1. DISABILITY INCOME INSURANCE Objectives Discuss disability insurance as a risk transfer tool Identify and describe the key product features of long- term disability insurance (LTD) Discuss the importance of how disability is defined and identify the three main definitions of disability Discuss the factors that impact on LTD premium Discuss the features that address the issue of partial disability Identify the common exclusions found in the LTD contract 1

2. Why Is Disability Income Insurance So Important? It replaces a portion of income lost due to illness or injury Helps provide peace of mind for family members who depend on your income 2

3. Can it Happen to You? Some Facts… According to the US Census Bureau, nearly seventeen percent of working-age Americans reported a disability in 2010 Three in ten workers entering the work force today will become disabled before retiring. An illness or accident will keep one in five people out of work for at least a year during their working careers. One in 8 workers will be disabled for at least five years during their working years Of the over 6.8 million workers receiving SS disability benefits, almost half are under age 50. The average long-term disability absence lasts 2.5 years. 63 percent of all disabling injuries occur outside of work. Workers compensation does not apply. According to the U.S. Bureau of Labor Statistics, 38 percent of all workers in private industry were participating in short-term disability income insurance in 2012; 32 percent were participating in long-term disability income insurance. Sources: NAIC, ACLI, CDA, BenefitsPro 3

4. What Is Your Most Valuable Asset? Your home may be your biggest asset, but your ability to work and earn an income is your most valuable asset. 4 1 Motor Trend, January 2005 2 www.investmenttools.com, May 2006 3 Projected cumulative income, 35-year-old earning $6,250/month assuming 4% annual increase to age 65 Principal Financial Group

5. Potential Earnings to Age 65 (with 5% annual salary increases) What Is Your Earnings Potential? 5 Principal Financial Group

6. The Need Approximately 30% of all people aged 35 to 65 will suffer a disability for at least 90 days, and about one in seven can expect to become disabled for five years or more.* *Health Insurance of America, 2000 6 Principal Financial Group

7. Times Are Different Now. 7 What used to cause death, now causes disability… For example, deaths due to hypertension are down 73%, while disabilities due to hypertension have increased by 70%. Principal Financial Group

8. Leading Causes of Disability Claims, 2013 8 Source: Unum/BenefitsPro

9. Source: Principal Life Disability Insurance claims incurred as of March 2007. The above is for illustration purposes only and is not intended as an inclusive representation of all claims. Real claims, it can happen …. 9 Principal Financial Group

10. Which Job Would You Rather Have? 10 * $100,000 less $1,500 in hypothetical annual disability income insurance premiums. Hypothetical premium amount paid and hypothetical annual benefit amount received depends on various factors. Principal Financial Group

11. Could You Afford Your Home Without Your Income? 11 Unexpected illnesses and injuries cause 350,000 personal bankruptcies each year. Nearly 50% of all home foreclosures are due to a disability. 1 out of every 18 mortgages are not being paid because of a disability to the mortgage holder. Source: National Underwriter, HUD Principal Financial Group

12. Can you live on 42% of your income? Is employer-provided group long-term disability (LTD) insurance coverage enough? 12 Chart based on $6,250 gross monthly income ($75,000 annual), with 60% Group long-term disability program, assuming a 30% tax bracket for Federal, State and FICA Principal Financial Group

13. What If You Were Unable To Work? What would happen to your income? How would you maintain your lifestyle? Where would the money come from to pay for bills? What happens to your retirement savings and other financial goals? 13

14. Addressing the Problem: Non-Insurance Options Borrow money from family or friends Sell property or investment assets Use savings, credit cards or home equity Move from your home Social Security Disability Benefits only if strict eligibility requirements are met, e.g., you must first have worked in jobs covered by Social Security you must have a medical condition that meets Social Security's definition of disability. 14

15. Insuring the Exposure Individual Short-term or cause related Long-term disability (LTD) Employer Group STDI Group LTD Worker’s Comp Others? 15

