Disability Insurance - New and Exciting Opportunities

1. Disability Insurance - New and Exciting Opportunities Michael Rosenzweig CLU, ChFC Mark W. Anthoine RHU, CLU, ChFC

2. Today’s Presentation • Why DI is still important today • Why Multi-Life DI? • What Drives the Interest in Multi-Life Disability Plans? • What Types of Cases and Why? • Sample Presentations • What Happens When Income Protection Need Diminishes?

3. Many of the conditions that once would have killed people are leaving them disabled instead. 100% 65% 55% 38% INCREASES in DISABILITY 50% 34% 35% 13% 14% 27% DECREASES in DEATH 36% 37% 47% 49% 71% 74% Hypertension Heart Disease Cerebrovascular Diabetes Source: LIMRA Men Women

4. Chances of Disability • Percentage of people who can expect to suffer a disability • lasting at least 90 days before reaching age 65 AgePercentageDisabled 25 52% 1 out of 2 30 51% 1 out of 2 35 48% 4 out of 9 40 45% 4 out of 9 45 40% 2 out of 5 50 34% 1 out of 3 55 27% 1 out of 6 60 16%1 out of 6 Source: Commissioners’ Disability Table

5. Why Multi-Life? • More efficient use of time compared to the traditional “one sale at a time” approach to selling disability insurance • Case size continues to grow as new employees are hired • Better quality business, retention and possible underwriting concessions to alleviate process “frustrations”

6. Why Multi-Life? • Higher continuing stream of revenue for service • Not many agents in this small/mid size marketplace • More cross marketing opportunities (ie estate plans, non- qualified plans, long term care, employee benefit plans, etc.)

7. What Drives the employee interest in Multi-Life DI ? • Premiums to employee are discounted • Convenience of payroll deduction • Favorable tax treatment at time of claim • Underwriting leniency • Higher Benefit Maximums

8. What Drives the employee interest in Multi-Life DI ? • Broader definition of covered income • Stronger contractual provisions • Future Cost Control • Conversion to long term care

9. Typical Group LTD Design • 60% Income Replacement • Coverage Provided by Employer (benefit is taxable) • Maximum Monthly Benefit is $10,000 • Only Base Compensation Covered

10. Typical Group LTD Design • Incentive Bonus, Deferred Compensation NOT Covered • Limitation on benefit provisions • Pre-existing condition limitations • Benefit offsets

11. Plan’s Effect on Highly Compensated- Reverse Discrimination x LTD at 60% to $10,000 cap

12. Gender/ Age Salary Bonus Total Comp LTD Benefit % Total Covered M52 250,000 250,000 500,000 10,000 24% F48 250,000 100,000 350,000 10,000 34% M38 200,000 75,000 275,000 10,000 44% F49 100,000 150,000 250,000 10,000 48% M58 100,000 150,000 250,000 10,000 48% F43 100,000 140,000 240,000 10,000 50% M39 100,000 125,000 225,000 10,000 53% F35 75,000 145,000 220,000 10,000 54% M42 75,000 140,000 215,000 10,000 56% F40 75,000 135,000 210,000 10,000 57% ALL OTHERS < 199,999 9,999 60% CAP Impact When Total Comp Is Covered

13. Gender/ Age Salary Bonus Total Comp LTD Benefit % Base Covered M52 250,000 250,000 500,000 10,000 24% F48 250,000 100,000 350,000 10,000 34% M38 200,000 75,000 275,000 10,000 44% F49 100,000 150,000 250,000 5,000 24% M58 100,000 150,000 250,000 5,000 24% F43 100,000 140,000 240,000 5,000 25% M39 100,000 125,000 225,000 5,000 27% F35 75,000 145,000 220,000 3,750 20% M42 75,000 140,000 215,000 3,750 21% F40 75,000 135,000 210,000 3,750 22% ALL OTHERS < 199,999 9,999 60% CAP Impact When Only Base Comp Is Covered

14. Executive “Pay for Performance Compensation” • Recent study shows that on average… • 25% of overall compensation is derived from bonus income based on performance results for people earning $150,000 to $300,000 • 40% of overall compensation is derived from bonus income for people earning over $300,000 to $750,000 • 65% of overall compensation is derived from bonus income for people earning over $750,000

