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Eugene Cohen

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Eugene began his insurance industry career in Cleveland, OH, with a company that specialized in disability income protection. In 1981 Cohen founded the Eugene Cohen Insurance Agency, Inc., Skokie, IL, which specializes in DI, life, LTCI, fixed annuities, and impaired risk cases. The agency is a member of LifeMark Partners, NAILBA, the IDIS and is a founding member of The Plus Group. Cohen received the W. Harold Petersen Lifetime Achievement Award from the IDIS and NAILBA’s Douglas Mooers Award for Excellence. Eugene can be reached at Eugene Cohen Insurance Agency, Inc. Telephone: 800-333-4340. Website: www.cohenagency.com. Email: eugene@cohenagency.net.

Exploring Association Group Disability Insurance Coverage.

“An investment in knowledge pays the best interest.”-Benjamin Franklin

We’ve recently been asked about association group coverage and wanted to touch base on some features to make note.

Why is it that some association group disability plans can be priced less than individual disability plans? Sometimes the price difference can be significant, so how can this occur? In fact, some association group plans insure the same highly sought-after occupational classes that individual disability insurance companies seek out. We are not talking about association discounts on individual plans, we are referring to plans that are developed for an association that use a group chassis.

If the occupations are similar or the same, then the morbidity rate would be similar as well. So, if the morbidity rates are similar, how can the group association plan charge substantially less premium? Typically, the contract would need to have provisions that may have an impact on policy pricing. Along with this, one of the questions people forever ask, is just how much should disability insurance cost? So, let’s look at some of those provisions that may influence product pricing. (Note-the association group marketplace is dynamic, and policies will vary from company to company, so please ask your client to obtain a specimen contract to be reviewed.)

Termination
Individual: Most individual plans are guaranteed renewable to a certain age, usually age 65. The company that underwrites the individual plan can’t cancel the policy and may even have provisions so the client can keep the policy past age 65.

Group: Most group plans have provisions that allow the insurance company to cancel the plan. Why is this important? If a client’s association group DI coverage were cancelled, they would need to obtain a new policy. There are medical conditions that may still allow a professional to work but may make them uninsurable for an individual plan’s underwriting. For example, an individual with treated cancer or heart disease may still be able to work but may be uninsurable or postponed. In addition, as one gets older, the premiums for individual coverage tend to be more expensive. The pricing of today’s individual DI product would most likely be significantly less expensive than a similar product ten years from now.

Rate Guarantees
Individual: Many individual plans are purchased with a provision called noncancelable, guaranteed renewable. The expansion of the guaranteed renewable clause can cause some confusion from a policy that is just “guaranteed renewable.” Essentially the “noncancelable” prevents the company from changing policy provisions, including the premiums, without the policyholder’s permission. Typically this provision will expire at a certain age, usually age 65.

Group: Many group coverage certificates will have variable rates that can change based on age, so as a client gets older their rate will increase assuming the plan has not been cancelled. In addition, many group contracts are built with provisions that allow the company to change the pricing of the actual product. Having certainty of pricing is of great value, especially over a 10 year, 20 year, or even a longer time period.

Association membership requirements
Most association group plans require that the certificate holder maintains their membership in the association. It’s important that the cost of the association and future increases in association dues be considered when a cost comparison is made between plans. Some associations have additional membership requirements that may need to be maintained in order to renew membership. In addition, some members may not always be socially, politically, or culturally aligned with their association, but dropping their membership would nullify their disability coverage. The association member must be aware of the various factors involved when their disability insurance is entangled with a membership requirement. Disability insurance can be someone’s most important insurance protection. To have that protection wrapped up and dependent on association membership can possibly become detrimental in the future. While premiums allow someone to pay for an individual disability policy, someone’s health and financials allow them to pass underwriting and to obtain an individually underwritten policy. If a client decides in the future that association coverage wasn’t a good match for them, it’s possible that their medical or financial underwriting may prevent them from obtaining an individual policy issued today. In addition, we never know what products may be available in the future, but we do know what is available today.

Policy provisions
We’ll touch on a few of the basic points that are important for someone who is considering buying an association group disability plan.

