The global pandemic has shown how an unforeseen situation can affect one’s financial stability and wellbeing — swiftly. As advisors, you are uniquely positioned to help clients through times of uncertainty by offering solutions that can help prepare clients for the unexpected and protect financial stability.
It is important to communicate with clients about how individual disability insurance (IDI) can provide long-term income protection and support should a client be unable to work due to an unexpected illness or injury. When discussing the benefits of IDI, there are a few key considerations to demonstrate why they need it.
IDI is true income replacement. Unlike other types of insurance policies, IDI doesn’t provide a single lump sum of money. Instead, IDI coverage takes into consideration the policyowner’s actual income, which often includes incentive and bonus pay. It can also be a longer-term solution since clients can receive this income replacement until the age of 65 or 67.
A person’s entire income — base pay, incentives, and bonuses — should be protected, as all sources of income contribute to their overall financial stability and lifestyle. While many employers offer group long-term disability (LTD) insurance that clients may be familiar with, that coverage is usually limited to 40-60% income replacement, often taxable and rarely covers bonuses and incentive pay. Advisors should ensure their clients are aware of the potential gap as they consider their income protection options.
Additionally, IDI is portable. This means it stays with the individual throughout their career no matter where they work, compared with employer-based coverage that ends when they no longer work for that employer.
The primary benefit of IDI is that it helps ensure that expenses can still be paid and can lessen financial worries. Most people don’t consider how they would pay their bills — mortgage, car payments and other recurring costs — if they experience a disabling event. Advisors can remind clients that if they are unable to work, those expenses wouldn’t disappear, and others may even be added due to their illness or injury.
By helping clients think about how they’d continue to meet these expenses, even in the absence of income, clients can better understand the connection between IDI and their future financial stability.
Advisors should also emphasize with higher-earning clients that their level of income may need the additional protection that IDI can provide. Employer-paid LTD coverage amounts are often capped at amounts that fall below the needed replacement of a higher earner’s monthly income. IDI can be critical to obtain the income replacement needed for future financial stability.
Though higher earners are prime candidates, they are certainly not the only group of people that need income protection. Younger professionals are not immune from experiencing a potentially disabling event, and it’s never too early for them to consider income protection insurance.
As research shows, at least one-quarter of today’s 20-year-olds can expect to be without work due to a disabling event before they reach retirement. Advisors should encourage younger clients to consider how they will protect their income over the course of their careers. They can purchase income protection while they’re young for more competitive IDI rates. Then the coverage can be increased as they advance in their careers and their income continues to grow, providing security throughout their working lives.
Ultimately, advisors should help their clients understand the importance of income protection, as many people never even think about it. The events of 2020 have highlighted how the unexpected can happen. Advisors can demonstrate how IDI provides valuable protection should clients experience an unforeseen long-term illness or injury.
Emphasizing these key considerations can help clients realize IDI is crucial for financial stability in the face of the unexpected.
About the author: Jeremy Horner, assistant vice president, leads The Standard’s individual disability insurance division. Horner joined The Standard in 2009. He held various leadership roles in the Corporate Financial Services division for his first nine years, and all aspects of the IDI business since March of 2018. Horner is a CPA and has a Bachelor of Accountancy and a Master of Accountancy from Brigham Young University.