Steve Brady, national accounts sales director at The Standard inPortland, Ore., remembers a group of ship pilots who work thewaters of Puget Sound. Their employer's agent proposed individualdisability insurance, with guaranteed issue, as a voluntaryaddition to group disability coverage.

“Of the 55 pilots, 53 signed up for individual disabilitycoverage,” Brady says. “The agent who wrote the policies has thatbusiness, as well as 53 new files of people who are high-incomeearners and may be interested in his other offerings, includinglife insurance and other products.”

Disability insurance is gaining popularity, both as a product inits own right and as a stepping stone to others. But it still has agreat deal of potential to fill for customers, employers, brokers,producers and issuers themselves.

A growing role

Long-term disability insurance is on the upswing, says KennethA. Bloch Sr., president of The Bloch Agency Inc. in Charlotte,N.C.

“It's going gangbusters right now,” he says. “People want tohave protection.”

The trend especially affects individual, guaranteed-issuedisability coverage.

“We’re not seeing new sales in group long-term disability,”Brady says. “It's become an ancillary product.”

Employers are focused on providing medical coverage, and so areless interested in funding additional group benefits.

In general, executive populations are more likely to buyindividual, guaranteed-issue policies than other workers, expertssay.

Brady says he first saw the trend of individual executivecoverage with law firms.

“They’ve gotten really competitive around recruiting, and thisis a way to lure people who are coming to it at partner level. It'sa recruiting and retention tool for associates as well,” hesays.

From law firms, individual disability has moved to otherbusinesses, which also use it as an executive retention tool.

“It's a form of golden handcuffs,” Brady says.

Some of the firms that buy individual, guaranteed-issue coveragealready have group coverage. Their professional staff members valuelayered group and individual coverage, because group coverage oftencomes with a maximum benefit that's a less-than-adequatereplacement for their monthly incomes.

“A group policy might have a limit of $5,000 or $7,500 permonth, and some people need to subsidize that with an individualproduct,” Bloch says.

The subsidy often comes with affordable rates, he adds, notingthe curve between individual and group pricing has flattened.

“We’re working with a law firm that wanted to increase theirmonthly long-term disability benefit from $10,000 a month to$15,000 a month,” Bloch says. “We got new bids and compared them tothe rates for the old maximums, and found that they could buy anindividual product for almost the same price as a group product,with guaranteed issue.”

That's led some firms to buy individual coverage for an entirecompany, including workers outside the executive levels.

“We had a case in which brokers were selling to workers andexecutive staff, including drivers, warehouse staff, salespeople,and executives,” Brady says. “They were augmenting group coveragewith individual coverage.”

Most of the new individual policies being sold have the bestavailable features, especially when the beneficiaries areexecutives.

“These are top-drawer products that pay out if you’re not ableto work in your occupation, with a trend toward not limitingpolicies by mental disease or substance abuse,” Brady says.

Coverage might come with a variety of extras, including policiesthat fund buy-sell agreements, pay off loans, pay a business'soperating expenses, or set up an educational or retirement fund forbeneficiaries and their families.

“We’re seeing growth there, too,” he adds.

By asking beneficiaries to pay income tax on the premium values,companies can arrange for benefits to be tax free to recipients.That's something many firms are doing, Bloch says, particularlygiven that many corporate executives think health care reform willpush tax rates higher.

“A company can write policies off as a business expense, as longas it's subject to non-discrimination rules,” he notes. “Givesomeone a bonus, they pay the tax, and then the benefits are taxfree.”

Other firms prefer to carry the initial tax burden themselves,particularly given the relatively small number of employers whoeventually will collect benefits. These companies might mix groupand individual coverage, to increase taxable benefits. If benefitsare tax free, Bloch says, policies typically are designed toreplace about 65 percent of income. Policy combinations that mixtaxable and tax-free benefits typically replace around 75 percentof pre-tax income, and completely taxable benefits usually replaceabout 80 percent of pre-tax income.