Total disability requirements during the elimination period: We tend to find this provision in some association group plans. It’s rare to find this in an individual plan, but we’ve seen it a few times here and there. This provision requires that, during the elimination period, the individual must be totally disabled. To become eligible for monthly benefits they can’t be working at all for the full 90 days or 180 days of the elimination period. Remember, if someone were going to the office a couple of days a week, they usually would not be considered totally disabled but rather partially or residually disabled. Most of the comprehensive individual disability plans will allow the elimination period to be satisfied with either a total or partial/residual disability claim. This provision raises the bar on who can or can’t qualify for a disability claim. Disabilities come in all shapes, sizes, durations, severities, and affect people differently. This one provision in an association group plan can restrict many individuals from qualifying for a disability claim that otherwise may have been covered under an individual policy. We can’t stress enough how limiting this provision can be for those who are unaware of its ability to be a barrier to a seemingly obvious claim.

Reduction of benefit based on current income: Again, we tend to find this provision in some association group plans. It’s rare to find this in an individual plan, but we’ve seen it a few times. The provision, usually called a Relation of Earnings clause, indicates that, at the time of claim, the policy will not pay more than what an individual earned the last year or two years depending on the contract. This means that the group member may be paying an annual premium that allows them to obtain a benefit only up to a certain amount of coverage. In fact, they may have qualified for that full amount based on their earnings at the time the application was submitted and the certificate issued. Fast forward years later and now the individual may be earning a lot less than they did when the certificate was purchased. At claim time, that individual may not be paid the full benefit if the benefit were to exceed their more recent income.

There are other provisions that may or may not be applicable that should be reviewed as well, such as: Changes in the definition of disability as the claim proceeds; mandatory rehabilitation provisions; integration of other income such as social security, workers compensation from somewhere like Scotti Insurance, retirement benefits, and pass-through income received as a result of being a partial or full business owner; soft tissue and self-reported ailment exclusions or benefit period restrictions; and mental nervous benefit limitations.

The value received is the value perceived. Skilled professionals are sought out due to their knowledge of certain professions. For the most part, analysis of a group association disability policy and the analysis of important provisions is not part of the training, education, and background of most skilled professionals. If someone knew they were going to be in a car crash, how many airbags would they want installed in their car? Would someone buy a car with no seat belts in order to save money? How large of a safety net would one want if they were an acrobat, how narrow or wide? When purchasing a product that may be someone’s financial lifeline, seek out the most comprehensive disability policy possible! The wider the net, the more comprehensive the policy, the more it can have the ability to catch the wide variety of disabilities that can occur.

Disability Insurance: A Pillar Of Planning And Protecting The Nest Egg

The proverbial “Nest Egg” is defined as being a sum of money saved for the future. Let’s put a pin in that thought and move to some basics of financial planning and the role of disability insurance.

There are many facets to a financial plan, but one of the basic pillars is a focus on retirement planning: When, where, how, and in what style. Once the retirement framework is structured, the planner can take into account the client’s budget, savings, investment objectives, and risk tolerance. Where does disability insurance play into the overall planning process? Let’s break into the budget part of the plan.
If you breakdown a typical client’s budget, you’ll easily see that most clients require between $5,000 to $10,000 per month in order to just maintain their standard of living. If a planner uses a basic assumption that an investment portfolio can earn four percent after taxes (about six percent taxable), then the Nest Egg needed to produce a monthly income to replace the monthly budget is: 12 x (monthly budget/four percent).

Therefore, just on these basic assumptions, in order to replace a monthly budget of $5,000 per month, your client would need about $1.5 million of investable assets. If your client’s budget is $10,000 per month, then they’ll need about $3 million of investable assets. A planner can use more assumptions and formulas to better pinpoint the amount of assets needed, but using these basic amounts you can see the amount needed for the majority of clients is well over $1.5 million of working, investable assets.

So, if the Nest Egg goal is to grow one’s investable assets to $1.5 to $3 million, then how does disability insurance protect the Nest Egg? Let’s look at what occurs when one gets disabled. Their income stops, so the assumption is that no income is coming into the household.

If the monthly expenses for your client are, say, $7,500 per month, then that money has to come from somewhere or the expenses have to be reduced. For most people, there are fixed monthly expenses and variable monthly expenses/discretionary expenses. Usually the fixed expenses, such as mortgage/rent, utilities, insurance, and others, are more difficult to change. While the discretionary expenses may be more flexible to change, cutting back on these expenses can cause a change of lifestyle for the family. Nonetheless, the $7,500 per month, or $90,000 per year would need to come out of savings…and the contributions that were being made to savings would now stop.

