Combination Group Combination Group and Individual and Individual

Disability PlansDisability Plans

Companies are shifting away from 100% employer-paid programs

Employers are looking at options, including voluntary, payroll deduction products, and combination plans to address real need, but limit their current and future costs

2003 totaled an estimated $5.07 billion, a 19 percent increase over sales for 2002

Source: Eastbridge Consulting Group’s U.S. Worksite Study, 2002

Trends in Worksite SalesTrends in Worksite Sales

Why This Class?

Neither group or individual disability income plans (IDI) provides a complete solution for every employer situation

Group LTD alone does not cover all applicable income high high-earners or those with variable income, ie., bonus or commissions

Group LTD

Designed with a maximum benefit amount designed to protect the majority of employees

Definition of covered monthly income usually is fairly restricted– Often does not cover commissions or bonuses– Even when does cover commissions or

bonuses, usually has an averaging to limit insurance companies exposure

Advantages of Group LTD

Typically cost is borne by employer Covers all eligible employees Cost effective Simple

Disadvantages to Group LTD

“One plan fits all . . . .” Limited ability to personalize to specific

individuals Limited plan design and definitional

requirements, ie., definition of earnings Limited portability Maximum may or may not cover high

earners

Advantages of IDI

Ability to tailor to the needs of the higher earners or certain classes within the group

True portability Availability of riders to personalize

coverage Stronger definitions based on contractual

language Guarantee cost and renewability

Disadvantages of IDI

Cost Effort necessary to create positive sales

environment Underwriting and selection Complication of payroll deduction Education of the participants Enrollment

Individual IDI Buy-Up

Instead of redesign of the core LTD plan, the LTD plan is often ‘capped’ at a level to provide a traditional maximum monthly benefit, however, the individual employees are offered individual policies above and beyond the group maximum

Target is often younger, more highly compensated, professional employees desiring greater or more flexible benefits and portability

Combo Plans

Definition: A combo plan is one which incorporates the group LTD with IDI plans sold to supplement the group coverage

Typically the IDI offering is based on class and is restricted to those with income or occupational need

Often the IDI can be offered with guarantee or simplified issue in these sales situations

What Do Combo Plans Provide?

For the employer– A way to minimize the cost increases found in

today’s market by limiting plan design– Avoids the escalating costs of providing rich plan

designs which run contrary to the employer’s goals

For the employee– Allows the employee to help him or herself, while

providing multi-life discounts, guarantee or simplified issue, and individual design of the program

Combo Candidates

Law Firms Physician practices and clinics Hospitals White-Collar firms Engineering firms Manufacturing carve-outs Sales organizations

0%

10%

20%

30%

40%

50%

5 - 9 10 - 24 25 - 99 100 - 999

Individual Only

Group Only

Both

Number of Employees

Percent of Companies Providing Percent of Companies Providing Employee Disability Coverage Employee Disability Coverage Percent of Companies Providing Percent of Companies Providing Employee Disability Coverage Employee Disability Coverage

Source: Response Analysis Corporation,1994

Discounted ProgramsFully Underwritten

3 or more lives 15 – 20% discount ER or EE paid Unisex rates Supports highly compensated List Bill or PAC

Guaranteed Standard Issue Program Available at 15 to 20 lives 20% + discount with unisex rates 100% participation required G.I. Of $6000 or more based on case size

Generally with LTD Carve out Wrapped around group Reverse carve out

Own-occ-to-65/not working (marketplace definition)

Available riders Residual/partial SIS COLA

No drug/alcohol limitation (no DAMN rider) on employer-paid cases.

How Does The IDI Work?

Employer-Paid Voluntary

Min. Size Group 15 participants 70 or more eligible participants*

Min. Participation 100% required 70+ eligible participants 30%

Occ Class 5AP-3AP3AP cannot be more than 15% of total lives

N/A to medical occupations

5AP-3AP3AP cannot be more than 15% of total lives

N/A to medical occupations

Discounts Discounts range from 20 to 30% off unisex rates depending on the case size.

