The risk of becoming disabled is real; yet, Americans continue to underestimate that risk. According to the Council for Disability Awareness, 64% of wage earners believe they have a 2% or less chance of being disabled for three months or more during their working career. The actual odds for a current worker are about 30%. One-in-eight workers will be disabled for five years or more during their working careers.
And while disability insurance is designed to cover an employee's wages if they become disabled, most plans stop paying out when the worker turns 65. Philip Davis, president of Corporate Compensation Plans, Inc., says the prevalence of 401(k) plans has put millions of Americans at a potentially catastrophic risk because when disability occurs, 401(k) contributions stop.
"Sixty million Americans have banked their financial futures on the 401(k), but they're completely exposed to getting sick or having a serious accident," he says. "The result can be catastrophic losses in their retirement benefits at age 65 - the very time when payments from their disability insurance policies usually terminate."
Defined benefit plans guarantee monthly retirement payments for life and if employees became disabled, their plan contributions continue but, says Davis, "as we know, there are hardly any DB plans left today; they've all been replaced by 401(k)s, which are nothing more than a savings plan with a tax feature."
Two new disability insurance products have entered the market recently, both aimed to help workers maintain their retirement income in the event they become disabled. But the two products - one offered by Davis's Corporate Compensation Plans and the other offered by Pension Advisory Group - take different approaches. One offers a lump-sum payment 12 months after the disability occurs, while the other holds funds in trust until age 62 or 65.
Held in trust
Pension Advisory Group's product, called the Retirement Income Assurance Policy, makes deposits that mirror employees' 401(k) contributions to a bank trust account. The bank then purchases an annuity on an employee's behalf and holds the annuity until normal retirement age. It's a guaranteed issue product, with no individual underwriting for insurability. Employers pay the premiums, which are tax-deductible as a business expense. Because the product is written on a group insurance basis, the cost is significantly less than for a comparable individual contract.
Rates are based on the amount of contributions the qualified plan is receiving. "Let's assume we have a plan that's receiving both elective deferrals and matches of $1 million. Our rates are going to run somewhere between 125 and 175 basis points of that contribution," says Paul Hinson, president of Pension Advisory Group, Inc. "So, we could insure that $1 million risk for approximately $15,000 a year."
RIAP is underwritten by Lloyd's of London, through ProFinancial Services. Bank of Oklahoma will act as trustee. Additionally, "we've made arrangements with American National Bank to be our investment adviser and act in the role of a fiduciary so that the disabled individual has an investment committee monitoring that annuity," says Hinson. "At age 62 or 65, that investment committee will deal with the disabled participant to select the best payout period - whether they're seeking a lifetime income or 10-year certain [income] or 20-year certain [income]."
Pension Advisory Group just closed a deal with a 200-employee law firm for the product and is busy pricing the product for another 10 to 12 employers.
"We insure up to the maximum that qualified plan limitations will permit and that's currently up to a little over $4,000 a month," says Hinson. "But we see this program being activated by firms where the rank and file will be contributing several thousand dollars a year."
Under CCP's plan, when employees become disabled, they'll receive a tax-free lump-sum payment equal to the value of all of their retirement plan contributions to age 65.
For example, a 45-year-old employee contributes $20,000 to his 401(k). Twelve months after his disability, he would be paid a lump sum of $400,000 in tax-free cash - 20 times his $20,000 contribution. He can then invest the money to offset the loss of his retirement plan contributions.
The insurance's cost is dependent on the employee's age and amount of the benefit. "Typically, at an age-45 level, anticipating a $20,000 a year [401(k)] contribution, somewhere around maybe $40 or $50 a month," Davis says.
In addition, the product can continue contributions to nonqualified deferred compensation plans, with lump sum payments available of up to $3 million.
It's available on a guaranteed-issue, no-medical-exam basis and can be acquired in addition to employees' group disability insurance - and will not be offset or reduced by payments from that insurance.
