Back to the Basics:

Building a Financial Safety Net Begins with Life and Disability Insurance

November 2011

Benefits at Work Series

A Colonial Life White Paper

Table of Contents

Executive Summary 1

The Far-Reaching Impact of the Uninsured and Underinsured 2

Most Employees Can’t Support Themselves Without Disability Insurance 5

Without Life insurance, Many Would Have Immediate Problems Making Ends Meet 8

Voluntary Life and Disability Insurance Should Be Standard Offerings 10

Voluntary Disability Plans Offer Many Advantages 13

Voluntary Life Plans Offer Advantages Too 15

Understanding the Employer’s Business and Employee Base Helps Boost Participation 17

Employers Will Lead the Charge for Workers’ Financial Wellness 20

References 21

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Employer-sponsored financial protection benefits, such as voluntary life and disability insurance, offer affordable, high-value safeguards for workers that provide the start of an all-important financial safety net.

Back to the Basics Executive Summary Few things are more devastating than a death or a disabling injury or illness. In addition to the financial strain, the physical and emotional toll of a death or disability can be overwhelming. Yet many employees feel more strongly about insuring their homes and automobiles than they do about insuring their ability to earn an income.1

The death of a wage earner can leave spouses and their families without the financial means to pay for their basic needs or to fulfill their life’s dreams. A disability can bring a host of unexpected health issues and deep financial worry due to loss of income.

Families today are struggling to make financial ends meet—juggling payments for rent or mortgages, utilities and basic necessities such as groceries and gas. They’re also working hard to reduce lingering debt on their credit cards. Many lack enough savings to protect themselves should a wage earner die or become disabled.

Without a safety net in place or financial means of their own, employees are forced to depend on family, friends or government programs to survive. But government programs are now strained beyond capacity. And the poor economy has forced nearly everyone to cut back, making these back-up plans less than reliable.

However, another source of support is gaining momentum: the employer. The economy has caused employees to take a closer look at the benefits their employers offer them at the workplace. Workers now place a greater value on their benefits and want to know more about them.2

Employer-sponsored financial protection benefits, such as voluntary life and disability insurance, offer affordable, high-value safeguards for workers. They provide the start of an all-important financial safety net. And they allow families to maintain a higher standard of living than those relying solely on government programs.

This whitepaper discusses how employers can help employees meet their critical need for financial protection with the basics of voluntary life and disability insurance. Employers will learn how this voluntary coverage fits into workers’ financial planning strategies and what makes it so essential. The paper also highlights how companies can help employees overcome their purchasing concerns to select the insurance products that best meet their families’ specific needs.

The Far-Reaching Impact of the Uninsured and Underinsured

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The Far-Reaching Impact of the Uninsured and UnderinsuredAmericans are underinsured for both life and disability protection. Underinsurance — not having enough insurance to adequately protect one’s assets — represents one of the greatest hidden risks for employees. Lacking sufficient coverage to shield them from financial hardship weighs heavily on employees’ minds. And underinsurance has potentially dire consequences, not only for employees and their families, but also for employers and taxpayers.

The uninsured — individuals living without any type of insurance coverage — are not necessarily those workers who have lost their jobs or those employed by a company that does not offer benefits. Even in businesses that offer coverage, not all workers are eligible to enroll as a result of waiting periods or minimum work-hour rules. Some employees simply choose not to enroll, often because they feel their share of premiums is unaffordable.

Approximately 100 million Americans are not protected by private disability insurance.3 Recent statistics show only 49 percent of U.S. workers have short-term disability insurance and only 44 percent have long-term disability insurance.4

Life insurance ownership has declined to an all-time low as 41 percent of U.S. adults — 95 million people — have no life insurance at all.5 In addition, 43 percent of those with life insurance say they are underinsured. For instance, of the households that own life insurance, seven in 10 only have enough to replace their household income for 3.5 years.6 The general rule of thumb is to carry enough life insurance to replace income for seven to 10 years.

