New direction for disability: disability insurers are reaching out to the untapped lower-income and blue-collar sectors by educating them about the need and affordability of coverage.

A common misconception about disability insurance is that the coverage is too expensive for widespread distribution. Disability plans are actually more affordable than most people realize, so why are so many lower-income individuals and blue-collar workers still not covered?

While research indicates that both long-term and short-term disability insurance markets are still largely untapped, many in the industry believe the trend is slowly beginning to change. But for low-income individuals and workers in blue-collar industries, the disability market is still very much underpenetrated.

Lack of awareness about the coverage is one of the biggest barriers to higher penetration rates. Many consumers still are unaware of what this income protection entails, including what it covers, how it can protect their assets, its affordability and the reality that one in three individuals will suffer some type of disability or injury between the ages of 35 and 65.

Disability carriers are not only trying to educate consumers and various constituents about disability income plans but also are crafting new approaches to make disability coverages even more affordable.

Untapped Market

While annualized premium for new disability policies increased by 3% in 2004, the number of policies sold dropped 1% compared with 2003, according to Limra International's recent "U.S. Individual Disability Income Insurance Issues and In Force Survey."

Up to half of U.S. employees lack disability coverage, and the statistics are even more grim for those who work for smaller employers. The U.S. Department of Labor Bureau of Statistics reports that only 19% of workers in companies with fewer than 100 lives have access to long-term disability plans.

There's a two-fold reason for the low market penetration among lower-income individuals and blue-collar workers, said Katie Dunnington, disability product director for The Hartford Financial Services Group Inc. "Employers possibly aren't offering certain types of workers full benefits that are employer-paid, and secondly, we as an industry may not be doing enough to work with employers to do a better job of educating employees to understand the true value of disability income protection and how affordable it really is."

In addition, Mark Bohen, senior vice president of marketing and customer relations for Assurant Employee Benefits, said companies operating in high-risk industries and that are more blue-collar in nature have not typically had access to affordable disability insurance.

Many individuals in the blue-collar sector also have their sights on other protections, such as life and medical insurances, said Matthew Gottfried, director of individual disability insurance for Berkshire Life Insurance Company of America. "In situations where both income and disposable income are limited, consumers tend to place greater emphasis on what they perceive to be more immediate needs."

Getting to Know You

According to Hartford Financial's "Second Annual Disability Literacy Study," employees overestimate the cost of disability insurance by nearly five times. On average, people thought a group disability plan purchased or provided through an employer cost about $1,000, but in reality, the industry average cost is only about $200 per employee per year, said Dunnington.

In addition, lack of awareness about the product as a whole is a common problem in the industry. "With medical costs going up, everyone's head is wrapped around medical and how to deal with it. Once we get by that, the industry still has the challenge of how we communicate the need for disability insurance and making sure people understand what the product does and how it works," said Assurant Employee Benefits" Bohen.

But many believe that challenge remains unresolved. "We" as an industry haven't done a good job at explaining the need for disability income protection," said Ken Smith, director of critical illness and disability insurance for Assurity Life Insurance Co. "Consumers don't understand that if they can't work, no money comes in and then they're left asking who pays the bills."

Many individuals also are unaware of their own risks. "People don't understand that one in three Americans will suffer a serious disability during working ages, and there's greater likelihood that they will need the coverage more than other protections such as life insurance," said Dunnington. "But more people buy life insurance and understand it better than disability."

Consumers aren't the only ones who don't understand the coverage. Very few agents in the market are truly cognizant about the product, said Smith. "Part of the reason is because at one time mutual career companies offered a disability insurance product and trained agents on it, but as they got out of the disability market, there's been a void there to provide necessary training." Now many agents view the product as a complicated sale with many moving parts, he said.

But not everyone is in the dark when it comes to disability insurance. Some segments are more aware of its need than others, said Gottfried of Berkshire Life. He said the professional and executive markets, for instance, are acutely aware of this need, especially those in highly-skilled positions such as physicians and dentists." They use their hands and appreciate the impact of a disability, often seeing it first hand from clients who are disabled," he said.

Finding a Solution

Despite disability insurance's already low pricetags, carriers continue to craft solutions to make plans even more affordable in hope of opening up the flood gates to greater penetration within more markets.

One of those markets includes blue-collar workers. "Given the size of a sale, many agents don't want to bother with working that market," said Assurity Life's Smith. The solution? Work-site marketing of disability policies is becoming an affordable and attractive means for reaching blue-collar workers, Smith said. Assurity Life, which primarily markets its products to the blue- and gray-collar markets both through individual and work-site sales, added features to its products to attract customers in these sectors, including shorter elimination periods--with those even as low as seven days--and monthly benefit amounts that range between $300 and $3,000, through work-site marketing.

Carriers have also relied on other approaches to make disability coverage more affordable, such as adding shorter benefit durations, lower benefit amounts, or more restrictive limitations on pre-existing conditions to plans. Berkshire Life, for instance, offers a variety of shorter elimination periods in its plans--anywhere from as short as 30 days to two years. "It speaks to an individual's preparation for disability insurance and how much self-insuring they do, which ultimately affects the cost," said Gottfried.

But, Hartford's Dunnington said she's not seeing as much demand today for such limited plans. "Rather, we're seeing more assistance with helping individuals better understand coverage," she said.

