DI Plan Differentiation And Consultative Selling

Sixty-five percent of working Americans say they could not cover normal living expenses even for a year if their employment income was lost, according to the Council for Disability Awareness.1

Furthermore, an illness or accident will keep one in eight employees out of work for five years or more during their working careers. To help employees protect their income, many employers provide disability benefits. Though valuable for income protection, some brokers and employers often see disability plans as a commodity and overlook the fact that all policies are not created equal.

There are some key distinctions to note in disability plans and how they help protect the employee and employer, as well as how you can differentiate yourself when it comes to selling them.

Definition of Disability One of the primary distinctions to review in a disability plan is the definition of disability, including the occupation test and earnings test, which indicate the number of opportunities available for a claimant to qualify for benefits. A key component of any disability policy, the definition of disability is contractually defined criteria used to determine whether a claimant is disabled and therefore eligible for disability payments.

When reviewing a contract’s definition of disability, you may want to consider the following:
• Does the disability plan offer just one opportunity to qualify, using an earnings test or occupation test only?
• Does it offer more than one opportunity to qualify? This is often indicated by the use of the word “or.”
• Does it require the claimant to satisfy multiple test to qualify for benefits? Look for the word “and.”
If the contract has an “or” definition, which allows claimants to qualify under either test, they have a greater likelihood to qualify for benefits than under the other definitions if the tests themselves are otherwise equal.

In reviewing qualifications under an occupation test, it is important to know if the plan requires the claimant to perform one material duty or multiple duties. If only one duty is required, there is a greater opportunity for the claimant to qualify for benefits. This option also helps promote a more efficient and consistent claims process because it may be less likely that the language could be misinterpreted.

You may also want to determine how and if the original onset date of the claim is protected in a return-to-work situation by reviewing how many days the contract allows a claimant to return to work, during the elimination period, and continue to qualify as disabled. The higher the number, the more likely a claimant will be able to avoid filing a new claim and the need to satisfy a new elimination period, which often can result in delayed disability benefits.

The earnings test qualifies an employee for disability benefits if an injury, sickness or pregnancy prevents that employee from earning a certain percentage of pre-disability pay. When it comes to the earnings test, you should consider what percentage of the claimant’s pre-disability pay can be earned by performing limited work and still qualify for disability benefits. Eighty percent is typical in many disability plans. You also should determine if the earnings threshold increases, decreases or stays the same over time. The higher the earnings threshold, the greater the likelihood that a claimant will continue to qualify for benefits.

Claimants also are often eligible to receive benefits from other sources, such as Social Security Disability Insurance (SSDI) or return-to-work earnings, which typically reduce their benefit payable through the disability insurance plan.
To calculate the impact of SSDI benefits on the net disability benefit payable, you can use various SSDI integration methods, such as full family direct, 70 percent all sources, primary direct only or primary plus one-half dependent. Each method may result in a different net benefit, sometimes significantly, so it is helpful to compare them to each other.
The same holds true for return-to-work earnings. Because many claimants return to work in a partial capacity before they fully recover—for as little as a few days up to a number of years—the method the long term disability contract uses to integrate those partial earnings will affect the net benefit that is paid. By comparing methods (indirect, direct or proportionate loss), you will get a better idea of how each will pay. 

Consultative Selling

In today’s uncertain economic and legislative climate, employers continue to seek ways to curb skyrocketing health care costs while providing key non-medical benefits that employees value. This presents an opportunity for brokers to educate employers and employees about disability insurance. It’s also an opportunity to do  more consultative selling, in which you go beyond the spreadsheet and dig deeper into a business’s overall objectives in regard to the total benefit package provided to their employees.

An unfortunate pattern in our industry has been to default to simply copying the same plan design as a policyholder’s coverage is moved from carrier to carrier without consideration of whether the existing plan was truly meeting the customer’s needs. It is, however, in everyone’s best interest to break out of this mold.

By analyzing an employer’s current situation and goals for the future, you can develop or provide some uncommon solutions, such as a total income protection strategy, business income benefit or tax-advantaged disability plan, and perhaps help them better engage employees, or protect and grow their business, while potentially reducing their premiums.

Based on previous experiences, some brokers may assume that all employer-paid disability plans are taxable. While this may have been true in the past, things have changed and now may be an ideal time to discuss the benefits of tax-advantaged disability plans with your clients.

To put a tax-advantaged plan in simple terms, if the disability premium is paid with employee after-tax dollars, then all or a portion of the disability benefit may be received tax free.
Receiving tax-free disability benefits is an important perk for employees because disability plans typically are designed to provide a benefit representing a percentage of the employee’s compensation. While the benefits are already a percentage of total compensation, receiving them tax free eliminates a further reduction in the benefit amount, which would otherwise occur as a result of taxation.

To help ensure that employer-funded plans achieve the tax-free status employees desire, there are certain choices in the disability plan design that employers can make in establishing and maintaining their plan. In general, if an employer designates its disability plan as a 2004-55 arrangement, and an employee irrevocably elects to have the disability plan premium paid for with after-tax dollars, then the disability benefits will be received tax free.

In contrast, if an employer does not designate its disability plan as a 2004-55 arrangement and simply chooses to “gross-up” the employee’s compensation to reflect the value of the premium, certain rules—including a three-year look-back rule—may cause all or part of the disability benefit received to be taxed, even though the disability plan premium was paid for with after-tax dollars.

For employers who already offer comprehensive benefit plans, you may want to conduct a total income protection assessment, which will help uncover potential cost-savings and allow them to integrate short term and long term disability, sick leave and salary continuation plans so employees are not over- or under-insured. Many of them may not realize that the policies and benefits they have in place may overlap or, conversely, leave a gap in which employees would be without coverage and benefits for some period.
Additionally, consideration rarely is given to the relationship between an employer’s paid time off and a fully insured disability plan. For example, employers could be needlessly spending money if their short term disability policy kicks in before an employee runs out of paid sick leave. In other instances, short term and long term disability policies may overlap for several weeks or even months. 

One more way to differentiate a disability plan is through a business income benefit, a form of income protection designed to help minimize the financial risk of a key employee becoming disabled. By paying an amount equal to the disabled employee’s gross benefit amount, the business income benefit can help the company maintain financial stability while the employee is recovering. A reduced benefit will continue to be paid to the employer even during an employee’s partial return to work.

Depending on the provider, a business income benefit is available to employers with a certain number of employees and allows the employer to specify a limited number of revenue generating and/or key executives whose disability and subsequent absence from the business would result in the business sustaining a substantial financial loss. If any of the specified individuals become disabled, the business receives a monthly payment for a specified amount of time to assist with the expenses and/or lost revenues associated with the employee’s absence. A business income benefit can provide an additional safety net to the business while a valued employee recovers.
By noting the primary differences in disability plans and leveraging the consultative selling tools available today, you have an opportunity to distinguish yourself from those who fail to maximize value for their customers because they see these plans as merely a commodity.

Be a true partner to your customers and help position yourself for a successful future.

Footnotes 1. Council for Disability Awareness, “Disability Divide,” proprietary research, March 2010, http://www.­disabilitycanhappen.org/chances_disability/­disability_stats.asp.

by Scott Horstman for the April 2012 issue of Broker World Magazine. Author’s Bio Scott  Horstman is a product manager with Assurant Employee Benefits, a provider of employer- and employee-paid benefits, including disability, life, dental and vision insurance, as well as worksite products.

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