Let’s continue with the same client and assume they have a gross income of $15,000 per month or $180,000 per year. Therefore, depending on the tax rate, the client’s after-tax income would be about $9,000 per month. So, if their monthly expenses are $7,500, then there could be about $1,500 per month or about $18,000 per year to invest and save. If a client were able to maintain this scenario for 10 years then, with a zero earnings rate, they would have saved $180,000. If they earned six percent per year then their Nest Egg would be about $250,000 after 10 years.

If this client had a disability and didn’t have disability insurance, then their savings would be their source of funds. It doesn’t take too much math to figure out the numbers will just not work. Someone can’t have $7,500 of expenses per month, or $90,000 per year, and savings of only $250,000. This person and the family would have to make some serious changes, or they would have a lot of financial challenges. On the other hand, if this person had $7500 per month in disability insurance and therefore had $7,500 coming in each and every month of a qualifying disability, then the Nest Egg could possibly be preserved (in the simplest of examples).

How many clients do you have who don’t have disability insurance? Make sure you have an inventory of insurance products your client has obtained. Review this inventory on a routine basis and make sure your client understands why disability insurance protects current and future lifestyles. Some clients spend more time planning their next vacation than their financial future. Educate your clients that disability insurance is one of the pillars of financial planning.

Buyout Coverage: To DBO Or Not To DBO?

We know that business owners have unique planning needs that require a financial advisor to be familiar with additional products and concepts. One of those concepts is succession planning and how to plan for the death of a business owner. Life insurance is typically used for that purpose and the concept is relatively straight forward. The clients’ business attorney needs to be involved so that the documents are prepared correctly and that the structure of the buyout is determined. Most properly drafted buy-sell agreements, partnership agreements or operating agreements will have some type of provision that describes what is to occur if a partner also becomes disabled. There are various parts of the planning aspects of business buyout agreements and analysis, such as: Structure, Valuation, Definitions, and Need. For the purpose of this article, we want to really focus on the need. While it may appear obvious, we want to take a deeper dive into the need for the actual agreement to have a well written disability provision and subsequently the necessity to fund the agreement as well.

Why is the agreement needed? When a business partner passes away, it’s obvious that the person is no longer able to work. Assuming there was a constantly reviewed and updated buy-sell agreement set up ahead of time, then the process usually will go fairly smoothly. When a business partner becomes disabled it can be a different, more strained, situation as the partner may still be able to have some strong opinions about how the business is operating and the compensation or distributions that should be owed to him or her.

Let’s look at some examples of how this can be challenging for the business partners. Take a law firm, accounting firm, or some other professional firm. One of the partners is diagnosed with a high stage cancer, one that with treatment the person can live a few years and, in some cases, beat it all together. Now let’s add that this is a senior partner with 35 percent ownership of the firm. The partners are compensated in three ways: A regular salary, end of the year bonus, and a passthrough dividend at the end of the year where the profits are split up. Let’s revisit the partner that is fighting cancer. Let’s say he’s been out for most of the year due to his treatments, recovery and more treatments. He checks in when possible, but the other partners, while very sympathetic to his condition, have taken on more of his work and responsibilities. The partners even had to hire an additional assistant to help with some of the administrative tasks the disabled partner was responsible for as part of his duties. The disabled partner was coming in one, maybe two, days per week, but has been too weak to stay all day, and it eventually comes to a point when he doesn’t come in for weeks or months. The firm has sick days, vacation days, and a basic group LTD that pays up to $5,000 a month and he is now on claim.

When the year end comes along, the existing partners take additional bonuses to make up for the extra work and there are no dividends paid. The disabled partner cries foul, as he feels the existing partners took all the profits that he should have been allowed to share in and paid it out as bonuses instead. The existing partner calls his attorney to see what can be done. Since there was no buy-sell agreement or an agreement that spells out what occurs if a partner is disabled, there may be very little the disabled partner can do except take legal action.

Let’s take another scenario of a business partner that doesn’t come back to work but refuses to relinquish ownership in the company. The other partner(s) need to still do more work and adjust the workload due to the absence. The other partner(s) have even offered to buy out the existing partner, but to no avail. The ailing partner refuses to sell in hopes of returning…even after years of being completely disabled. Now his spouse has been asking for copies of the income statements, bank statements, and annual financials so that their accountant can analyze the books. The disabled partner is causing more work and expense for the firm with all the additional requests and inquiries. If they had a properly structured a buy-sell agreement with a disability buyout provision, this type of scenario could have been avoided.

