Disability insurance illiteracy spells trouble

Apr 10, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - A lack of understanding as to the cost of disability insurance and what it covers is causing many people to avoid buying such policies, a recent study found.

"The industry has become more complex than it needs to be," said Steve McConnell, assistant vice president of producer partner programs for The Hartford Financial Services Group Inc. in Connecticut, which last month released its second annual disability literacy study. About 600 U.S. adults ages 18 to 65 were interviewed.

The company has developed educational workshops for agents in order to demystify the coverage.

Most people are literate enough to read the policies, but few can understand them, the study found.

"When consumers are confused by a product, they tend to postpone buying it - and even thinking about it," said Bob Taylor, executive director of The Council of Disability Insurers in Portland, Maine.

"Disability insurance is product driven, so insurers have focused on adding new features," he added.

"That made the policies - both group and individual - very complex," Mr. Taylor said. "Even many insurance agents don't want to spend the time to understand them."

Agents tend to focus 90% of their attention on medical products and view income replacement as "ancillary," Mr. McConnell said. "But to the disabled person, it's anything but ancillary."

Some advisers run into roadblocks in convincing clients of the need for disability insurance, because the policies - especially those purchased by individuals, as opposed to groups - have so many moving parts.

How the policy defines disability - whether the inability to work applies to any occupation or the individual's own occupation - is often a source of confusion, according to Philip Harriman, a partner with Portland-based Lebel & Harriman LLP. The firm manages $700 million in client assets.

In group coverage, "executives often believe their income loss will be fully covered, when in fact the policies max out at $5,000 a month," Mr. Harriman added. In those instances, individually purchased supplemental coverage may be needed, he noted.

Half the respondents to The Hartford's survey said they didn't have disability insurance.

About 42% of those without such coverage said that high premiums were the reason, with many guessing that the annual cost for group coverage was up to $1,000, when it is actually closer to $200. Also, many employers pick up part of the tab, the study noted.

Although more of the cost of group disability insurance has been moved to the employee, coverage often costs the employee "only a couple of bucks per paycheck," according to Mr. McConnell.

Individual policies usually cost about $500 to $1,500 a year, Mr. Taylor noted, but premiums vary significantly and are rising by about 3% to 5% a year. No more than 25 insurers write the coverage, he added.

"Disability insurance should not be hard to sell," said Stephen Thaler, senior vice president of Richmond, Va.-based insurance broker Hilb Rogal & Hobbs. "Just show the client the statistics indicating their chances of becoming disabled."

One-third of people in the United States between the ages of 35 and 65 will become at least temporarily disabled, according to The Hartford's study.

Almost three-quarters of the respondents were confused about the cause of short-term disabilities, saying that accidents and injuries were to blame. In fact, most non-work-related disabilities are caused by pregnancy and disease, the study pointed out.

A fifth of the respondents thought that health insurance or workers' compensation benefits would replace part of their income. But health insurance covers medical costs only and almost never includes lost-income benefits.

And workers' compensation applies only to job-related injuries and diseases.

These misperceptions are blinding people to the coverage's importance, the experts indicated.

"Disability insurance should be on the top of clients' hierarchy of needs, but in fact, it's way down the ladder," Mr. Taylor said. "There is a value perception gap."

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