable for the employee Bonuses and incentive pay typically not covered 11

12 Individual DI insurance benefits Premiums and benefits are guaranteed through age 65. Tax-free benefits (when paid with after-tax dollars) Quality benefit provisions Bonuses and incentive pay can be covered Policy and discounts are portable Payment options available (employer-paid or employee-paid) Offer Integrated DI Solutions DI insurance can present an integrated disability solution such as the hypothetical example shows below. Note: Hypothetical example. Elimination and benefit periods can vary depending on how the policies are structured. 12

13 OBJECTION I CAN BUY IT LATER OR IT COSTS TOO MUCH. Take a look at what waiting may cost your client. (Besides possibly no longer being in the best of health!) Age Male 35 $1, $2, $2, $3, Female $2, $3, $3, $4, Colorado resident, Non-smoker, 5A, $100,000/annual income, $4,800/mo benefit, 90 day elimination period, To Age 65 benefit period and your occupation period, residual disability benefit rider. 13

14 Another Viewpoint Premium paid until age 65 for: 35 year old male: $50, year old male: $56, year old male would pay an additional $5, of premium for 10 years less coverage. $7,950/mo benefit replaces 48% of $200,000 annual income For 1.51% of annual income 14

15 OBJECTION SOCIAL SECURITY OR WORKERS COMPENSATION WILL TAKE CARE OF ME. Social Security Initially denies about 65% of all claims. 1 Pays Benefits for Total disability only Severely impaired, physically or mentally, can t perform any substantial gainful work and must last 12 months or result in death. 2 1 Social Security Forum, Volume 21, No. 5 May 1999 (for fiscal year 1998) 2 Guide to Social Security and Medicare, 28 th Edition, April

16 Social Security Maximum benefit for $100,000/year income is: $16,800/year ($1,400/month x 12 months) Workers Compensation Must be due to an occupational disease or injury arising out of or in the course of employment. 16

17 OBJECTION I COULD STILL WORK IF I BECAME DISABLED. But would they want to? Today we face many concerns and diseases that weren t as common several years ago: Terrorist attacks Natural disasters Workplace violence AIDS Bird Flu West Nile Virus 17

18 OBJECTION I DON T LIKE NEEDLES OR I HEAR THAT UNDERWRITING PROCESS IS REALLY LONG AND DIFFICULT. Simplified Program Discuss a simplified concept with your client 18

19 OBJECTION MY FAMILY AND FRIENDS WILL HELP ME OUT. What if the disability lasted? Would they want to put that burden on their family? How long would their family be able to support them? 19

20 Chances of a Disability What is the chance of being disabled for life if the disability has lasted at least three months? Age Lifetime Disability 25 25% 35 28% 45 33% 55 40% Source: 1985 CIDB Disability Tables 1980 CSO OBJECTION I CAN RELY ON MY SAVINGS. 20

21 What Are Your Clients Saving For? Is your client saving to pay for a disability? Or are they saving for: A New Home Travel Education Retirement Savings Needed $60,000/year salary and wanted to save three months of salary at they would need to have: $15,000 in savings ($5,000/month income x 3 months) 21

22 OBJECTION I HAVE ALREADY MAXED OUT MY INDIVIDUAL DISABILITY INCOME COVERAGE. Protect their Retirement Savings What would happen if they suffered a disabling illness or injury and could not work? 22

23 Impact of a permanent disability on retirement savings at age 40 Retirement Assets Age Assumptions: $2,000/month contributions beginning at age 30, 8% rate of return and age 65 retirement. Consequences of disability at age 40, without retirement savings protection. How does it work? Insured Before disability insured pays DI insurance premiums Insurance Company Upon reaching the benefit period insured may begin receiving Trust assets per the terms of their Trust Agreement Irrevocable Trust Upon disability company pays DI insurance benefits which the Trust invests 23

24 Traditional Individual Disability Income (DI) Traditional DI with Lifetime Rider/Feature Retirement Protection When would disability benefits stop for a permanent disability? End of benefit period (i.e. To Age 65) Benefits continue to pay for your lifetime Benefits are paid into the trust until the end of the benefit period. Withdrawals then made from the trust until death or until funds are gone What Death Benefit is available? 3x s ultimate monthly benefit if death occurs before end of benefit period 3x s ultimate monthly benefit Insured s estate receives any remaining trust assets. What is the amount of Death Benefit paid? $10,200 ($3,400/mo x 3) $10,200 ($3,400/mo x 3) $4.1 Million* Thank You! Home Office: Principal Life Insurance Company, a member of the Principal Financial Group, Des Moines, IA Approval #