Disability insurance: Get it off the benefits back burner

People rarely think about disability the same way they think about health care. But without coverage, both can have a similarly devastating impact on a person's health, income or livelihood.

So with all the extra attention being paid to health care reform as the Patient Protection and Affordable Care Act (PPACA) goes into effect, it's more important than ever for brokers to encourage their clients to take a closer look at all of their benefits — especially disability coverage.

PPACA affects the group of 47 million Americans who have no private health insurance. At the same time, about two-thirds of the workforce, roughly 100 million working Americans, has no private disability insurance. Yet, arguably, it's just as likely to suffer a severe financial setback from losing one's income as it is to incur large medical expenses.

There is no question that PPACA is already affecting the income-protection landscape. Without a concerted effort by all stakeholders, the end result could be even fewer protected incomes. More workers experiencing disabilities could find themselves without a source of income to support their households and no available resources to help return them to productive employment.

According to the Council for Disability Awareness' Disability Divide Research, employees, advisors and HR professionals agree that income is almost every American worker's most valuable financial resource.

Using the CDA's earnable income quotient calculator, the estimated lifetime earnings for a 35-year-old worker currently earning $46,000 per year exceeds $2 million. That is more than eight times the median price of U.S. homes sold in August 2013, and 27 times the average balance in a U.S. worker's 401(k) account. Virtually every working American needs income to survive financially. If income is most important, certainly it follows that protecting income is a necessary step toward financial security.

The voluntary benefits trend

PPACA is accelerating a trend toward more voluntary benefit plans, more employee choice, and more employee responsibility.

Meanwhile, other non-health-insurance benefit programs are being caught in PPACA's backwash. With more resources being diverted to focus on health care issues, there's less focus on other types of benefits — in particular, disability insurance programs.

According to the CDA's 2013 Long-Term Disability Claim Review, the number of employees insured by group LTD plans increased just 1 percent in 2012. And that's down about 6 percent since 2008. The number of employers offering group LTD plans was flat in 2012, following three consecutive years of decline.

Anecdotally, 2013 prospect activity and sales of new disability insurance benefit programs have fallen below expectations, as employer and distributor attention has been riveted on health plans and PPACA compliance.

Many of the new disability benefit programs being sold are voluntary, partly because employers don't want to commit to any additional benefit costs given the uncertainty of health care reform impacts. This means employees still need to decide whether to opt in and pay the premium.

Other factors driving this "voluntarization" of benefit programs include:

Employers' desire to stabilize or reduce their benefit (mostly health care) budgets
The desire on the part of employers to offer a robust benefit program within the scope of a limited benefits budget
Many employees' preferences to get their benefits at the worksite
More marketing focus devoted to voluntary benefits by carriers and distributors, in response to employer needs
Availability of new and better technology to support the sale and administration of voluntary benefit programs, making mass customization possible (Health care private exchanges are just one example)
Fewer and fewer insurance agents who work with individuals one-on-one to meet their protection needs

Many companies that currently have disability benefit programs have put them on autopilot in order to focus on PPACA compliance. So far, employers don't seem to be terminating disability plans, as some predicted would occur, but few are adding new plans.

Historically, most disability plans were chosen by the employer, paid for by the employer, and all eligible employees were automatically enrolled. Most employees covered by group long-term disability insurance today are still in employer-paid plans.

But that is slowly changing. And as more employers adopt voluntary programs, it is noteworthy that typically about 40 percent to 50 percent of the employees sign up for that voluntary disability program, leaving some employees unprotected.

An underestimated risk

The CDA's Disability Divide Research, conducted with employees, financial advisors and HR professionals, reveals all three groups dramatically underestimate — typically by a tenfold or more factor — their odds of experiencing a disability that will prevent them from working for an extended period of time.

According to the Social Security Administration, about one in four 20 year olds entering the workforce today will experience a long-term disability during their working career. Yet, when it comes to facing up to the potential of deteriorating health in the future, most wage earners are in denial that it could ever happen to them.

At this crossroads of the typical employee's lack of understanding of disability risk and the trend toward voluntary disability plans lies a critical educational challenge. Given the importance of income — virtually all working Americans need income to survive financially — protecting employee income is vitally important. Many workers' incomes are not protected today, and many others are protected only because their employers choose to provide and pay for long-term disability insurance programs. Some have protection, but not enough, which can lead to a false sense of security.

In unpublished data from the CDA's Disability Divide: Advisor Study, just 10 percent of the surveyed individual advisors thought their clients fully understood or knew the key points about the disability insurance plans offered by their employers.

In the Disability Divide: Employer Study report, fewer than half of the human resource benefits experts surveyed thought their employees fully understood or knew the key points about their companies' disability insurance plans. And only 26 percent of those same HR benefits experts thought their employees were adequately prepared to withstand the financial impact of a disability.

Somewhat ironically, those same HR professionals also overwhelmingly identified themselves as the key source for their employees' information about their disability risk and disability insurance benefits.

The education solution

Education is the key to helping employees choose the right benefits for themselves and their families. As the responsibility for benefits decisions shifts to employees, they need information and resources to support informed, fiscally sound choices.

In particular, many employees have a limited understanding of disability and disability insurance, so educating them about their disability risk and the consequences of disability is very important to help make income protection a no-brainer. And many studies have shown that when employees understand their benefits, they appreciate them more, have higher job satisfaction, remain with their employers longer, and are more productive.

Advisors and employers, and certainly American workers, all benefit from protecting their incomes from the impact of a disabling illness or injury. So does society as a whole, as many of the financial and sociological burdens of employees who become disabled with no source of income fall back on taxpayers and society in general.

It is important for all to join forces in this educational effort. After all, it is just as easy to be crushed financially by income loss as by large medical expenses.

For more on disability insurance, see:

Disability insurers wrestle for mind share

Disability Insurance Observer: Bionic

Supreme Court hears LTD case arguments