There's almost universal agreement among employers and employees that one's income is a person's most important asset - and that a sound financial-planning strategy must be in place to protect those earnings.
Yet, as is the case with other employee benefits, a perception gap exists. While disability insurance coverage is widely coveted, today's difficult economic climate comes into play. However, the lack of enough decisive action demonstrates a puzzling indifference among workers - whose behavior could best be described as penny-wise but pound-foolish.
The reality of employee attitudes is all too evident in their purchasing patterns. LIMRA International found that while long-term disability was up 11% for the first three quarters of 2009 based on new premiums for employee-paid products, short-term disability was down about 4%.
Mike Simonds, a senior vice president for Unum in Chattanooga, Tenn., notes that researchers at JHA (a division of General Re Life), among others, reported flat sales in 2009 - even with regard to aggregate earned premium for disability insurance and other benefits based on a percentage of salary.
Just 10% of more than 2,100 working Americans responding to a recent Harris Interactive poll conducted for Northwestern Mutual are insured if they become disabled, with 30% receiving such coverage through the workplace.
Here's the kicker in the Harris poll: Nearly 80% of the survey respondents said they'd be devastated if a disability prevented them from earning a living - an emotional impact that ranked below only a fire destroying one's home and belongings. Ironically, 73% of the respondents have insured their home or rental property, and 88% have auto insurance, but fewer than 50% of them consider having their car destroyed in an accident to be a devastating loss.
In the pantheon of employee benefits, health insurance, a retirement savings plan, life insurance and dental coverage all seem to trump disability, according to Ron Neyer, LIMRA's senior analyst, distribution research, who says many employees "don't understand just how high the incidence is of somebody having some sort of disability before they retire."
LIMRA saw an uptick in simple products such as term and whole life insurance as a means of protecting dependents, though the urgency did not translate to DI - even though it seems like a logical step. "It's an emotional decision when it should be a financial decision," he says.
DI is a more technical benefit that can be harder to explain, says Amy Friedrich, vice president of the Principal's specialty benefits division. Mindful of this issue, she thinks "some of those technicalities will get simplified a little bit, and sales will be more geared toward the average employee."
One such solution is to offer benefits on an employee-pay-all voluntary basis. STD on a voluntary basis is palatable to even a decent-sized organization of 50 employees or more because "it is so reasonably priced," says Chance D. Potts, a member of Employee Benefit Design, LLC in Springfield, Mo. "Most everyone will purchase it because they are living paycheck to paycheck, and they can't make it past eight days without a check. So they almost have to buy it."
But the trouble is that other voluntary benefits, which may be considered a lower priority in the grand scheme of financial protection, can drain precious dollars that may be more wisely spent on DI. "People will pay $60, $70, $80 a month on these products," Potts observes, "and they have no money going into savings, no disability coverage, and they're one paycheck away from bankruptcy."
One of the pitfalls for arranging coverage on a voluntary basis is that without the right educational process in place, Potts cautions that employers can be exposed to potential liability if they don't properly handle their enrollments. Any inertia in this area could be seen as a breach of their fiduciary duties under ERISA.
Scott Horstman, a disability product manager for Assurant, sees a migration toward voluntary coverage, particularly with smaller firms. But one creative alternative to shifting these costs onto employees is an arrangement established in 2004 under Sections 104(a)(3) and 105(a) of the tax code whereby DI benefits can be offered tax-free.
He says IRS Revenue Ruling 2004-55 permits employers to reduce the cost of coverage by as much as 20% to 25% when paying the DI premium through an employee's salary-reduction arrangement and lowering the income-replacement threshold to 50% from the 60% industry standard. For employees, the result is an even higher net benefit than they would have received under the 60% plan.
This solution is applicable to any type of employer or industry except for executives who own more than 2% of a subchapter S corporation or other partnership and already receive a tax-free benefit. To guard against fraud, the IRS analyzes the prior three years of coverage so that employees who know they're about to become disabled aren't able to switch to a post-tax basis of premium payment and realize a tax-free benefit.
An educated consumer
Neyer believes the biggest barrier to DI enrollment is poor education. Horstman says this is an area where benefit professionals can rely on brokers and advisers to lend a helping hand.
Producers have startling data on their side to help promote DI coverage. Industry research, for example, suggests that about 40% to 50% of working Americans would have to file for bankruptcy if they had to go without income for much more than 90 days, according to Matt Tassey, former chairman of the nonprofit Life and Health Insurance Foundation for Education, as well as a principal of Scribner Insurance and Burwell & Burwell in Portland, Maine.
Failing to protect one's income stream from the unfortunate event of a disability can take its toll over time. Calculations by LHIFE, which each May teams with more than 40 leading insurance organizations to promote Disability Insurance Awareness Month, show that a 25-year-old worker earning $50,000 a year who suffers a permanent disability could lose $3.8 million in future earnings.
The advocacy group also notes that one in five working Americans will miss work for at least a year before they turn 65 because of an accident or illness.
"When there's confusion," Neyer notes, "an employee doesn't want to allocate money toward a benefit that they don't fully understand. If the employer is going to give it to them, great. But if they have to pay for it out of their pocket, they need to understand it a little better."
Bruce Shutan, a former EBN managing editor, is a freelance writer based in Los Angeles.