A few companies - Mass Mutual, The Principal - have individual products that provide monthly disability benefits payable directly to the employee to offset the loss of 401(k) contributions.
"What's new about the approach we've developed is we anticipate the future contributions by paying a lump sum," says Davis. "That lump sum has a lot of advantages to it, in our opinion, in that the money for the family is now sitting there - all the future contributions are there in a bank account, the employee doesn't have to continue to offer evidence of his disability - and if there's a need for substantial cash, it's there. And we can administer it on a group approach."
But Hinson believes placing the money in a trust - rather than distributing it as a lump sum - is a better approach. "We feel it's mandatory to use a trust for the interest of this disabled individual," he says. "I can't imagine a 33-year-old getting a lump-sum deposit to replace his or her pension plan and he or she [still] having [that] retirement fund 30 or 32 years down the road."
Regardless of the approach, "employers need to offer a solution, whatever disability solution it is," says Davis. "They owe it to their employees to offer them the security of knowing if something happens to their health, their retirement programs will continue in force."
Where there's crisis, there's opportunity
In Chinese, the words for "crisis" and "opportunity" are the same. While the cost-reducing, package-restructuring shift toward voluntary benefits creates opportunity for disability carriers, the need for disability coverage - more pointedly, the lack of awareness of the need - represents a workforce crisis nationwide.
Barry Lundquist, president of the Council for Disability Awareness, says the Patient Protection and Affordable Care Act and federal budget negotiations have made disability education efforts more important now than ever before. He says eventually the market will probably see more disability products, but it's more important that the ones that already exist get used.
"I do believe the need to raise disability awareness will become even greater than it's been in the past, and it's the responsibility of the industry to champion that effort," Lundquist says. "The insured disability market has shown little or no growth for several years now, and we still, amazingly, only have about a third of the civilian labor force that has any form of private disability insurance."
Benefits providers, he acknowledges, more than have their hands full this year, and disability, always at risk of becoming an afterthought in the benefits lineup, is even more endangered of falling off the radar entirely in the post-health-care-reform world.
"The medical care portion of employee benefits will certainly dominate the benefits discussion going forward, even more than it has in the past, and it always has," Lundquist says. "If you had an hour discussion with a broker, employer and employee, 55 minutes would be devoted to health care, the other five to everything else. The medical care conversation is kind of sucking all the oxygen out of the room. We think it will be difficult to find shelf space for disability products. I think people will be happy to offer it, but finding people who will focus enough on it to really get it out there [will be hard]."
The customer, for the most part, is on their own in terms of purchasing and maintaining disability coverage. Lundquist predicts: "Very few employer-paid plans are going to be added. If they're added, they're going to be voluntary plans." It certainly would be nice, then, if they weren't on their own in terms of need-education.
"The rise of the private exchanges is creating opportunities," Lundquist says. "And that's a good thing, I think, but it's also going to change the equation. A lot of companies are going to move to a true defined contribution model where the employer just says, 'OK, go to the exchange, I'm going to give you $1,000 a month and it's up to you to decide what you're going to buy.' And that's why I think the need to raise awareness about disability is even greater because in that scenario, the HR person isn't really even involved in the decision-making or the communication."
In a video interview with EBN last fall, Lundquist lamented the growing long-term coverage gap: The number of American workers protected by LTD is declining, even as claims continue to rise. Lundquist also announced the launch of Defend Your Income, an awareness-raising campaign and website of the same name aimed at informing all employees of their risk, and especially those younger workers who may be most cavalier toward it.
Now, more than six months later, Lundquist tells EBN that the site is up and spreading key information like the fact that one in four working Americans will experience a long-term disability event at some point in their lives, a risk most vastly underestimate.
"The campaign's been great," Lundquist says. "We didn't intend to have it just be a flash in the pan, so we'll continue to promote and push and gain wider and wider audience participation. Our audiences have been pretty engaged consumers, financial advisers of all varieties, and our own member companies as well. I think people really appreciate that it is a breath of fresh air." -by Tristan Lejeune
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