After leaving a job of 23 years and the wide range of benefits that went with it, Cecilia Felix found herself shopping not long ago for individual long-term-disability income insurance.
“I was very concerned I didn’t have disability,” said Felix, who was a corporate officer with a national bank before joining a small lease company in Tucson. “I wanted to get it no matter what the price.”
Felix, 44, found an unexpected way to save money on her premium. By recruiting three other co-workers and having her employer organize payment of the premiums through payroll deductions, she was able to save nearly 50 percent on individual disability income insurance.
The program Felix uses is commonly known as “list-billed” disability insurance. Not to be confused with group disability programs, these plans belong to the employee but are “sponsored” by the employer, who in many cases organizes payment so there is only one bill. When at least three employees at the same company take part, the plans are offered at rates generally 10 to 20 percent less than those of a comparable individual policy.
The company may decide to pay the total premium, or to split the cost with the employees or simply to coordinate payment, as Felix’s company did.
“We can provide more competitive prices in that situation for a couple of reasons,” said Russell Anderson, senior vice president of individual disability insurance at UNUM, the largest seller of group disability insurance in the country. “One, the sales costs are less when you’re enrolling three or more people at a time. Secondly, the notion of spreading the risk.”
For women, the savings can be higher–around 50 percent–because, unlike the cost of individually purchased disability insurance, the rates are unisex. In Felix’s case, the cost for the UNUM policy went from nearly $80 a month, which she would have paid had she bought individually, to about $40.
In recent years, insurance companies began charging women more for long-term disability insurance because they were considered a greater risk. The change came in the early 1990s because insurance companies’ research showed that women were filing more claims than men.
William W. Walker, a benefits specialist with Meisenbach Capital Management in Seattle, used the example of a woman executive making $300,000 a year who was looking for disability coverage. Without list-billing, she would have paid $960 a month for coverage that would pay $15,000 a month (60 percent of her regular $25,000-a-month income) if she were sidelined. With list-billing, her premium would be $305 a month.
When Rebecca J. Wilson, co-owner of W&W Rehabilitation Services in Tucson, went to buy some disability coverage for herself, she was quoted rates ranging from $5,000 a year for straight income replacement to $15,000. She eventually went with a UNUM policy whose cost was cut from $5,000 a year to $2,380 a year with a list-billed arrangement.
She also looked into buying group disability coverage for her employees. “It was exorbitant,” she said.
Richard W. Patterson, an independent insurance agent-broker, suggested that Wilson look into a list-billed arrangement. Out of 20 eligible employees, at least 10 have taken advantage of the offering, she said.
“You should have seen them on open enrollment day,” she said. “They were so excited. They thought this was the most wonderful thing that had ever happened.”
It is relatively unusual to find an individual putting together a group as Felix did; such arrangements are more often made by the employer. But Felix’s situation exemplifies the new thinking in the insurance industry, born of insurers’ desires to sell coverage everywhere they can–and more often in the workplace than at the kitchen table because it is more lucrative.
For years, professionals–doctors and dentists in particular–were the target market for individual disability coverage.
“Unless you were in certain occupations, earning a stable amount of income for a certain number of years and in good health, you might be readily turned down or have a surcharge added,” said James D. Johnson, a spokesman at Provident Life and Accident.
Most people have some very basic disability coverage, said Mark S. Abrams, an agent with the Guardian Life Insurance Co. of America in New York. The federal government provides disability income through Social Security, but the person must be severely disabled and must be terminally ill or expected to be disabled for at least 12 months.
A few states also provide short-term disability coverage for workers. Then there is workers’ compensation, provided by the employer when a person is injured on the job. Beyond those coverages, full-time employees may have coverage through group disability plans, which typically cover 60 percent of earnings. If paid by the employer, the benefit is usually taxable.
Walker said agents could make as much as 70 percent commission on list-billed business while earning just 15 percent commission on one person.
“They’re trying to tell you they don’t want individual cases anymore,” Walker said of the insurance companies. By building list-billed business, insurers can not only write more policies but can establish potentially lucrative relationships with employers.
Traditionally, individual disability income insurance was marketed to high-income professionals. Many of these policies paid out the full monthly benefit–typically 60 percent of monthly base income–to workers unable to do the job they had held, even if they were rehabilitated and went to work in another field.
Today, those policies are hard to find and very expensive. Instead, companies have come up with less expensive products offering less coverage. Policies may have a more conservative definition of disability, may stop paying if someone goes back to work in another field and may limit the benefit period.
Coverage may also be restricted for problems related to mental illness, stress and drug or alcohol abuse.
