The living of life costs lots of money. From the first breath of life until the last, we must spend or someone must spend for us, money to pay for the cost of living. One’s income must equal outgo because “Life is a Cash Flow,” and if income stops we are financially dead.
People face three financial problems in life over which they have no control—death, disability and old age—any of which render a person unable to earn income to keep the cash flowing.
Fortunately, insurance and financial advisors have an antidote for these problems: Replacement income. Life insurance can be used to finance the living costs for the surviving dependents. Retirement income plans will, if fully funded, provide a comfortable cash flow when a person stops working. Disability income insurance provides replacement income cash flow for those who become disabled and are unable to earn a living.
Because life is a cash flow, income planning is the cornerstone of financial planning. No comprehensive income plan is complete without an adequate program of disability income insurance. Advisors have had difficulty in the last half-decade in solving the disability insurance needs of many clients because insurance companies have abandoned the field or drastically reduced their issue limits. There are modern ways to achieve this planning goal in today’s admittedly challenging disability insurance market, but such solutions are not commonly known.
Advisors face challenges in securing adequate amounts of disability insurance coverage for many clients—especially highly-compensated persons and clients who work in occupations or conditions many insurers deem unacceptable.
There is a problem! Known in the industry as the “disability shortfall problem,” studies reveal that, regardless of their level of income, most people have financial obligations that consume 60 to 70 percent or more of their income.
Separate surveys conducted by U.S. News and World Report and the U.S. Bureau of Labor Statistics, provide statistics that confirm the necessity for a person, regardless of income level, to have an income cash flow of 65 to 75 percent of normal income in order to cope with the economic punishment and possible financial disaster that follows a period of non-productivity.
Supplemental High Limit Disability plans (HLD) are designed to imitate customary disability plans currently available from traditional carriers. The definitions are virtually identical to those in the insured’s base policies, and the terms and conditions mirror those of the base products to the extent permitted by state regulations, hence they provide a solution for adequate amounts of coverage. The HLD products can be used to “solve” a wide variety of disability situations. Here are four common situations where they can be used.
1. Most insurers use a sliding scale on issue/participation limits on individual DI plans. The result is that the higher the income, the lesser the percentage of income the DI company will insure. In today’s market, maximum DI issue limits provide only modest coverage to many income earners.
Most income earners, regardless of income level, have spending commitments that consume 65 percent of normal earned income. If they can secure only 12 to 50 percent of their income, they end up with insufficient coverage.
The accompanying charts show the shortfall that often exists under current plan arrangements and the amount of additional DI coverage needed to bring the client to adequate levels.
2. Well-paid executives often suffer reverse discrimination, because their firm’s group long-term disability plan has a “cap” to keep the cost of the plan low.
The 60 to 70 percent of salary typically promised to employees is applicable to the $30,000 per year employee, but not the $300,000 per year employee. Excess disability coverage can be superimposed over the group LTD to provide the percentage of coverage that other employees enjoy.
3. Many banks demand that their borrowers assign the benefits of existing DI coverage to secure the repayment schedule to the bank in the event of disability. Assigning the benefits this way robs the family of its critical protection should a disability occur. With HLD plans, the borrower can use bank loan indemnification coverage to insure these special situations without impairing the borrower’s personal disability program.
4. Good planning calls for business owners to establish a properly funded disability buy/sell agreement. The problem is, many insurers limit coverage to 80 percent of purchase price, have modest issue limits and refuse to cover persons over the age of 57. High-limit DI plans can help. These products can be structured to handle jumbo buy/sell benefits of up to $20 million, in amounts up to 100 percent of purchase price, and include persons age 57 and over. (An added plus: These plans do not reduce benefits as someone ages.)
“Life is Just a Cash Flow.” People must have adequate income to match outgo when disabled and unable to earn money. If people attempt to cover such cash flow needs by invading savings, they are destroying their wealth accumulation and retirement income plans. They will not be collecting compound interest, and their future well-being will forevermore be dependent upon earned cash flow.
If they borrow money to cover these cash flow needs, they will be spending intended future savings for the repayment of loans and interest. Wealth accumulations will stop, and retirement plans will be underfunded. This will restrict economic freedom.
Fortunately, people now have another option. They can include the high-limit supplemental disability coverage in their financial planning. These plans are reasonable as to costs and are affordable to most advisors’ clients. The coverage will relieve concerns about short-term liquidity, thus freeing clients to concentrate on long-range investment strategies. HLD is an essential financial tool.
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.