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

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

Can it Happen to You? Some Facts… Between the ages of 25-45, workers have about a one in three chance of a 90+ day disability. Average length of a disability that lasts more than 90 days is 2.5 years.1 More than 1.5 million people have left the US workforce due to a disabling condition.2 A 35 year-old earning $25,000 a year who suffers a permanent disability could lose approximately $750,000 in future earnings (assuming no future changes to salary and disability to age 65) Sources: National Association of Insurance Commissioner’s Individual Disability Table A, 1985. America’s Health Insurance Plans, “Disability Insurance: A Missing Piece in the Financial Security Puzzle,” 2004 Excerpted from Metlife illustration

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. You insure your home, your cars, but what about your income? The ability to work and earn an income may be your mainly valuable asset. 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

What is your earnings potential? Potential Earnings to Age 65 (with 5% annual salary increases) What would you if you became too sick or hurt to work? If you’re like most people, you would probably find it hard to maintain your current lifestyles. Principal Financial Group

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 If asked, most of us would consider our home or our savings our most valuable asset. Actually, our most valuable asset could be considered our ability to earn the income that provides the resources and security so important to our families. Did you know that 30% of those aged 30 to 65 will, during their work career, experience a disability that will last at least three months. One in seven of us will be disabled for five years or more. This statistic may strike you as high but there are reasons for the high incidence of disability. Principal Financial Group

Times are different now. 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

Disabilities play no favorites The causes of disability may surprise you. Here’s a typical breakdown (by percentage of claims) of some typical reasons an individual may become disabled. The causes of disability may surprise you! Here’s a breakdown (by percentage of claims) of some typical reasons an individual may become disabled. With Individual Disability Income insurance from Principal Life, you can feel secure in knowing that by helping to protect one of your most valuable assets, your ability to work and earn an income – you can reduce the financial strain even a short-term disability can cause if you become too sick or hurt to work. Principal Financial Group 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 …. 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. Principal Financial Group

Which job would you rather have? For only a small percentage of your salary, Principal Life can help replace a portion of your income and help protect what it provides if you become too sick or hurt to work. * $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

Could you afford your home without your income? 48% of all home foreclosures are due to a disability.1 1 out of every 18 mortgages are not being paid because of a disability to the mortgage holder.2 How would you meet one of the biggest financial obligations you face each month if you became too sick or hurt to work? • Did you know that 48% of all home foreclosures are due to serious medical problems? (National Underwriter, May 2002) • More than 40% of U.S. workers risk losing their homes and ability to support their families because they lack income replacement protection if a disability strikes. (Hartford Financial Services Group, Inc., study, Oct. 2003) • Most people’s savings will cover less than six months of expenses. (Business Almanac, 1997) • Nearly half of the one million Americans who filed for bankruptcy protection in 1999 did so after being sidelined by an unexpected illness or injury. (New York Post, April 3, 2000, “There’s No Insuring You Won’t Go Bankrupt”) 1 - National Underwriter, May 2002 2 - National Underwriter, May 2002 / HUD 1998 Principal Financial Group

Can you live on 42% of your income? Is employer-provided group long-term disability (LTD) insurance coverage enough? 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

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? If you were too sick or hurt to work, there are a few questions you should be able to answer: Would your income stop or be reduced? How much money would you and your family need to maintain your current lifestyle? Where would this money come from? How soon and for how long would you need it? If you use your retirement savings today, what would you retire on? 8

Options are limited without disability income insurance coverage 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 Excerpted from Metlife Illustration

Key Provisions of LTD Insurance Definitions Benefits Waiting/Elimination Periods Rating Factors RMI4115 Disability Insurance and Annuities

Definition of Disability is a Key Contract Feature The four most common definitions of total disability are: 1. Inability to perform all 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 RMI4115 Disability Insurance and Annuities

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 5/26/2018

Presumptive Disability In most cases, people do not receive any benefits while waiting for the Social Security Administration to make a decision on their disability cases. However, sometimes the Social Security Administration does pay benefits to a person while it gathers the evidence needed to make a decision on his or her case. This is called a “Presumptive Disability.” When the Social Security Administration has evidence in file that strongly suggests that a person will be found disabled but still needs more evidence to make its final decision, it can perform a presumptive disability to temporarily provide benefits to the person until it gathers the evidence it needs to make its final decision. Presumptive SSI is for disabled people with little or no income or low benefits from State Disability Insurance (SDI) or Social Security Disability Insurance (SSDI). SSI pays up to $750 (2002) a month for single individuals (up to $770 2002 if collected together with SSDI or SDI). Income must be under the maximum level and assets under $2000 (bank accounts, stocks, IRA's, pensions, cash value of life insurance policies, etc.). One vehicle and your residence are excluded.

Benefit issues Monthly Amount Duration How much can you buy Sources of income Duration 2-5-age65-age70-lifetime The benefit period is the length of time that disability payments are payable after the elimination period is met Most disabilities have durations of less than two years Individual policies normally contain an elimination 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 19

Elimination Period AKA waiting period Length 30-60-90-180-360 Compare with property deductible   Recurrence Period 6 months same cause 20

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 Rates will not change Other policy provisoins will not change costly but great feature Cancelable policies are rate – customers want guarantees! 21

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. Excerpted from Metlife Illustration

Common Exclusions Normal pregnancy Self-inflicted intentional injuries War or military duty Injury in illegal occupation or commiting crime Non-passenger flying Drug abuse 23

Loss of Earnings Contracts These are relatively new They work like Own Occupation with Residual Benefit policies, except The insured’s post disability earnings from any occupation reduce the benefit payable under the policy They are cheaper than Own Occupation policies

Rating Factors – (which affect cost) Age: Younger persons pay less per year for a policy than those who are older and more likely to become disabled. Benefit amount: Policies that replace more of an individual’s salary are more expensive. A policy that replaces 80 percent of your salary costs more than one that replaces only 60 percent of your salary. Benefit period: The shorter the benefit period, the less expensive the policy. For example, a policy with a two-year benefit period costs less than a policy that pays benefits to age 65, or the retirement age specified under Social Security. Current health status:  Your health status determines whether you are eligible for standard rates or rates that are higher. A policy also may exclude from coverage any health conditions that exist before the policy is issued. Definition of disability: A policy that pays benefits if you are unable to perform the duties of your own occupation is more expensive than a policy that pays benefits if you are unable to perform the duties of any job for which you are reasonably qualified. Insuranceyak.com

Rating Factors – (which affect cost) Extent of disability:  A policy that pays benefits only if the policyholder is totally and permanently disabled costs less than a policy that also pays benefits for a partial or temporary disability. Gender:  Women usually pay more than men for an individual policy because claim costs are higher for women than men (usually pregnancy related issues) . Under a group policy, however, men and women typically pay the same rate. Optional benefits:  For an extra premium, some policies offer additional benefits, such as cost-of-living increases or the option to purchase higher benefits in the future. Smoker/tobacco use:  Most companies either give a discount to non-tobacco users or add a surcharge to the premium for tobacco use. Type of job:  Expect to pay more (or be declined) for a policy that covers a high-risk occupation compared to a low-risk line of work. Insuranceyak.com

Rating Factors – (which affect cost) Discounts:  Many companies offer discounts for policies issued at the same time on more than one person, as well as when an employer (or association) collects the premiums for individual policies from employees and pays the insurer. Insuranceyak.com

Rates Occupation Class per $100 of monthly benefit Relationship between premium and Waiting period Benefit period 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 lesser replacement ratio. Nahu.org