16. Key Provisions of LTD Insurance Definitions Benefits Waiting/Elimination Periods Rating Factors 16

17. Definition of Disability is a Key Contract Feature The four most common definitions of total disability are: 1. Inability to perform the duties of the insured’s occupation 2. Inability to perform the duties of any occupation for which the insured is reasonably fitted by education, training, and experience 3. Inability to perform the duties of any gainful occupation 4. Loss-of-income test, i.e., your income is reduced as a result of sickness or accident Most insurers use a combination of 1 & 2 17

18. Other Definitions Partial disability is defined as the inability of the insured to perform one or more important duties of his or her occupation Some policies offer partial disability benefits Usually, partial disability benefits must follow total disability Partial disability benefits are paid at a reduced rate for a shorter period Residual disability means a pro rata disability benefit is paid to an insured whose earned income is reduced because of an accident or sickness The typical provision has a time and duties test that considers (compares) both income and occupation 18

19. Presumptive Disability Within the contract Waiting Period waived Loss of sight, hearing, limbs Presumptive Disability under the Social Security Administration The Social Security Administration may (but not required) to pay benefits to a person while it gathers the evidence needed to make a decision on his or her case. disabled people with little or no income or low benefits from State Disability Insurance (SDI) or Social Security Disability Insurance (SSDI).. 19

20. Benefit Issues Monthly Amount (“Benefit”) Replacing “earned” income ~ 2/3 maximum Duration (“Benefit Period”) the length of time that disability payments are payable after the elimination period is met 2-5-age65-age70-lifetime Given that most disabilities have durations of less than two years what benefit period should be selected? Individual policies normally contain an elimination (or waiting) period, during which time benefits are not paid The typical elimination period is 30 days A waiver-of-premium provision allows for future premiums to be waived as long as the insured remains disabled Policies typically include a rehabilitation provision

21. Elimination or Waiting Period Length 30-60-90-180-360 Compare to a property insurance deductible Recurrence Period 6 months same cause 21

22. Other Features Waiver of Premium Insuring Clause Guaranteed Renewable Policy cannot be cancelled Other provisions of the contract cannot be changed. Rates can be adjusted, as long as its for the entire class of insureds Noncancellable Policy cannot be cancelled Rates will not change Other policy provisions will not change costly but great feature Cancelable policies Benefits/Exposure to consumer? 22

23. Rehabilitation Incentives Rehabilitation Benefit Boosts your benefit (to some %) when you work within a participating rehabilitation program Family Care Expense Reimbursement Reimburses for eligible expenses incurred for the care of each qualified family member when working or participating in an approved rehabilitation program Work Incentive Benefit Lets you receive up to 100% of your pre-disability earnings including your disability benefit, rehabilitative work earnings, rehabilitation incentives and other income sources. 23

24. Common Exclusions Normal pregnancy Self-inflicted intentional injuries War or military duty Injury in illegal occupation or commiting crime Non-passenger flying Drug abuse 24

25. Rating Factors Age Gender Occupation Class Current health status Prior disabilities? Location? Marital Status? 25

26. Premium Factors Rate (see above) Benefit amount Benefit period Definition Riders/Optional Coverages Insurer profitability/experience/goals Uncertainty about current/future disability markets 26

27. Example: Cost of Disability Income Insurance policy Age Monthly Premium 30$37.84 35$45.16 40 $54.85 45 $63.72 50 $70.55 27 The average cost for a disability income insurance policy is 1% - 3% of your annual income. Assumptions and Optional Benefits: $50,000 Annual Salary, $2,500/Monthly Benefit, Colorado Resident, Male, Occupation Class 4A, Non-Smoker, 90 Day Elimination Period, To Age 67 Benefit Period, Your Occupation Protection, and Residual/Partial Disability Benefit rider.

28. How much coverage? Most insurance companies will insure only those with a minimum income, i.e., $15,000 They also look for stable earnings power. An insurance company will allow higher earners to purchase larger amounts of coverage, on a percentage, the ratio of coverage provided to earned income tends to decrease as one’s income goes up. This is because higher earners have more ‘discretionary income’ and can afford a lower replacement ratio. 28

29. Guide to Disability Income Insurance http://www.ahip.org/Issues/Documents/2009/Guid e-to-Disability-Income-Insurance.aspx http://www.ahip.org/Issues/Documents/2009/Guid e-to-Disability-Income-Insurance.aspx 29