An employer who subsidizes coverage offers a significantbenefit, of course, and even those who offer long-term disabilityas a voluntary benefit typically offer employees at least somein-kind help by letting them choose and purchase a policy duringwork hours, with educational meetings on company time.

“The employer doesn't have to put out any money for it, but itlooks like a benefit,” Brady says.

Profitable product

Guaranteed-issue, individual, long-term disability provides anopening to other products—but it's also profitable on its own,Brady says, across different companies and jobs.

“We price our products by each occupation, so it doesn't matterwhat kind of occupations we get,” he says. “Our returns have beenreally strong.”

That's in part because employer-paid policies have much lowerclaim rates than do true individual policies, which individualstypically seek without employer input.

“The people who buy underwritten long-term disability may havesomething in their past that will lead to a claim,” Bloch says.

Employer-paid policies, on the other hand, are often written forwhite-collar employees from every industry.

“These people are employed, and that makes the claims experiencesuperior to individually underwritten business.”

Voluntary individual disability is also on the rise, but isn'tas profitable, Bloch says, again because people with a reason touse it are more likely to buy it.

Both policy types may become more expensive, depending on SocialSecurity's ability to provide basic disability benefits—a capacitythat government numbers suggest will run out in 2015. Manylong-term disability products integrate with Social Security. Theypromise the beneficiary will receive a particular monthly income,but assume that Social Security will provide part of it. Ifcarriers must pay the entire amount, rates will go up.

“The good individual policies don't integrate with SocialSecurity,” Bloch says.

Room to expand

Even with long-term disability's growing popularity, there'sstill a substantial opportunity to sell more of this benefit,experts say.

“The biggest hurdle is that people don't recognize the need,”Brady says. “The customer doesn't understand that their ability toearn an income is their greatest asset, and that they need toprotect that. We need more people to come into the business andsell this product.”

Carriers are doing their part, Bloch says, by bringing out newproducts to cover new risks.

“They’re being creative for the first time in a long time,” hesays, citing disability protection for key people—a help for smallbusinesses—as well as options that provide pension completion,student loan repayment, alimony and child support payment,educational funds for college or private school, or provisions fordependents with special needs, as new potential policy options.

Unfortunately, he says, many producers are confused about howall those new policies work.

“Carriers are trying to make it easier for producers, but a lotof producers have backed off individual, because they’re afraid ofmaking a mistake,” Bloch says.

Fixing the problem will involve getting back to the basics ofinsurance sales, says Doug Lenhoff, managing director and founderof DIBroker in Lake Oswego, Ore.

“The sales skills among insurance folks aren't very good,” hesays. “Part of the issue is that, as a profession, we’ve abandoneda lot of the training that we used to associate with it.”

Many issuers consolidated or left the marketplace in the 1980s,and that means fewer companies to train new disability insurancesalespeople, and fewer salespeople who expect disability policiesto provide a substantial portion of their incomes, he says.

“I just made a presentation to a group of brokers in Lincoln,Neb., and I asked which of them made 10 percent of their incomefrom disability insurance. No one did. But they’re free to writewhatever they want. You can't get to a sales presentation if youdon't bring up the subject,” Lenhoff says.

The salespeople who do bring up disability coverage often do soas a secondary concern, one slipped into a primary presentation ona different product.

“It's the ‘oh, by the way’ approach, where disability insuranceis a secondary sale to life insurance or long-term care insurance,”Lenhoff says. “We’re taught that this is not an importantproduct.”

The product fills an important need, Lenhoff says, and theindustry has created high-quality offerings.

“We don't need better products. The products are great, andbuying them should be basic. The ability to make an income is thebasis of all other financial plans.”

When insurance people realize the potential for what Lenhoffsuggests renaming “income-protection insurance,” he says, “somebodyis going to look at this and say, holy smokes, this is a gold mine.If I start marketing hard, I can make a lot of money sellingdisability insurance. And nothing motivates like seeing someoneelse have success with something. We work with a lot of smartpeople. Someone is going to see this opportunity and grab it.”