Combination Group and Individual Disability Plans

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 Groups U.S. Worksite Study, 2002 Trends in Worksite Sales

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

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

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

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

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

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

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

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

What Do Combo Plans Provide? For the employer – A way to minimize the cost increases found in todays market by limiting plan design – Avoids the escalating costs of providing rich plan designs which run contrary to the employers 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

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

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

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

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. How Does The IDI Work?

Employer-PaidVoluntary Min. Size Group 15 participants70 or more eligible participants* Min. Participation 100% required70+ eligible participants 30% Occ Class 5AP-3AP 3AP cannot be more than 15% of total lives N/A to medical occupations 5AP-3AP 3AP cannot be more than 15% of total lives N/A to medical occupations Discounts Discounts range from 20 to 30% off unisex rates depending on the case size. GI Max Issue Limits # of Issue Part. Max. GI Amt.** $100/life/month to max. of $ $8000 # of Eligible Max. GI Issue Participants Amount** $ $ $5000 Employer-Paid and Voluntary Plan Specifications *For cases with 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 eligible participants. **The maximum amount available can vary based on the characteristics of the group. Plan Design Sample IDI Offering

Sample Case

Law Firm 114 EEs 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

IDI Offer Partners ER Paid $4,000 per month maximum Pure own occ definition Residual Inflation Rider

Example Partner Gross Monthly Income$17,000 Group LTD Benefit$ 6,000 Group Replacement Ratio 35% GI Offer$ 4,000 New Replacement Ratio59%

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

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.

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

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

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 employees 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!

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 Answering Objections

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 Insured 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 Employer 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 $$$ Agent Wins

Questions?????