15. Design Options Buy-Up Carve-Out “Choices” (Defined Contribution) Reverse Combo Reverse Combo Sandwich Client Objectives Equalization Contract Definitions Cost Control “Program” Equalization and Cost Control Equalization and Cost Control Various Types of Cases

16. Design Options “Choices” (Defined Contribution) Reverse Combo Sandwich Client Objectives Cost Control “Program” Equalization and Cost Control Various Types of Cases

17. Employee “Choices” Program • Allows EMPLOYEES a “Choice” from the following options: • Group LTD Only • Self Carve-Out to IDI • Group LTD with IDI Buy-Up • The company continues to contribute premium equal to the Group LTD premium regardless of the “Choices” option selected by the employee.

18. Employer’s Perspective Voluntary – No cost to employer Doesn’t disturb existing LTD plan Minimal administration required Premium discount savings provided to employees as a “benefit” Employee’s Perspective Personal decision and choice made by employee Fills gaps created by LTD caveats Personal attention given Premium discount made available by employer helps reduce cost to employee “Choices” Disability Benefit Program

19. Option 1 Option 2 Option 3: Combo LTD Only DI Only LTD + DI = TOTAL Benefit Formula 60% By Table 60% By Table B/T Monthly Earnings $29,167 $29,167 $29,167 Covered Monthly Earnings $13,333 $29,167 $29,167 B/T Monthly Benefit $8,000 $12,000 $8,000 + $10,000 = $18,000 A/T Monthly Benefit $5,200 $10,600 $5,200 + $10,000 = $15,200 Monthly Premium $130 $375 $130 + $312 = $442 Monthly Premium “Credit” ($130) ($130) ($130) + $0 = ($130) EE Net Monthly Premium $0 $245 $0 $312 $312 “Employee Choice” Program

20. Group LTD plan covering 60% of SALARY to maximum of $10,000/month Percentage of earnings covered decreases as earned income increases How Group LTD Plans “Discriminate” Against Higher Earning Employees

21. Results…23 employees covered with DI…guaranteed issue problem resolved Cost to employer held within budget Employees able to “buy-up” and maximize their disability coverage The Ultimate Option: Focus is on Target Replacement % using DI as the Underlying Base PLUS Increasing Overall Coverage for Employees

22. Results…23 employees covered with DI…guaranteed issue problem resolved Cost to employer held within budget Employees able to “buy-up” and maximize their disability coverage Reverse Combo Sandwich The Ultimate Option: Focus is on Target Replacement % using DI as the Underlying Base PLUS Increasing Overall Coverage for Employees

23. Transitioning From LTD to Long-term Care Top of the Table Annual Meeting October 2003 Palm Springs, CA Mickey Rosenzweig, CLU, CHFC, EAP

24. Query ? • At our firm we have over 1,500 professional clients and over 150 small and mid-size corporate clients. • How to try to penetrate the transition from DI to LTC? 1. Individual Market 2. Corporate Market

25. Why is there a need to penetrate the LTC market? Source: projections of Total Population by Age Groups, Population Projections, Population Division, U.S. Census Bureau, Washington, DC December 1999-January 2000, NP-T3A-F.

26. Why is there a need to penetrate the LTC market? Source: How Will You Pay for Long Term Care if You Need It? Office of Personnel Management for the Government. http://www.opm.gov/insure/itc/posters/pay_for_itc.htm. Citing: Dept. of Health and Human Services, HCFA, Office of the Actuary, National Health Statistics Group, Personal Health Care Expenditures, 2001

27. Sales Distribution of LTCI by Age. Source: based on data from Broker World, July 2002, page 154.

28. Doctor, Professional, Individual Market • Our dilemma ? • Client average age now is about 50. • Carriers changed issue/participation limits dramatically in mid 1990’s. • We’re writing about $250,000 per year in non-can DI. • Most Doctor/Professionals are now over insured. • Our DI production annually has dropped dramatically, but we service about $4million per year in non-can premium.

