The value of disability insurance in retirement planning

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Life insurance policies sometimes, but not always, are included within employer-sponsored retirement plans. But disability insurance is less common to cover future retirement funding. Although there is a three in 10 chance of suffering a disability that keeps someone out of work for 90 days or more, most employee benefit advisers fail to communicate this higher risk to their clients or urge them to consider disability insurance for their employee benefits.

Disability insurance should also be considered for young executives and partners in need of buyout plans. If you differentiate your services by encouraging the use of disability insurance, you will set your clients and their employees up for success while securing lifetime clients.

So what’s the first step when it comes to selling the benefit? Advisers must gather key information about their client’s business prior to the discussion of retirement plan options to fully understand how they can apply disability insurance to employers and key employees. First, ask business owners to describe their business. Determine if they started the business, inherited it or began as an employee. Find out if they have business partners and whether they have buyout plans in place.

Assess clients’ current benefits situation to find out if there are any company-sponsored retirement plans or insurance policies in place. This discussion will allow advisers to capture a quick snap shot of the company and evaluate the opportunities for services. After determining that they can help, advisers can request the proper documentation and conduct a study to discover the best options for the company.

Inquire about the form of the business (C-Corp, S-Corp, etc.) to understand how knowledgeable the business owner is and how the company is operated from a tax point of view. If they are unsure of how to respond to this question, it’s a signal that they rely heavily on their advisers. Others can identify whether they are a C Corporation, S Corporation, LLC or another business type. Either way, this question will reveal the level of involvement the business owner will want from you to help guide them with their retirement and benefits planning.

Be sure to request information about the owner’s income and average profit margins to give you a frame of reference for the type of benefits you will be able to suggest and the services you can provide. If the owner approaches you with key employees that they’d like to reward, this also signals you will have the opportunity to set up executive benefits.

Benefits of disability insurance for executives

An individual disability insurance policy that will help replace current income — either paid out in a lump sum or installments — is a valuable plan for executives and key employees in the event of a disability. An insured individual who suffers a disability can facilitate a full buyout through disability insurance. They also can purchase a disability retirement policy to continue to contribute to a retirement plan even if they are still not working.

Additionally, if a future purchase option is put in place, they can acquire a crucial source of income through the policy and continue to contribute to a retirement plan as if they’re still working. This rare policy arrangement allows the client and their family to feel at ease with their financial situation despite an unexpected life event.

It’s more valuable to encourage your clients to purchase individual disability insurance policies for key executives before evaluating the options for group policies. Owners should consider this insurance option and potentially add other key employees, which can activate a discount for each plan. This gives the company a way to protect and reward key employees who are in decision-making roles while establishing the policies.

Challenges of disability insurance

Some advisers do not pursue disability insurance buyout plans for the employees they work with due to the expensive premiums and difficulty involved in underwriting the policy. However, it’s worth the challenge to avoid the extensive negative risks if a plan is not put in place. Partners typically see the value once they understand that they would have to pay out of pocket to buy out the shares of their partner, should they suffer a disability and are no longer able to help run the business.

When owners consider employee benefits, they often think of group plans. If you are able to show them the value of purchasing individual disability insurance for key employees and executives before establishing a group plan, you will differentiate yourself from similar advisers and earn the trust of your clients and their employees. Individual disability insurance is an investment that will protect a company’s success and provide business partners with a valuable option for buyout arrangements.

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