Once the buyout or partnership agreement is set up and there is a disability buyout provision, then the planning conversation is whether to fund the agreement with a disability buyout policy or to payout the buyout via operating business income. As we said initially, there are many different styles and types of agreements with various corresponding types of policies to help fund them. The financial strain of an unfunded buyout agreement can be devastating to the business. The business may need to get a loan to satisfy the obligations of the agreement. It’s possible that the working partners may need to use their own savings to satisfy the obligation as well. Without a properly funded buyout agreement there can be hardship for the business and the partners.

The road to disability buyout insurance policies first starts with a properly structured buy-sell agreement. Once your client has the agreement, you should ask for a copy so that you can work with your disability insurance MGA or company to see how funding the agreement with disability buyout insurance could be an option.

2019 New Year’s Resolution: Monthly Reasons To Sell More DI

Since this is January, you may have already done your New Year’s planning, but for many of us the new year is just beginning. So as a financial planner, what are your goals? Pick a few resolutions and see how your disability income business will thrive.

Resolution 1: Learn a traditional individual disability insurance product. Pick a product: Business Overhead Expense (BOE); Disability Buy Out (DBO); Key Person Disability; Guaranteed Standard Issue (GSI); Disability insurance products that can create a retirement fund for a disabled client; or just regular disability insurance. Call an MGA who has a DI specialist and set up an hour appointment to understand the product. Get the brochure, get the specimen policy, get a sample illustration and understand the product. Your resolution: Educate yourself!

Resolution 2: Make sure every working client in your portfolio of clients has a plan if they had an extended recovery or never recover from the malaise of an extended sickness or accident. Walking through the exercise of what to do if there is no more, or a reduced amount, of income coming into the house is a good way to start the planning process. If each household were treated like a business, what would happen if that household generated no income and had a lot of expenses? How will your client and the client’s family cope with no income coming into the household? Disability insurance is a clear solution to the problem for most clients.

Clients will tend to listen and work with professionals they’ve worked with in the past. Your client database is your best source of clients who need disability insurance. Discussing and planning for an unfortunate accident or sickness is critical for any type of financial planning. Your resolution: Educate your clients!

Resolution 3: Understand pre-underwriting before you order another quote. There are many steps in helping a client obtain disability insurance and the underwriting process is a major part of it. Understanding the red flags of underwriting can help you pre-quality clients who can obtain this important product.

Health pre-screen. It’s pretty obvious this is important. Most advisors have general health questions they ask. Be sure to ask about muscular-skeletal issues (knees, back, hips…etc). This is often missed, as life insurance underwriting is less concerned about these issues. Also, mental-nervous medications and any type of talk therapy (marriage, family, personal, etc.) can be missed as well. Make sure to ask questions about all of the issues above, as they are often a source of exclusions in the underwriting offer. Disability insurance underwriting is different than life insurance in that the disability insurance underwriter has the ability to exclude or limit coverage on specific medical conditions. The ability to recognize this upfront and educate the client can be crucial when delivering a policy that contains such exclusions or limitations.

Occupational class pre-screen. Make sure when you order your quotes that you have a good visual image of what your client does on a weekly basis. Be sure to ask the approximate percentage of administrative, supervisory, sales, and manual duties. If there has been a change in occupation, make sure you know when the change occurred and if the new job was related to the old job or a different occupation/industry all together.

Financial pre-screen. Underwriting for a disability insurance policy involves financial underwriting. The larger the case, the more proof of financials will be needed. Make sure you understand your client’s net income, not gross income.

If your client is an employee it’s usually the W-2, but for clients who are also owners it can be more involved. Essentially, you need to know the total earned income on which they are taxed. Also, if your client earns a 1099 they are considered self-employed, so it’s important to know their net income. In addition, if a client is new to a position, newly self-employed, or earns income based on commission or bonuses, even more questions are needed. Your Resolution: Know what questions to ask when obtaining a quote for disability insurance.