29. Transition from DI to LTC • RFS current attempt - Issues With Clients • Many DI policies have Lifetime coverage if disabled before age 55 or 60. Most of our clients are in their early 50’s in age. • Most have accumulated wealth to now protect as they age. • Most can’t qualify for more DI coverage now. • LTC is the next mountain to climb. • LTC sales substitute firm revenue lost from DI sales.

30. RFS Transitioning & Marketing to Clients • Waive mailings. Your handouts include 3 letters we send out bi-weekly to 20 clients. (3 letters over 6 weeks) • They are then contacted on the phone to discuss and arrange meetings, 6 weeks after first letter. • Handout provides our summary letter if meeting is not secured after phone call.

31. RFS Transitioning & Marketing to Clients? • We are seeing tremendous levels of activity and sales are brisk. • Collateral business: as you could imagine. • Employer leads being created!

32. Remember This Slide? • 80% of long term care claims nationally are home health care and community based care. • American Health Care Association, 1998 & Contemporary Long Term Care, 11/98 Are there any guesses on who usually provides this care?

33. LTC In The Business Market Place

34. Aged Base dollar amounts deductible in 2003* Age Before Close of Tax Year 2003 Tax Year 40 or younger41 to 5051 to 6061 to 7071 and older $ 250$ 470$ 940$2510$3130 Tax Treatment For Self-employed, S Corp., Partnerships and Limited Liability Corp. *Premiums fully deductible for employees, 2% or less interest in S-Corp., retirees and spouses.

35. Tax Treatment in a C-corporation • IRC Section 7702B • 1. Tax deductible Premiums! • 2. Tax free Benefits!a. Reimbursement Policy – benefits not incomeb. Per Diem Policy - $220/day in 2003 tax free. (excess taxable if it exceeds expense incurred) • 3. Premiums not reportable as W-2! • That’s right 100% deductible for “W-2” employees. (Retirees and spouses also)

36. What Types Of Groups Do We Look For? • Sole Proprietorships, S-Corps. • Partnerships like law firms, medical practices, accounting firms, etc. • C-Corps. • Hospitals • Associations, affinity groups and unions

37. Employer Flexibility In Design • Employer can provide minimum benefits • Employee can buy up additional benefits • Voluntary plans, no cost to employer • Different plans for different groups in company • Sound familiar? Like the DI market

38. Insured has LTC protection C-Corporation LTC Tax Treatment - 2002 Company Purchase “LTC Insurance” on Key Executives “LTC Insurance” is health insurance IRC 7702B Premium Deductible IRC 162 Premiums paid for LTC are not Taxable to Executive IRC 106 Benefits are Tax Free up to $210 per day IRC 7702B d(4) ESTATE Gets refund of premium upon death of insured's) IRC 7702B (b) (2) (C) This information is not intended as legal or tax advice. You should consult with your legal and tax advisors to determine the proper legal and tax treatment based on your specific situation.

39. Creative Designs in C Corporations • Accelerated Payment Policies ! • Get your cake and eat it to ! • Paid up at age 65* • in 10 years • in 5 years • in 1 year *Using C Corp. dollars creatively

40. Example of One Carrier in the Market Age 50 48 Elimination Period 0 days 0 days Benefit Period Lifetime Lifetime Nursing Home Daily Benefit $300 $300 Home Care Daily Benefit 100% 100% Monthly Benefit Rider Yes Yes Inflation Protection compound compound Non-forfeiture Benefit none none Return of Premium upon death upon death Spouse Premium Waiver Yes Yes Surviving Spouse Premium Waiver No No Indemnity Rider Yes Yes Policy Costs Return of Premium Pay Type = 10 Pay Guarantee ANNUAL PREMIUM $ 30,023 $ 27,941 AGE 63 5 pay 136,353 AGE 63 1 pay 380,998

41. Where Do Single Premium Payment Options Work Best ? • C-Corp / Key Employee bonus • C-Corp knows they will have larger write offs in future.

42. What’s In It For You? • Company / Individual will enjoy some or total deduction of premiums. • Insured fills a devastating financial void now. • You win by increasing your revenue this year and with renewals.

43. Best Of Luck As You Too Transition Into The Long Term Care Market!