Brokerage Ops the July/August 2013 issue

Gambling With Bad Odds

Educated employees will beef up their disability coverage—on their own dime.
By Scott Maker Posted on July 15, 2013

Oh, sorry. Getting ahead of myself. Here’s the question: How can we close the gap in coverage for a product employees want and need but less than a third have access to?

Research conducted last year by the Consumer Federation of America found that when workers were made aware of the risks and causes of disability and the likely finances available to them if they became disabled, nearly 90% said it was “personally important” to have disability coverage. In addition, 90% said all businesses should offer disability insurance and six in 10 said they would pay the estimated $30-a-month premium for protection.

Here’s the unfortunate part: Nearly 70% of working Americans don’t have access to this affordable coverage at work. Given what’s at stake, that’s an astounding shortfall.

Following its earlier research, the consumer federation is taking a deeper look at the value of coverage by surveying those who receive, or recently received, long-term disability benefits. This research is producing powerful anecdotes about the importance of income-protection insurance in helping to pay for medicine and groceries and in preventing foreclosure on mortgages. Beyond the financial, there’s the emotional benefit, a byproduct of being financially stable when faced with significant health challenges.

The Value of Coverage

In 2011, Unum commissioned a study by Charles River Associates to assess the value of disability benefits provided in the workplace. The study found private, employer-sponsored disability insurance helps as many as 575,000 families avoid impoverishment and the need for public assistance programs.

Individuals with income-protection coverage who become disabled are much less likely to require support through government assistance programs. The Charles River report suggests that poverty among working adults who become disabled during their careers could be virtually eliminated if all workers had some form of standard employer-sponsored disability insurance.

A new report by the Advisory Council on Employee Welfare and Pension Benefit Plans, recently submitted to the Secretary of Labor, recommends that the Department of Labor conduct a comprehensive education campaign for employers and their employees around the risks of becoming disabled from illness or injury and the significant financial impact a disability can have on an employee’s financial security. This report echoes recent recommendations from the President’s Advisory Council on Financial Capability, which noted that the workplace is a vital resource for directing employees toward critical financial products such as disability insurance. The similar conclusions reached by these reports underscore the important role that benefits firms can play in helping clients and their employees prepare for the financial consequences of illness and injury.

In the large-employer market, disability insurance is almost always part of an employee’s benefits package. The real gap in coverage is in the small- to midsize-employer market, where the competition for benefits dollars is fierce. At this level, an employer’s consideration of disability coverage almost always comes down to affordability.

This is where employer-based education on the value of disability makes the biggest difference. Teaching employees a few important facts about the likelihood of becoming disabled and providing affordable coverage at the workplace through group or group voluntary can stimulate participation.

What Employees Should Know

Americans greatly underestimate the probability—and the impact—of losing their income due to illness or injury. And they overestimate the safety net available to them should they become disabled. The Social Security Administration estimates that a quarter of today’s 20-year-olds will become temporarily disabled before age 67. For workers between 35 and 65, the odds are higher: Up to one-third of these workers will experience a disability that will last at least six months. Statistics compiled by the Society of Actuaries show workers who become disabled for 90 days remain disabled for an average of two years.

Ninety-five percent of disabling illnesses and accidents are not work-related and thus are not covered by workers comp, says the Council for Disability Awareness. The average Social Security Disability Insurance benefit, $1,100 a month, is reserved for eligible disabilities expected to last for at least one year or result in death. Roughly 70% of applicants are turned down when they apply, and the four-tiered appeals process can take years.

Numerous studies have shown that most Americans do not have enough savings to compensate for a disability, with many saying they live paycheck to paycheck and would be unable to weather any disruption to their income stream.

The Auto-Enroll Option

Although employees need, want and would pay for disability insurance, a chasm in coverage exists. Based on the model used for employee 401(k) contributions, automatic enrollment may be the solution to help your clients provide disability coverage and see healthy participation rates. One of Unum’s customers, a large food producer, increased participation in its group voluntary long-term disability plan from 25% to 70% using auto enrollment over five years. This commitment—coupled with clear communications about the coverage, financial implications and opt-out options—were the keys to a successful auto enrollment.  

It’s an approach that should bring good business for you and that helps span a gap in coverage that is leaving so many working Americans at financial risk.

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