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Short-term disability insurance 49%Long-term disability insurance 44%

Source: The Hartford, “The Hartford Sees Drop in Number of U.S. Workers with Disability Insurance,” News Release, June 7, 2011.

WHO HAS DISABILITY INSURANCE?

No life insurance 41%Not enough life insurance 43%

Sources: LIMRA, “Fast Facts About Life,” 20ll; Retzloff, Cheryl, “Trillion Dollar Baby – Growing Up,” LIMRA, 2011.

WHO HAS LIFE INSURANCE?

Source: Retzloff, Cheryl, “Trillion Dollar Baby – Growing Up,” LIMRA, 2011.

WHY DON’T THEY BUY LIFE?

A Colonial Life survey indicated a majority of full-time employed adults who were enrolled in an insurance program provided by their employers expressed concern that their insurance plans may not provide adequate life and disability coverage:

l 35 percent felt their plans may not adequately cover their inability to earn an income for an extended time due to illness or injury.

l 19 percent felt their plans may not adequately cover the death of a primary wage earner.7

Why are there so many uninsured and underinsured employees? Several reasons exist.

l Consumers have other financial priorities. Consumers are likely to delay the purchase of additional insurance because they have other financial priorities right now or feel they can’t afford it. Household finances have been hurt by the economy’s recent turmoil, with high unemployment, reduced household incomes and increases in daily living expenses such as gas and food. Because of these economic pressures, many people have delayed their financial decisions and held off making major purchases. They’re struggling to figure out how to fit insurance premiums into their budgets on top of other priorities demanding their attention.

l They lack the knowledge to make informed purchasing decisions. Many people put off making life or disability insurance purchases because these decisions are not always cut and dried. Often, consumers don’t understand what type of policy to buy or how much coverage they need, and they worry about making the wrong decision. When consumers don’t understand their choices, especially the type of coverage needed for their own personal circumstances, they won’t buy. In fact, 44 percent of those who say they need life insurance say they haven’t bought any because they don’t know how much to buy.8

l For procrastinators, it’s not high on the priority list. Many consumers procrastinate over their purchases and won’t proactively seek out insurance until they need it and it’s too late. For example, 54 percent of those likely to buy life insurance in the next year say they just “haven’t gotten around to it.” More than one-third of these consumers say they haven’t bought life insurance because no one has contacted them.9

Lack of channels from which to purchase life or disability insurance doesn’t seem to be a problem for consumers, though. Consumers can purchase this type of coverage through many avenues: insurance company sales associates, financial advisors, professional organizations, the Internet and the workplace.

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44% don’t know how much they need.

Most Employees Can’t Support Themselves Without Disability Insurance

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Most Employees Can’t Support Themselves Without Disability Insurance The ability to support themselves if disabled or unable to work is among the top three financial concerns for people — ranking just behind money for retirement and paying medical expenses.10 Yet, too many of today’s workers aren’t covered by disability insurance.

Interestingly, 64 percent of wage earners believe they have only a 2 percent or less chance of being disabled for three months or more during their working careers.11 The actual odds of a worker being disabled for at least six months is 33 percent.12 That compares to a .003 percent chance a person’s home will be damaged by fire.13

One explanation for the discrepancy could lie in the perceived definition of a disability. Many people think disabled means being confined to a wheelchair due to a lifelong illness or medical problem. But in reality, 91 percent of disabilities are caused by common illnesses or health conditions — and therefore, most of them are not covered by workers’ compensation.14

According to Unum,15 the most common reasons for disability leave include:

l Cancerl Childbirthl Heart attacksl Muscle and bone disordersl Strokesl Surgery

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Source: Council for Disability Awareness, “The Disability Guide, CDA 2010 Consumer Disability Awareness Survey,” March 2010.

91% of disabilities are caused by common illnesses or health conditions —so most are not covered by workers’ compensation.

The financial impact on individuals who become disabled can be exorbitant — as high as 20 times a person’s annual salary. This amount can total nearly $1 million for a 40-year-old, single male earning $50,000 per year who suffers a long-term disability lasting until age 65. The costs associated with short-term disabilities can be quite significant as well, sometimes equaling one to nearly two times a person’s annual income for a disability lasting just two years.16 Yet people mistakenly think they’re covered by government programs or can get by on their own means — whether it’s tapping personal savings or the goodwill of family and friends.

