Advice For An Insurance Broker
My associate and I were speaking the other day about how much we enjoy the marketing and sales of disability insurance. Quite honestly, we were also focusing on the income stream that disability insurance provides to our agencies. Even with the time value of money, our earnings are higher over a 10-year span than with any other product. It is wonderful to get all of that up front money from the life sale, but where are the renewals we were promised when we first entered the business.
Whether you are an agent or General Agent, over the lifetime of a life policy, you just do not get the same financial reward. In addition, the lapse ratio for most disability policies is lower than for life. This translates into a more stable and long lasting client relationship.
What makes disability policies stay on the books? I believe there are several reasons. First, there are fewer carriers selling DI today than in the past. With fewer carriers, there are less product innovations. In addition, those remaining in the market usually do not sell the same type of product your clients currently own. This is true in both the blue and white-collar markets. Let us examine some of the changes in the disability field.
No less than five years ago, we were marketing a blue-collar disability plan that many white-collar clients were buying. It was not the definition of “own occupation” that attracted them; it was the pricing and the fact that there was a true residual benefit built into the policy. We were not marketing the plan to that clientele, but many purchased it when they compared the price to other companies non-cancelable, guaranteed renewable, own occupation policies. For roughly 60% of the cost, they were getting a very viable and solid product. Their concern with rate increases was not nearly as great as the concern for the current cost.
Most of today’s blue-collar policies only provide partial disability. Partial disability is payable for a maximum of six (6) to nine (9) months at roughly 50% of the selected benefit. A few companies still sell a residual benefit. However, the benefit period has to be five (5) years or less. One nice feature about our current blue-collar policies is the availability of an age 65 benefit for all but the hard-core blue collar (i.e., hazardous) occupations. However, the self-employed plumber, carpenter, contractor and the like can purchase this longer benefit term.
There are still companies very active in this marketplace with a large appetite for the blue-collar market. It is my opinion they know about the low lapse ratio and can count on a long lasting stream of premium dollars.
Now do not get me wrong. Companies are not giving these products away. Underwriting is very tight, especially regarding financial documentation. Moreover, medical underwriting has been tweaked to a point where most agents are left screaming. However, the disability companies today are looking for good, healthy, long lasting policyholders. They do not want to face the financial devastation other companies have faced in the past by making the same mistakes. Carriers realize the more they know about their prospective policyholders background, the sounder their decisions can be made.
The same can be said of the white-collar carriers. To the agent, it seems as if they are underwriting the client to death. With requirements such as blood and paramedical exams, several years of income documentation, and if it is a business case, at least one to two years of profit and loss statements. It is important to realize the potential benefit being paid by the insurance carrier. When you multiply the monthly benefit by the number of years it could be received (discounting a cost of living benefit rider), there could be millions of dollars paid out over the lifetime of the contract. However, the good news is that the own occupation definition is still available together with Business Overhead and Disability Buy-Out policies readily available.
I believe that most agents overlook the value of and the sale of disability policies. Once there were disability agencies that focused on and sold predominantly DI. Today, there are financial planning partnerships and financial services companies.
As I have stated in previous articles, as a financial associate, it is imperative that the sale of disability and other health coverage be a focal point of discussion. When an individual studies for their Series 7 securities exam, at the top of the checklist of coverage verification stands health and disability. Now, can you image if the SEC is stating that this coverage be in place what would happen if you, as the representative, do not sell the product?
So what if you have placed a large life case and are working on a clients’ investment portfolio and retirement program; if the client cannot complete the plan due to a disability, of what service were you to them? The same can be said of the partnership or corporate buy-sell agreement. Read the articles of incorporation or the buy-sell agreement itself. Does it say anything about what happens after a long period of disability? Are you not opening yourself up to a legal suit if you do not have all of the financial bases covered? Let us review some of the basics of the above outlined policies. Their purpose and some of the issues you want to review before the sale.
First is the traditional disability policy. We all know the purpose of these plans is to provide income during a period of prolonged sickness or accidental injury. Factors such as the elimination period and benefit duration will affect the cost of the contract. When advising clients, we all want to see that they have at least a three to six month supply of cash on hand in case of that “rainy day”. Assuming that is in place, we can suggest a 90 to 180 day elimination period thereby reducing the overall cost of the contract. With that longer elimination period, the addition of riders such as residual, cost of living, and future purchase option more affordable. Please note that the average cost for most blue-collar policies is around $900 per year and the white-collar plan approaches $1500 annually. These are very nice sales when you consider most disability carriers pay at least a 10% renewal for at least 10 years.
The next policy type I would like to examine is the Business Overheard Expense (BOE) policy. The purpose of this policy is to provide cash when the owner or principal is disabled. This policy is a reimbursement plan that pays in arrears. That is, if the client selects a benefit of $5000 per month with a 30 day elimination period and a 2 year benefit period, at the end of the 60th day of disability, he files for benefits based on the previous 30 day time period.
The client must show the actual expenses paid and the carrier will reimburse them accordingly up to the monthly benefit maximum. Most companies have a carry-over provision that will allow ups and downs in a business’ expenses. For example, if a client has the above listed benefits and has $4,000 of expenses in one month, the carrier will only reimburse the $4000. However, if in the following month there is $6,000 in expenses, the carrier should pay that total since the combined total for the two-month period totals $10,0000. Most BOE contracts stipulate the maximum monthly benefit and the total benefit payout over the life of the claim. In the above example, the maximum monthly benefit is $5,000 and the total benefits payable per claim would be $120,000.
The main purpose of BOE is to keep the company viable when the rainmaker is sick or hurt. If the principle is out for a protracted period of time, this type of policy can help them maintain their business so that it can be sold as a going concern and not at fire sale prices.
Lastly is the Disability Buy-Out (DBO) policy. As important as the life insurance policy is for the buy-sell agreement or corporate buy-out, so too is the disability buy-out important. I would like to propose that if there is a limited budget that a company has for the above, that term insurance be sold in conjunction with a DBO policy. The combined premiums are usually less than a well-funded permanent policy sold to cover the death of a partner or shareholder. As I stated above, when you read the buy-sell agreement or stock retirement plan, almost every one has a disability provision. Every attorney has on their computers a template for these forms of agreements. All they do is change the corporate or individual’s name and the document prints. Yet, to a man, most attorneys’ and accountant’s focus on the death and not the disability. It is your responsibility to focus the clients’ attention to the entire contract and not just one small portion.
Once again, as a financial associate in today’s litigious society, I strongly urge every one of you to keep up with this marketplace. Yes, there are fewer carriers, but the ones that remain have variations within their contracts that can benefit you and your client. If you have not taken the disability course provided by LUTC, I believe you are missing a golden opportunity. That course provides you with product knowledge (i.e., what to look for in policies) but with sales ideas that you will not find in most CE courses.
In closing, I would like to emphasize the viability of all forms of disability insurance. I strongly urge each of you to review your own plan of insurance. If as sales associates you do not have an own occupation policy with residual and cost of living, consider revising your own coverage. In addition, if you have an office away from your home, you too have un-reimbursable business expenses. Consider the purchase of a BOE policy for yourself . . . after all, you are entitled to own one too. Lastly, for those agents in a partnership or other business relationship, do not be like the shoemakers’ children. Review your own business documentation and see what is call for in case of the disability of one of the principle’s. Of course, if you have any questions, I would be more than happy to assist you personally or with any question in the disability field.