Resolution 4: Talk about disability planning at least once a week. It’s just like the old saying—out of sight, out of mind. Don’t trust your memory that you’ll eventually discuss this product with a client. If you stop talking and thinking about disability insurance planning, then most likely you will forget to talk to your clients about this important part of planning. Build a reminder on your calendar to pop up on Monday morning: Talk about disability insurance this week. You can build this to come up every single week by using the reoccurrence feature. Set it up once and you can get a reminder every week. Put up a picture on your office wall that will trigger you to remember to talk about disability insurance. It can be a picture of a para athlete who inspires you or it can be a picture of anything that is inspirational that reminds you of how tenacious people get through hardships. Take a copy of the front page of your own disability policy and put it in a picture frame for your desk. Your Resolution: Remind yourself to talk about disability insurance planning.

Resolution 5: Make sure you have disability insurance coverage! I’m sure you’ve heard the story of the shoe cobbler whose children have no shoes. In our world, it’s the financial advisor who doesn’t have any disability insurance coverage. It’s amazing when we run into financial advisors and insurance agents who do not own coverage or do not understand the limitations of their own group policy. Discuss your own situation with a trusted IDI specialist and make sure you are covered. It’s healthy for you to go through the process so that you can share your experience with your clients. Your Resolution: Do your own disability planning.

From all of us to all of you, have a happy and healthy new year!

‘Tis The Season: After Open Enrollment, It’s Time To Help Clients Protect Their Income

With another major medical health insurance enrollment season coming to a close, the best time of the year is coming up—after enrollment season! The first quarter of the year is a great time to review your client list and set up appointments to discuss disability insurance. It’s so important for each of your clients to have their income protected.

This is one of the best opportunities to reach out to those clients that you may have reconnected with when you have assisted them with major medical health insurance. Think about it, disability income insurance is the perfect additional benefit for any working client or group. What happens when someone had to use their health insurance? That person was either sick or injured and needed medical assistance. Hopefully that person will get better quickly and get right back to work. We do know, though, that there are a percentage of people that need extra time to recover from their sickness or injury—sometimes months and sometimes years. We also know that there will be a percentage of these people that may never recover.

Ask the questions to your clients. Does your client know there is a policy that will help to provide them an income for a period of time while they can’t work? Many people do not realize that this type of insurance policy even exists. Some of your existing clients are seeking you out for help with major medical health insurance. These clients have a concern that, if they end up getting sick or injured, the medical bills can become a financial strain. Next question: How long could a client miss work while trying to recover from a health issue and not have that missed time at work cause a financial strain? For most people, they can only last a few months if that. This conversation of how long it can take to get better and the possible financial strain is a very natural extension of any conversation about one’s health.

We all know that major medical health insurance will not provide any disability income payments to a policyholder. Major medical health insurance is not disability insurance. Therefore, when clients are concerned about protecting themselves and their families with health insurance, you need to discuss with them the need for disability income insurance as well.

Your clients, like most, have a lot of fixed expenses that need to get paid every month. Do the exercise of calculating your own personal fixed expenses that need to be paid every month. It’s amazing when you put pen to paper and figure out that your fixed expenses are $5,000, $7,500, or even $10,000+ per month! Now imagine how these expenses would increase if someone needed medical care—and the expenses can get even higher! These expenses have to get paid, so with no income from working people usually start a progression of liquidating assets to pay them.

The liquidation process usually starts with the checking account and usually quickly moves to the savings account. The process continues in various fashions until eventually there may be nothing left to liquidate. Now imagine if your client had a disability insurance policy that started to provide income after the elimination period. Now your client can pay those fixed expenses and they can make less extreme lifestyle changes. They can have the ability to concentrate on getting better and should be able to sleep a little better at night. Have you protected your income? We find that advisors that buy disability insurance can better explain to their clients why this product is so important. What’s your plan?

BOE: That Was Easy!

The “Aha!” moment. If you are like us, we’re sure you love the feeling you get when you find a solution to a problem or understand a certain product. The light bulb goes on, the excitement builds-it’s that feeling that “this makes a lot of sense.” That’s the feeling we are told advisors get when they understand the tremendous need for BOE insurance.

BOE
Yes, another insurance acronym, which stands for Business Overhead Expense disability insurance. There may be some variations of name with different companies, but most call it BOE.

The Basic Idea
A business owner client has a prolonged sickness or injury that causes a disability and loss of work. Being the business owner, your client is still fully or partially responsible for the monthly bills and expenses of the business. A BOE disability policy is intended to create a reimbursement for those qualifying expenses.

