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

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

The trend especially affects individual, guaranteed-issue disability 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 are less interested in funding additional group benefits.

In general, executive populations are more likely to buy individual, guaranteed-issue policies than other workers, experts say.

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

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

From law firms, individual disability has moved to other businesses, 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 coverage already have group coverage. Their professional staff members value layered group and individual coverage, because group coverage often comes with a maximum benefit that's a less-than-adequate replacement for their monthly incomes.

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

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

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

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

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

Most of the new individual policies being sold have the best available features, especially when the beneficiaries are executives.

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

Coverage might come with a variety of extras, including policies that fund buy-sell agreements, pay off loans, pay a business's operating expenses, or set up an educational or retirement fund for beneficiaries 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, particularly given that many corporate executives think health care reform will push tax rates higher.

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

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

An employer who subsidizes coverage offers a significant benefit, of course, and even those who offer long-term disability as a voluntary benefit typically offer employees at least some in-kind help by letting them choose and purchase a policy during work hours, with educational meetings on company time.

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

Profitable product

Guaranteed-issue, individual, long-term disability provides an opening 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 matter what kind of occupations we get,” he says. “Our returns have been really strong.”

That's in part because employer-paid policies have much lower claim rates than do true individual policies, which individuals typically seek without employer input.

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

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

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

Voluntary individual disability is also on the rise, but isn't as profitable, Bloch says, again because people with a reason to use it are more likely to buy it.

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

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

Room to expand

Even with long-term disability's growing popularity, there's still 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 to earn an income is their greatest asset, and that they need to protect that. We need more people to come into the business and sell this product.”

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

“They’re being creative for the first time in a long time,” he says, citing disability protection for key people—a help for small businesses—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 for dependents with special needs, as new potential policy options.

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

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

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

“The sales skills among insurance folks aren't very good,” he says. “Part of the issue is that, as a profession, we’ve abandoned a 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 insurance salespeople, and fewer salespeople who expect disability policies to 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 income from disability insurance. No one did. But they’re free to write whatever they want. You can't get to a sales presentation if you don't bring up the subject,” Lenhoff says.

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

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

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

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

When insurance people realize the potential for what Lenhoff suggests renaming “income-protection insurance,” he says, “somebody is 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 selling disability insurance. And nothing motivates like seeing someone else have success with something. We work with a lot of smart people. Someone is going to see this opportunity and grab it.”