Source: Unum internal data.

MOST COMMON REASONS FOR DISABILITY LEAVE

l Cancerl Childbirthl Heart attacksl Muscle and bone disordersl Strokesl Surgery

In a recent Colonial Life survey, 65 percent of employers said they didn’t think their workers could maintain their current standard of living if they were unable to work for two or three months because of an illness or accident.17 And they’re probably right. Without disability insurance, the financial odds of employees being able to support themselves appear somewhat bleak, considering these figures:

l 61 percent of American workers still live paycheck to paycheck.18

l 71 percent of American households consume 100 percent (or more) of their paychecks through credit cards and debt each month.19

l Half of households say they couldn’t raise $2,000 within a month, if needed. Even among households earning $100,000 to $150,000 per year, less than a quarter can do so.20

l Counting all savings, investments and money in retirement accounts, six in 10 households have less than $50,000 of investable assets, and one-third have less than $10,000.21

l Most disabilities don’t qualify under the federal Social Security Disability Insurance program. Approximately 70 percent of first-time applicants are denied. For those who qualify, they typically wait an average of two years before receiving their first payment.22

Disability insurance provides significant economic value to employees and their families. This coverage provide households with stronger financial security and a higher standard of living in the event of disability or death than if the employee and his or her family had to rely on savings or government assistance. Disability insurance also prevents affected families from becoming impoverished, saving the government billions of dollars in public welfare program benefits. Recent research estimates as many as 575,000 families are saved from impoverishment annually because of group disability coverage, saving the government and taxpayers up to $4.5 billion a year.23

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Without Life insurance, Many Would Have Immediate Problems Making Ends Meet

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Without Life Insurance, Many Would Have Immediate Problems Making Ends Meet During the past 50 years, life insurance ownership has reached an all-time low.24

A dichotomy exists between thought and action when it comes to owning life insurance. Today, 70 percent of adults agree they need life insurance. And 34 percent of households admit they would immediately have trouble meeting everyday living expenses if a primary wage earner died today.25

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Research shows family protection is the primary reason individuals own life insurance. According to LIMRA, the top three reasons U.S. households purchase life insurance are to pay for burial and other final expenses, to replace the income of primary wage earners, and to pay off their mortgages.26 The motivation to make a life insurance purchase is influenced by a number of different factors:

l Forty-five percent of consumers were most influenced because of a life event (marriage, divorce, birth of a child, death of a close friend or relative).27

l Twenty-four percent were influenced by contact from a financial advisor.28

l One in 10 life insurance shoppers were prompted to consider life insurance because it was offered at work.29

34% of households admit they would immediately have trouble meeting everyday living expenses if a primary wage earner died today.

Source: Retzloff, Cheryl, “Trillion Dollar Baby – Growing Up,” LIMRA, 2011.

Voluntary Life and Disability Insurance Should Be Standard Offerings

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Voluntary Life and Disability Insurance Should Be Standard Offerings Employees want protection, but they also want to be able to meet their other financial obligations. Underinsured consumers need alternative benefits solutions that reduce their risk and give them the security and peace of mind they need, especially in the current economy.

Employers can play a key role in helping workers create an affordable yet strong financial safety net. By integrating voluntary benefits with core group offerings, employers can help employees protect themselves against increased financial exposure and help alleviate the economic pressures many are now under. Life and disability protection are the basis of this safety net.

Voluntary insurance plans allow employers to offer a cost-effective, expanded benefits package at little to no direct cost to them. Employees choose the benefits that best meet their individual and family needs and typically pay for these products themselves, usually through convenient payroll deduction. Individual voluntary benefits are owned by employees, so if they ever leave the company they can keep their coverage. Some voluntary benefits are available as group products, which employees usually can convert to individual policies to maintain coverage if they leave their jobs.

