Insurance

Disability and Life Insurance Combo Saves $
Source: Bankrate

Here's a familiar midnight wake-up call: What will happen to my family's financial future if tomorrow I am hit and killed by a bus or injured and unable to work?

Fortunately, there are insurance products to cover either unpleasant scenario.

Life insurance, be it the cash-value whole life insurance or the more popular term life variety, can provide for your spouse and children upon your death.

Meanwhile, disability income insurance can replace up to 60 percent of your monthly income for either a fixed period or until you reach age 65.

The good news is that these two types of insurance -- life and disability -- can guarantee that your family will be financially protected in the event of a calamity.

However, the bad news is that it's tough for most American families to afford both. As a result, some people may insure against one calamity and hope like crazy that the other one doesn't happen first.

"To say you're going to take one of them rather than the other, I can't get my arms around that idea," says Joseph Belth, professor emeritus at Indiana University's Kelley School of Business and author of "Life Insurance: A Consumer's Handbook."

"These are both very serious exposures," he says.

Odds that a 20-year-old worker will:
-- Die before retirement: 16 percent.
-- Become disabled before retirement: 30 percent.
Source: Social Security Administration/CDC

Recently, a handful of major insurers have begun tinkering with their term life products to develop affordable hybrid term life and disability insurance policies, or bundled packages aimed at the demographic most at risk: the so-called "middle market" Americans, ages 25 to 49 with $50,000-plus household income and less than $500,000 in invested assets.

The assumption is that if you're wealthier than that threshold, you're probably able to weather disruptions to your income stream without a disability insurance policy. And, if you fall short of that benchmark, you likely cannot afford the premiums.

Combining life and disability insurance is hardly a new concept. Belth estimates insurers have been offering whole life policies with disability insurance riders for 85 years. But the success of term life in recent years may give underwriters a new way to introduce disability coverage, a traditionally hard sell, into the equation.

It remains to be seen whether the new product can be offered at a price point acceptable to America's increasingly stretched middle-market demographic.

The knee bone's connected to the house note
Marianne Purushotham, research actuary with LIMRA International life insurance research consultants, has been studying the latest term/disability insurance hybrid products. So far, she has identified five companies that offer some form of this hybrid.

Companies that offer term/disability insurance hybrids:
-- AIG
-- Aegon/Transamerica
-- Protective
-- Mutual of Omaha
-- Farm Bureau Life

The need for disability insurance coverage is real: The Social Security Administration says studies show that a 20-year-old worker has a 30 percent chance of becoming disabled before reaching retirement age. By contrast, your odds of dying before you retire are about half that (16 percent), according to Robert Anderson, chief of the mortality statistics branch at the Centers for Disease Control and Prevention.

Yet fewer than 30 percent of U.S. workers have any form of long-term disability coverage, according to the Bureau of Labor Statistics and AARP.

Employer-sponsored disability plans typically only cover up to 50 percent of your paycheck. How long could you live on half-pay? Yes, Social Security disability benefits kick in after a year and last until death, but to qualify, you must be unable to engage in any type of work.

So why don't we buy disability insurance? Purushotham says we typically say we can't afford it, when what we really mean is we're not sure we need it.

"The big problem with disability insurance is that people, especially young people, aren't aware of their risk of suffering a disability and that you can insure against it," she says. "A lot of people are aware of the idea of life insurance, but many middle-market people don't know there is a disability product they can buy."

There's also a distribution issue surrounding disability insurance. These are complex policies that don't lend themselves to easy side-by-side comparisons in the same way as, say, term life policies. Individual disability insurance policies historically have been marketed to highly paid specialists such as surgeons and engineers. Consequently, many insurance agents are reluctant to spend the time it takes to sell them and would be even less likely to do so if the costs -- and their commissions -- were reduced.

"They are confusing. Even term (insurance) can be confusing," Purushotham says. "When you add on disability elimination periods and benefit periods, it gets confusing real fast."

But a few insurers believe they've found a natural opening: your front door. What caught their attention? Possibly this nugget from the National Safety Council: Half of all foreclosures on conventional mortgages are due to a homeowner becoming disabled.

"The idea was that they would market (life-disability insurance hybrids) to people who were just going out for life insurance for the first time to protect their mortgage," Purushotham says.

Elements life-disability insurance hybrids have in common:
-- Term life base with disability insurance rider.
-- Modest maximum monthly disability insurance benefit (between $300 and $3,000).
-- Elimination, or waiting, period: 90 days.
-- Disability insurance benefit period: 18 months to three years.
-- Limited additional underwriting, often based on the rate class of the term portion.

Though it is virtually impossible to do an apples-to-apples comparison on these policies, Purushotham says one hybrid quote she obtained for a 45-year-old male offered a $250,000 death benefit (the term life portion) and a maximum $1,800 per month disability payment (the disability insurance portion) for an annual premium of $850. Disability payments are tax-exempt, an added plus.

Will insurers convince us that what happens to our knee bone is connected to our house note?

"My answer is, 'I hope so,'" Purushotham says. "I think people are missing the fact that even a disability that keeps you out of work can really have a huge impact on your finances. They may think, 'Oh my God, if I die, what will my spouse do?' But they haven't yet clicked with the idea of, 'What if I can't work?'"

2 risks, 1 'starter kit'
MetLife takes a different approach to underwriting term life and disability insurance. MetLife bundles its term life and disability insurance policies together. It's not a hybrid; the policies remain segregated (separate applications, underwriting and billing), but they are marketed together with special pricing that starts at $825 per year.

Joe Jordan, MetLife senior vice president for individual business marketing, calls the bundle a "starter kit" for young people who want to cover both risks in a cost-effective way. MetLife's starter bundle pairs a $1 million, 10-year level term policy with a 10-year, $2,000 a month term disability policy, at a savings of about 46 percent off the cost of a permanent disability policy with a benefit period through age 65.

Yearly premiums for the "starter kit" begin at $825 for a 30-year-old male, $1,200 for a 40-year-old male. Those rates will creep up annually during the 10-year term to roughly the next entry level. At the end of the term, you have options: renew at the next level (another medical exam is required), convert to a whole life product with guaranteed insurability or walk away altogether.

Jordan says that because the policies remain separate, consumers can easily "buy up" on the benefit amounts. But bear in mind that the disability benefit amount cannot exceed 60 percent of your monthly income.

MetLife's goal was to simplify a very complex product, both for sales agents and consumers. Jordan says if agents can sell these starter kits to young clients, they can upgrade them to more robust policies once they've had the opportunity to "kick the tires."

"It just makes it easier and more convenient to get insured," says Jordan. "The beauty of it is, later on, they have the ability to convert this without evidence of insurability."

Jordan says that so far, Americans have done little more than cross their fingers and hope for good health and long life. On average, we have just 2.5 times our income in reserves for the unexpected, while, with the help of insurance, we can have a much safer 10 times our income available. All it takes is acknowledging the risk of disability and insuring for it.

"Denial is the big issue. People are in denial of the fact that they're going to die or get sick. It's not something they want to focus on, much less spend their money on. But if you go without either of these, you're exposed. Your house of cards could tumble -- fast."

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