Combination Group and Individual Disability Plans

1. Combination Group and Individual Disability Plans

2. Trends in Worksite Sales •  • 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

3. 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

4. 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

5. Advantages of Group LTD • Typically cost is borne by employer • Covers all eligible employees • Cost effective • Simple

6. 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

7. 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

8. Disadvantages of IDI • Cost • Effort necessary to create positive sales environment • Underwriting and selection • Complication of payroll deduction • Education of the participants • Enrollment

9. 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

10. 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

11. 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

12. Combo Candidates • Law Firms • Physician practices and clinics • Hospitals • White-Collar firms • Engineering firms • Manufacturing carve-outs • Sales organizations

13. Percent of Companies Providing Employee Disability Coverage Source: Response Analysis Corporation,1994 Number of Employees

14. Discounted Programs • Fully 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

15. How Does The IDI Work?  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.

16. Plan Design Sample IDI Offering 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.

17. Sample Case

18. 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

19. IDI Offer • Partners • ER Paid • $4,000 per month maximum • Pure ‘own occ’ definition • Residual • Inflation Rider

20. Example Partner Gross Monthly Income $17,000 Group LTD Benefit $ 6,000 Group Replacement Ratio 35% GI Offer $ 4,000 New Replacement Ratio 59%

21. 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

22. 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.

23. IRC Section 162 (Executive Bonus) • An employer can deduct a “reasonable allowance” for wages and other compensation for services actually rendered.

24. 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

25. 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!

26. Answering Objections 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

27. Insured Wins 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

28. Employer 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

29. Agent 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 $$$

30. Questions?????