Discounts range from 20 to 30% off unisex rates depending on the case size.

GI Max Issue Limits

# of Issue Part. Max. GI Amt.**

15-99 $100/life/month to max. of $6000

100+ $8000

# of Eligible Max. GI Issue Participants Amount**

70-149 $3000

150-299 $4000

300+ $5000

Employer-Paid and Voluntary Plan Specifications

*For cases with 15-69 eligible lives, the Home Office will consider making an offer on a Guaranteed Issue basis. Such an offer is contingent on a minimum of 15 paid lives. If fewer than 15 paid lives are written, full underwriting will be required. Discounts and GI maximum Issue Limits are the same as for cases of 70-149 eligible participants.

**The maximum amount available can vary based on the characteristics of the group.

Plan DesignPlan DesignSample IDI Offering

Sample Case

Law Firm 114 EE’s with 30 Partners Partners

– Average age 46– 68% Male– $220,000 Average income

Non-Partners– Average age 41– 70% Female– $56,000 Average income

LTD Plan Design– 60% of income up to a maximum of $6,000 per month

IDI Offer

Partners ER Paid $4,000 per month maximum Pure ‘own occ’ definition Residual Inflation Rider

Example

PartnerGross Monthly Income $17,000Group LTD Benefit $ 6,000Group Replacement Ratio 35%GI Offer $ 4,000New Replacement Ratio 59%

Applicable IRS Regs

Sick Pay Plans– Section 104,105,106 and 162 of the IRS regulations

and Title 1of ERISA serve as the framework for formalized Salary Continuation or Sick Pay Plans

IRC Section 104– Proceeds received from disability or income

replacement insurance plans are not included in a persons’ gross taxable income.

– The exclusion from gross income assumes that the coverage is purchased with after tax dollars

Applicable IRS Regs IRC Section 105

– In order for a sick pay plan to be tax deductible it must be in place prior to a disability.

– Employers do not have to give equal benefits to all employees.

– Requires the employee to include in gross income the proceeds received from employer purchased plans

IRC Section 106(a)– Employer paid disability insurance premiums for individual

or group policies are not included in an employees taxable income.

– Disability income benefits are tax exempt to the employee as long as the employee is paying the full premium.

IRC Section 162 (Executive Bonus)

An employer can deduct a “reasonable allowance” for wages and other compensation for services actually rendered.

Formalized Sick Pay Plan

The Plan must be in writing and describe who is covered and what are the plan benefits

It must be communicated to the covered employees

The benefits available should be put in writing in some form of business memo or letter

Qualified Sick Pay Plan FAQ What is a Qualified Sick Pay Plan? It is a

simple agreement providing for a firm to continue some portion of an employee’s wages during a disability.

What type of firm or business entity may adopt a Sick Pay Plan? Any corporation(C or S), professional corporation, partnership, or sole proprietorship.

When is a person considered to be an employee? When the person is currently performing services or when the person is receiving benefits under the terms of a Qualified or Formalized Sick Pay Plan.

When must a plan be adopted by a firm? Before the employee becomes disabled!

Multi-Life Plans offer discounted premiums

Guaranteed Issue program does not require financial documentation

Guaranteed Issue does not require medical underwriting

Plan design is done at group level

Answering ObjectionsAnswering Objections

Guaranteed issue (larger qualifying groups)

No detailed underwriting process

Discounted premiums on unisex rates

Rapid turnaround of application

Higher income protection

Can be employer paid

Insured WinsInsured Wins

Create perks for key employees Deductible business expense List billing Reduce LTD costs Foster persistency and loyalty among

key employees Allow employer to add an additional

benefit without incurring additional cost

Employer WinsEmployer Wins

No detailed underwriting process; streamlined underwriting

Approach multiple insureds —

Cross-selling opportunities

Discounted premiums on unisex rates

One plan design for all

Multiple sales — more commission $$$

Agent WinsAgent Wins

Questions?????Questions?????