One of the main reasons that insurance producers decline to present Individual Disability Insurance to their clients is because there are a lot of intricacies that can make the product intimidating at first glance. Due to the fact that the product is rather complicated, it’s easy to fall into some traps when shopping for the perfect product. Here are a few tips to avoid steering your client down the wrong road:
1. Be careful with graded premium.
Since IDI can be expensive in some cases, graded (or increasing) premiums can be quite appealing. Premiums are often less than half the cost of a level premium structure. For these types of plans, the carriers are hoping to attract younger professionals with a low premium who will likely drop the policy as the premium (along with their likelihood of becoming disabled) increases.
If your clients are interested in protecting their income and their financial future, level premium will be the most cost-effective in the long run in most cases. If you are looking into a graded premium plan, make sure to check the premium schedule to see how much the rates will increase over time.
2. Don’t overpay for coverage.
The number one objection for those shopping IDI coverage is that it’s too expensive. Not everyone sees this coverage as a need, so the amount they are willing to pay is sometimes minimal. Here are some common mistakes often made that can run the premium up:
- Non-cancelable plans. Many IDI plans offer the option to add the non-cancelable option, meaning that the policy’s rates and provisions are locked in for the entire length of the policy. While this may sound like a necessity, history would disagree. Other industries (such as LTC) have struggled with pricing, most of the carriers in the IDI industry have never had to raise rates on their existing business. If carriers do want to raise rates, they have to do so across the entire occupation class after petitioning to the state board. It’s far more likely that they will develop a new product instead.
- True own-occupation plans. True own-occupation can be a nice feature, especially for physicians. It allows you to collect your full benefit even if you can go back to work in a different occupation. However, aside from a surgeon that injures his/her hands and becomes a general practice physician, can you think of many other situations where that would be useful? If your client is an accountant and is physically unable to sit at his/her desk and use a computer, what exactly would they be able to do? True own-occupation adds a cost that wouldn’t be useful to a great majority of the population.
- Only showing the maximum benefit & benefit period available. As mentioned earlier, the most common objection to IDI the price. A lot of the time, clients will get sticker-shocked by a quote showing the maximum monthly benefit available that pays out through retirement age. If this winds up being the case, don’t just dismiss coverage as an option. In fact, we have a worksheet that makes sure that we can help them protect the necessities.
3. “I am already covered through my work.”
While employer-sponsored plans can be a blessing, many times people are left with less coverage than they expect. This is for a few different reasons. One, employer-paid insurance premiums will return a benefit that is taxed. Even with 60% income replacement, which is usually adequate, taxes will knock the percentage covered down to around 42%. Not everyone can last for an extended period of time on 42% of their usual income. The second reason is that there are benefit caps on the group plans. Let’s look at a common group plan for an example: 60% income replacement with a $5,000 cap. If your client earns $125,000, that $5,000 month will only cover about 48% of their income, and that’s before tax! Finally, group coverage often does not cover income sources outside of base salary. This leaves other sources such as commissions and bonuses excluded from coverage. Make sure your clients are aware and can get by on their group benefits before dismissing individual coverage.
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