Carriers can play another critical role in keeping policies affordable. Len Cavallaro, senior vice president of sales and marketing for Jefferson Pilot Financial Insurance Co., believes an important key to affordability lies in a company's ability to run a lean and efficient organization. "This helps keep expenses down, which eventually work their way into pricing," he said.

UnumProvident is also sensitive to employers' need to manage to a very tight budget. The company spends much time thinking about how it can bring down costs through the use of technology, for example, said Mike Simonds, vice president of market development. "There's an expense component that goes into the premium, so we're constantly looking for ways to lower those expenses to bring a more competitive product to market. It's doubly impactful when these investments can ease the administrative burden for employers while helping manage cost." In addition, he said the company can offer purchasers who may not be able to afford disability insurance a plan that provides catastrophic-type coverage.

"For instance, there's room in how you define disability and the duration of the benefit period. If it's going to be own occupation for a long period of time, that will be more expensive vs. a more conservative definition of disability and shorter duration," Simonds said.

Several other carriers are redefining disability as an approach to more affordable coverage. "Probably one of the biggest changes that's occurred over the years in the executive and professional market is lower use of what I would call a 'pure own occupation' definition in which individuals who can't perform the duties of their own occupation because of a disability receive benefits regardless of whether they're working anywhere else," said Dan Skwire, principal and consulting actuary for consulting firm Milliman's Portland, Maine office. "Now the more common benefit for those policies would be what I would call 'modified own occupation' for individuals who can't perform the duties of their own occupation because of a disability and aren't working elsewhere." He said he's seeing an increase in white-collar carriers moving to a two-year own occupation definition followed by an "any occupation" period for their business. The blue-collar market, however, has traditionally always had a two-year occupation definition, he said.

Flexibility within products is also a key component to keeping premiums more affordable. Some carriers, for instance, recently added catastrophic riders to disability policies that provide an additional benefit triggered by activities of daily living-similar to that found in long-term-care riders.

While some experts believe pricing of disability products may swing slightly upward in the next several years, particularly with incredible pressures on profitability driving that trend, A1 Hemond, senior vice president of disability risk management for Prudential Financial, believes the strengthening economy, better return-to-work accommodations and steadily improving recovery patterns all are helping keep disability coverages more affordable.

What's Ahead

The future of work-site marketing of voluntary products as a way to provide affordable disability plans to employees appears strong.

In-force premium of voluntary long-term disability insurance grew 33.4% from 2002 to 2004, and in force premium of voluntary short-term disability climbed 34.5% during the same time period, according to Limra. In 1994, only 10% of employers offered long-term disability plans on a voluntary basis. In 2002, 43% of employers made such offerings.

In its recent "Employee Benefits Trend Study," MetLife found that 26% of employees working for companies with two to 49 employees and 46% of those working for organizations with 50 to 99 employees are interested in having their employers provide a wide array of voluntary benefits. Among all employers, half of the respondents said voluntary benefits offer employees better rates, and nearly half see voluntary benefits as an economic solution to a critical challenge--meeting the diverse needs of employees. In addition, 44% believe voluntary offerings are a cost-effective way to enhance the attractiveness of their overall benefits programs.

Assurant Employee Benefits believes voluntary disability products are the wave of the future. In January, the company began selling its new Serious Disability product, which is designed to be simple and inexpensive and cover only those disabilities deemed very serious in nature--all of which help control costs. The benefits last up to six months for claimants who are initially hospital-confined for 72 hours or longer and six months if a claimant qualifies under the impairment rating definition of disability, which uses a rating with guidelines set by the American Medical Association. The product, which Bohen says is designed particularly for groups where either access or affordability has been a barrier to disability insurance, has no industry restrictions and is competitively priced.

Employer-sponsored plans have the impact of making disability insurance more affordable because they improve the risk selection of issuing a policy by changing an individual risk into something closer to a group risk, said Milliman's Skwire. "And it has the impact of reducing expected claims and that's why you see discounts on policies."

Key Points

* The disability-insurance market for low-income individuals and workers in blue-collar industries is underpenetrated.

* One in three individuals will suffer some type of disability or injury between the ages of 35 and 65.

* While disability insurance is more inexpensive than many consumers realize, carriers continue to craft solutions to make plans even more affordable.

Learn More

Assurant

A.M. Best Company # 70135

Distribution: Agents

Hartford Life Insurance Co.

A.M. Best Company # 06518

Distribution: independent agents, brokers, banks and wirehouses

Jefferson Pilot Financial Corp.

A.M. Best Company # 06928 (Jefferson Pilot Life Insurance Co.)

Distribution: Independent agents, captive agents

Prudential Insurance Company of America

A.M. Best Company # 06974

Distribution: Career agents, brokerage general agencies, independent financial advisers, banks, wirehouses

Unum Life Insurance Company of America (UnumProvident)

A.M. Best company # 06256 Distribution: Independent brokers and agents, corporate marketing agreements, benefits consultants, direct sales force

For ratings and other financial strength information about these companies, visit www.ambest.com.

Voluntary Disability
Sales Soar

In-Force Premium Growth

             Total Disability *    Voluntary Disability **

2004/2003          4.2%                    8.5%
2004/2002         10.6%                   34.4%

* Total Disability sales includes employer-paid, employee-paid
and buy-up disability plans.

** Voluntary disability sales are defined as 100%
employee-paid plans

Note: Table made from bar graph.

Source: Limra International