Most people in the United States currently obtain their health insurance through their employers — and a significant number obtain other types of coverage in the workplace, too. Of those who say they prefer to buy life insurance through the workplace:

l 33 percent say it’s an easy and convenient way to buy.

l 26 percent believe it will cost less or be a better value.

l 20 percent trust their employers.

l 13 percent like having the premiums deducted from their paychecks.30

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Employers can play a key role in helping workers create an affordable yet strong financial safety net by offering voluntary life and disability insurance.

Most employees appear to have access to this coverage at work. A 2011 SHRM employee benefits survey shows 76 percent of employers offer long-term disability insurance, 66 percent offer short-term disability insurance and 85 percent offer life insurance.31

While voluntary products offer many advantages to employees, employers also have much to gain. Companies report that voluntary benefits offer value in the following areas:32

l Improvement in worker morale, satisfaction and productivity

l No added direct costs to the company

l The ability to attract and retain employees with more competitive total compensation packages

l Improved loyalty by giving employees options to purchase less expensive insurance than they could get on their own.

With voluntary benefits, employers can make both life and disability insurance available to employees easily and affordably without affecting the company’s bottom line. Every working American needs access to these financially crucial types of insurance.

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Easy and convenient 33%Costs less or is a better value 26%Trust their employers 20%Like paycheck deduction of premiums 13%

WHY EMPLOYEES BUY LIFE INSURANCE AT THE WORKPLACE

Source: Retzloff, Cheryl, “Trillion Dollar Baby – Growing Up,” LIMRA, 2011.

With voluntary benefits, employers can make both life and disability insurance available to employees easily and affordably without affecting the company’s bottom line.

Voluntary Disability Plans Offer Many Advantages

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Voluntary Disability Plans Offer Many AdvantagesWhile some employers do offer low-cost private disability insurance to employees, a full two-thirds of working Americans do not have access to this type of safety net.33 Voluntary disability insurance provides companies with a cost-effective solution that provides that much-needed access.

In addition to financial peace of mind, employees enjoy other features of today’s voluntary disability policies.

l Portability. With individual policies, the employee, not the employer, owns the policy, which means workers can keep their policies if they leave their jobs.

l Guaranteed issue. Guaranteed issue, where available, means there is no health underwriting if participation and eligibility guidelines are met.

l “Own job” definition. An employee’s disability is generally defined in terms of his or her own job. The trigger point for the benefit payment is being unable to perform the duties of his or her own occupation.

l Partial benefits for return to work. Partial benefits are sometimes paid to employees who are disabled and come back to work early. This feature allows employees to ease back in to work and still receive a partial disability benefit.

l Exemptions from health care reform. Voluntary disability insurance will not be offered through health insurance exchanges. This coverage also will be exempt from health care reform changes to guaranteed issue and preexisting condition requirements, as well as from the “Cadillac” excise tax, whether it’s paid for with pre- or after-tax dollars.

Every day an employee is out on disability, employers pay the cost. Companies have a vested interest in seeing their disabled workers return to work. Employers subsequently benefit from offering voluntary disability programs with strong return-to-work components.

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Voluntary Life Plans Offer Advantages Too

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Voluntary Life Plans Offer Advantages Too Voluntary life insurance is just as important as voluntary disability coverage in an employer’s benefits package, whether it’s sold as a complement to company-provided life insurance or as a stand-alone offering.

Life insurance provides reassurance to employees, offering them protection against a permanent loss of income in the event of death. This type of voluntary coverage also includes many important features.

l Portability. With individual policies, the employee, not the employer, owns the policy, which means workers can keep their policies if they leave their jobs.

l Simplified underwriting. Both guaranteed issue (no health questions for underwriting) and simplified issue (minimal health questions for underwriting) are available, if participation and eligibility guidelines are met.

l Variety of life insurance plans. Employees now have choices in plans to meet their individual needs when it comes to protecting their families and building cash value.

l Accelerated death benefit. Covered employees with this benefit, if available, can receive cash advances against the death benefit of their policies if they’re diagnosed with a terminal illness. Many individuals who choose the accelerated death benefit have less than one year to live and use the money for treatments and other costs needed to stay alive.

l Long-term care riders. Employees with this benefit in their universal life policies can use the death benefit to help pay for long-term care expenses. This coverage helps employees fill in the gaps of what their health insurance doesn’t cover for long-term care expenses.