The Market
A small business owner or professional (physician, dentist, attorney, accountant, etc.) that is ultimately responsible for paying the expenses and the employee payroll of the firm. Typically, the firms that are most susceptible to the perils of a disability would be the smaller firms in which the revenue created is dependent on the owner’s ability to work. One of the key underwriting criteria will be the need for the coverage. Will the firm lose significant revenue if the owner becomes disabled? In many cases it’s very obvious. For example, if a lawyer, physician, accountant or dentist has six employees and can’t practice due to an injury or sickness, then the primary revenue creator is no longer creating the required revenue. If a business has a large amount of employees, say a restaurant owner of an upscale restaurant, it may be more difficult to prove a revenue loss if the owner becomes disabled. If a firm has multiple owners, then the underwriter may ask to see the operating agreement to see if there is an allocation of expenses clause or something that would indicate each owner is independently responsible for the expenses of the firm.

The Need
The owner of a business will either personally or corporately obligate themselves to pay the overhead expenses of a business. This is part of the risk and reward trade off of being a business owner as opposed to an employee. The business owner assumes more risk but can reap more rewards in return. Most business owners do not take into account the risk of becoming disabled and how that would affect their business, personal income and net worth.

Disabilities come in different shapes and sizes, but there will be a time in which the business owner will need to make a decision to continue, sell, or close down the firm. Each scenario can be different, but you can only imagine the mental anguish of trying to recover from an injury or sickness and also making life changing decisions for not only the business, but also all the dedicated employees of that business.

Take a successful attorney, physician or dentist that has five employees: Two medical or legal assistants and three office personal (front desk, secretarial /insurance filing/bookkeeping, and other clerical duties). If the revenue creator becomes disabled, which employees are kept on and which are let go? Now add some more elements, such as highly trained employees that have developed intimate knowledge of the business. It can take years to train employees on various aspects of a business-working with insurance companies, vendors, preparing the books, maintaining a database, website, and so much more. Most owners would not want to close down the practice and layoff highly valued employees if the owner feels or is told that they should be able to get back to work in the “near” future, say a year or two.

In addition, the business owner has obligated themselves for being responsible for other business expenses. It’s not uncommon to have a long lease, leases that last five years or longer. In addition, some office space leases require a share of the property taxes and common expenses be paid as well. The business owner also has to maintain other common business insurance, such as: Liability insurance, workers’ compensation insurance, malpractice insurance, property insurance, and health and other employee benefit types of insurance. It is important for the business owner to ensure they have the proper coverage, ideally opting to research options like https://www.leveragerx.com/malpractice-insurance/ before making any direct moves. The investment at an early stage can pay off greatly later down the line if something were to happen. Without this coverage, the business as a whole could ve very vulnerable, but with it stability can continue despite a worst-case scenario rearing its head. Business owners looking to protect themselves should check here for more detail on business insurance solutions. There are other common expenses as well, such as utilities, office equipment leases for copy machines and other office equipment, computers, business software (click here to see how you can develop your own!), professional dues, and postage among the many type of monthly obligations, many of these monthly costs can be decreased by looking for the same product for a cheaper price, such as comparing utility providers somewhere like Utility Bidder, for cheaper monthly utility bills, for example. In addition, most business owners still need other professional services that need to continue such as accounting, computer/network maintenance, and legal services to name just a few. Just reading about all these expenses can be overwhelming. Now imagine a successful client that survives a bad car accident and requires corrective surgeries and/or months, if not years, of rehabilitation. What about the client that is diagnosed with a potentially fatal form of cancer but needs to go through years of treatment before the final outcome is really known?

The Loss to the Business Owner
Eventually there will be a crossover point in the business in which the loss of revenue caused by the disabled owner will create a perilous situation for the business. For a business to create income, the revenue must exceed the expenses. If the primary revenue creator and business owner is disabled, there will be a loss of revenue. At a certain point the business owner will be forced to pay the expenses of the business out of personal savings, start to trim the expenses of the business or, even worse, shut down the business. While some may say the business can be sold, the value of a service business typically will diminish very quickly without the primary revenue creator involved. The longer the disability, the more patients and clients need to seek services elsewhere resulting in even a greater loss of value. What about hiring a person to fill in for the disabled owner? While that may be possible, it’s unlikely for several reasons. The success of the firm is usually based on that revenue creator but, even so, the firm would need the “right” person. Who is going to do the professional search and conduct the interviews? It can take years to find the right person or associate. In addition, even if the right person is found, adding a new professional increases the firm’s expenses tremendously. In addition, restarting a flow of revenue will have a natural delay and may be less then previous receipts. Also, the cost of a professional with the same duties as the policyowner may be an excluded expense in the BOE policy.

