Estate planning is an exercise intended to arrange a person’s personal and business affairs so that accumulated wealth is transferred in the most advantageous way (timing, cost and tax savings) to intended beneficiaries. A plan typically contemplates the disposition of accumulated assets and is thought to be primarily advantageous for people of attained wealth, based on accumulated tangible assets.
Overlooked in many estate plans is the asset of capitalized human life value. This invisible asset may well be the person’s most valuable and substantial asset. Overlooked, too, is the fact that few people simply “drop dead.” The reality is that more often than not there is a “suffering period”—a living death, or disability, that can be either a temporary or permanent condition—that will immediately have an eroding effect upon an estate plan, many times totally preempting it. An estate plan without disability insurance to support it can end up in a serious financial snag.
Insurance and financial advisors do not ignore the “living death” problem because of lack of sophistication as much as the fact that there have been few practical solutions available due to lack of product or adequate issue limits.
Adequate Personal Disability Insurance
There are now some products that can be utilized in putting together a disability financial plan that will perform very well. Step one is the guaranteed delivery of an adequate amount of income for the victims and their families, businesses, or both, to support an acceptable lifestyle without invading savings, retirement plans or other accumulated assets.
Separate surveys conducted by U.S. News and World Report and the U.S. Bureau of Labor have provided startlingly similar statistics that confirm the necessity for a person, regardless of income level, to have an income cash flow of 65 to 75 percent of their normal income in order to cope with the economic hardship and possible financial disaster that follows a period of non-productivity due to a disability.
This level of coverage has been virtually impossible to achieve with the disability insurance issue and participation limits insurance companies commonly offer. Insurance and financial advisors find, on an earnings chart, that the higher the income earned by their clients the lower the percentage of income that can be insured. In the past, this has been a great discouragement to advisors because creating an adequate disability financial plan often crumbled under the unsuccessful search for a product powerful enough to deliver adequate minimum cash flow.
Today supplemental disability plans are available in individual or group disability plans. The combined coverage will deliver an adequate percentage of normal cash flow for the client if disabled. Where a supplemental plan is in place, assets that are put aside for an estate plan will not have to be used in part or in total to support a disabled person’s lifestyle, and the substantial asset of future value of the person’s working life will not be irretrievably lost. With adequate disability insurance, a client will be substantially indemnified for the loss.
Business Uses of Disability Insurance
Other disability financial plans intended to deliver peace of mind and security for the disabled victim, family and business include combinations of monthly benefits and lump sum payments that fit every conceivable need. Plan design must be accompanied by a willing underwriting attitude to get the amounts desired. The good news is that all this is now available.
Insurers of such disability financial plans do not deny coverage because of a person’s high net worth or high unearned income. If the insurable interest is obvious and the plan need is correctly documented, very substantial amounts of disability insurance can be arranged to fulfill the need exposed by a disability financial planning expert.
Overhead expense, salary continuation, key person indemnification, loan/lease and mortgage coverage, and funding buy-sell, employment and severance agreements are among the popular business plans that can be put into place with ease and affordability.
Change has come painfully slowly in this important and interesting arena of disability financial planning. The industry has reached a level with product development and underwriting flexibility so that we can fulfill the complete disability planning needs of clients.
From the book Life Is Just a Cash Flow we learn that sound financial planning begins and ends with income planning. Proper income planning is impossible without adequate amounts of disability insurance.
Solving this devilish problem of adequate cash flow during periods of disability is professionally satisfying and rewarding to client and advisor. These truly are the best of times in disability planning.
W. Harold Petersen, RHU, DFP
RHU, DFP, is founder and chairperson of Petersen International Underwriters. He is recognized as an expert in underwriting development and policy innovation for such products as high-limit disability insurance, residual disability benefits, cash-value DI, and the expanding field of disability financial planning. The life/disability industry has acknowledged his leadership as an author, educator, motivator and leader, and has bestowed upon him the Harold R. Gordon Memorial Award (NAHU), the Will G. Farrell Award (NAIFA Los Angeles), the Lifetime Achievement Award (IDIS) and the Distinguished Service Award (NAIFA CA). His extensive industry involvement includes NAIFA, LIMRA, NAHU and The American College, all on local, state and national levels as well as IDIS. Petersen can be reached at Petersen International Underwriters, 23929 Valencia Boulevard, Valencia, CA 91355. Telephone: 800-345-8816. Email: firstname.lastname@example.org.