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Understanding the Employer’s Business and Employee Base Helps Boost Participation

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Understanding the Employer’s Business and Employee Base Helps Boost Participation A voluntary life and disability insurance program provides employers a cost-effective way to deliver a more robust benefits package to meet the individual financial needs of their workers. However, as HR executives streamline their departments through reduced staffs and cost-cutting measures, they know that changes to benefits plans sometimes are easier said than done. Employers need to select a strong voluntary benefits partner that can simplify, rather than complicate, benefits administration.

Companies should look for a provider that not only offers a broad portfolio of life and disability insurance products, but one that can also remove most of the administration involved in the process. Additionally, they should engage a partner that provides the necessary education and communication to help employees overcome their purchasing concerns since many don’t understand their coverage. For example, a Colonial Life survey of employers found only 41 percent of HR professionals say their employees understand the need for life protection very well, and only 44 percent say their employees understand the need for disability protection very well.34

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When looking for a voluntary benefits partner, companies should evaluate providers on their ability to understand their respective business and employee base:

Business understanding. Employers should look for partners that not only provide a versatile product portfolio, but also have a proven history and a foundation of best practices across a number of industries.This type of benefits partner brings a wide and deep base of knowledge learned through the course of hundreds of customer engagements.They are best positioned to understand industry nuances and tailor programs to specifically address individual company needs.

Percentage of employers who say employees understand the need for coverage very well.

HOW WELL DO EMPLOYEES UNDERSTAND THE NEED FOR COVERAGE?

Source: Colonial Life, Life Insurance and Disability Insurance Survey, October 2011.

Disability Insurance

Life Insurance

44%

41%

Benefits communication and enrollment. A well-designed benefits plan should be simple to understand and use, but many carriers rely on self-enrollment for their plans. Self-educated delivery gets very low participation and sometimes leads to dissatisfaction from workers who do not understand what their plan does and does not cover. A top provider can meet one-to-one with each employee to explain the company’s benefits program and help employees select the best coverage for their family’s needs. This method ensures that employees understand, appreciate and take advantage of their benefits. A provider that can enroll all employees, including other core benefits, also removes a major hassle for the employer.

Helping employees understand their insurance improves the likelihood they will participate. People often don’t know how much coverage they actually need and are more likely to purchase coverage when given a specific recommendation. For example, six in 10 individuals who bought life insurance while meeting face-to-face with an insurance professional had received a recommendation to buy a specific amount of coverage. On the other hand, only one in three who decided not to buy after shopping for life insurance received a recommendation about the amount of coverage they should purchase.35

One-to-one benefits counseling in the workplace contributes to stronger participation in the benefits program. Most employees — 57 percent — say they want face-to-face interaction when buying insurance,36 and nearly 60 percent of employers believe one-to-one benefits counseling sessions can strongly improve employees’ understanding of their benefits and their coverage needs. In fact, 55 percent of employers rely solely on this type of benefits communication and enrollment method.37 Companies that work with insurers to improve employees’ understanding of the need for life and disability insurance will boost participation in these programs.

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Source: Colonial Life, Life Insurance and Disability Insurance Survey, October 2011.

Almost 60% of employers believe one-to-one benefits counseling sessions can strongly improve employees’ understanding of their benefits and their coverage needs.

Employees are more interested than ever in benefits that provide for their financial well-being. Therefore, the workplace is fertile ground for financial education programs and related benefits that help employees build a strong financial safety net. When employers sponsor life and disability coverage, they extend the financial safety net opportunity to individuals and families who otherwise might find access to this type of coverage restricted by cost or lack of information.

Employees benefit from the financial protection voluntary life and disability insurance provides, while employers gain the advantage of offering benefits that help attract and retain quality workers. Employers can contribute greatly to their employees’ financial education and overall fiscal well-being by providing access to the basics of life and disability insurance.

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Employers Will Lead the Charge for Workers’ Financial Wellness

Employers can contribute greatly to their employees’ financial education and overall fiscal well-being by providing access to the basics of life and disability insurance.

References1 Mitchel, James O., “2011 Insurance Barometer Study,” LIMRA, 2011.2 MetLife, “Seventh Annual Study of Employee Benefits Trends,” 2009.3 Social Security Administration Fact Sheet, March 18, 2011.4 The Hartford, “The Hartford Sees Drop in Number of U.S. Workers with Disability Insurance,”

News Release, June 7, 2011. 5 LIMRA, “Fast Facts About Life,” 2011.6 Retzloff, Cheryl, “Trillion Dollar Baby – Growing Up,” LIMRA, 2011.7 Colonial Life & Accident Insurance Company, Harris Interactive Survey, 2009.8 Retzloff, op. cit.9 Ibid.10 Mitchel, op. cit.11 CDA Disability Divide proprietary research March 2010, http://www.disabilitycanhappen.org/research/consumer/.12 Social Security Administration, op. cit.13 U.S. Fire Administration, usfa.fema.gov/statistics/index.shtm2009.14 Council for Disability Awareness, “The Disability Guide, CDA 2010 Consumer Disability Awareness Survey,”

March 2010.15 Unum internal data.16 LIFE Foundation and America’s Health Insurance Plans, “The Impact of Disability,” May 15, 2009.17 Colonial Life, Life Insurance and Disability Insurance Survey, Oct. 2011.18 CareerBuilder.com, “More Than One-Third of Workers Will Put Their Tax Refund Into Savings, Finds New

CareerBuilder Survey,” April 12, 2011.19 American Payroll Associates, “Getting Paid in America,” Survey, 2008.20 Lusardi, Annamarie, et. al, “Financially Fragile Households: Evidence and Implications,” National Bureau of

Economic Research Working Paper 17072, May 2011.21 Retzloff, op. cit.22 Charles River Associates, “Financial Security for Working Americans: An Economic Analysis of Insurance

Products in Workplace Benefits Programs,” July 2011.23 Ibid.24 Retzloff, Cheryl, “Person-level Trends in U.S. Life Ownership,” LIMRA, 2011. 25 Retzloff, “Trillion Dollar Baby,” op. cit.26 Mitchel, op. cit.27 Ibid.28 Ibid.29 Retzloff, Cheryl D., “To Shop or Not to Shop for Life Insurance: Turning Shoppers Into Buyers,” LIMRA, 2011.30 Retzloff, “Person-level Trends,” op. cit.31 SHRM, “2011 Employee Benefits: Examining Employee Benefits Amidst Uncertainty,” June 2011.32 Neyer, Ron, “The Voluntary Benefits Report Card,” LIMRA International, 2007.33 Council for Disability Awareness, op. cit.34 Colonial Life, op. cit.35 Retzloff, “Trillion Dollar Baby,” op. cit.36 Ibid.37 Colonial Life, op. cit.

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Colonial Life 1200 Colonial Life BoulevardColumbia, South Carolina 29210coloniallife.com12/11

©2011 Colonial Life & Accident Insurance Company.

Colonial Life products are underwritten by Colonial Life & Accident Insurance Company, for which Colonial Life is the marketing brand.

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About Colonial LifeColonial Life & Accident Insurance Company is a market leader in providing insurance benefits for employees and their families through the workplace, along with individual benefits education, advanced yet simple-to-use enrollment technology and quality personal service.

Colonial Life offers disability, life and supplemental accident and health insurance policies in 49 states and the District of Columbia. Similar policies, if approved, are underwritten in New York by a Colonial Life affiliate, The Paul Revere Life Insurance Company. Colonial Life is based in Columbia, S.C., and is a subsidiary of Unum Group.

For more information on voluntary benefits, call Colonial Life at (803) 798-7000 or visit coloniallife.com.