The Policy
Most BOE policies will usually have similar features: A waiting/elimination period, usually 30,60, or 90 days, and a benefit period, usually 12, 18 , or 24 months. A BOE policy will vary from an individual disability policy in that the monthly benefit is paid as a reimbursement of qualified expenses. In addition, there is usually a provision indicating that any monthly benefit that is not claimed in the request for reimbursement may be used later so it is not lost. For example, a client has a $10,000 per month BOE policy and a 12 month benefit. If the client has a qualifying disability and has $5,000 of reimbursable expenses, then the policy benefits may last for 24 months instead of just the 12 months. Please review the definitions and insuring agreement of any BOE policy you may propose, as policies can vary.

The Taxes
We don’t provide tax advice and your client should seek individual counsel for their particular situation. In general though, it’s typically accepted that the premium for a BOE policy is usually treated as a business expense. In addition, the reimbursable nature of the policy usually creates an offset of income and expenses which would normally result in a non-taxable event.

Most likely you have clients in your advisory practice that need this type of policy. Now it’s up to you to educate them as well.

When It Comes To Disability Insurance, You Have To A-S-K to G-E-T!

One of our regional sales VPs for a disability company would always start out his meeting by saying:  “You’ve got to ask to get when it comes to disability insurance.  Many times, discussing disability insurance is obvious.  When developing a financial plan, it’s obvious that a discussion of how your client’s income would continue if they could not work should be part of that planning process.  Many advisors work with clients on insurance planning, but are not considered their financial planner.   It’s during many of those conversations that the disability insurance conversation can and should happen.     

Life Insurance Planners
The need for disability insurance can be similar to and as important as the need for life insurance.  

Income Replacement: Many times the amount of life insurance recommended is based on the income of the primary income earner.  There are various formulas to recommend the face amount of insurance, but a popular one is to simply to use 10 to 20 times income.   We all know that the likelihood of being disabled is greater than that of dying during the primary income earning years.  During the life insurance income replacement conversation comes a great opportunity to discuss disability insurance.  Sometimes a life insurance planner may wait until the life insurance is approved and then discuss disability insurance.   Those planners prefer this method, as they know that their client is insurable and thus feel more comfortable discussing the disability insurance products.   

Business Buy-Sell Life Insurance: Many times the buy-sell agreement will not only contain a provision for death, but also will have a provision for disability.  When this is missed or not addressed, your clients may have an unfunded liability that can cause an issue at a later date.   Disability buyout (DBO) is a wide open market, as many brokers forget to address this part of a buy-sell agreement.   Asking for a copy of the buy-sell agreement can help you to identify when this product is needed.  

Business Loans: When a client needs life insurance for a business loan, many times they are an owner of the business.  In any business there are expenses that need to be paid regardless of whether the owner is working or not.   Business overhead expense (BOE) coverage is an essential product for many small businesses.   

Property and Casualty Brokers
Some of our most successful disability insurance producers are actually brokers that focus primarily in property and casualty and have the proper state licenses to discuss life and health products.  

Personal lines—new home coverage:  When a client seeks out P&C insurance for a new home, asking about the life and disability insurance is a natural follow up question.   Buying a new home or upgrading the home is a life event that triggers the need to discuss disability coverage or a review of current policies to see if current coverage is still adequate.

Personal lines—car insurance for children or luxury cars:   When a client calls in and wants to put his child on his car insurance, this is another life event moment.   When a child is able to obtain a driver’s license, you know that college planning may be the next big financial decision for the family.  A review of the primary income earner’s life insurance and disability insurance is essential.   A client may have bought disability insurance when they first got married or first bought a home.   When a child is old enough to drive is a good indicator that a review of life and disability insurance coverage is due.  For many clients, their incomes over the past 16 plus years has greatly increased, yet, many have not increased their life insurance or disability insurance.  Also, when a client wants to insure a luxury car can be a nice indicator that their income has increased and that their life and disability coverage should be reviewed.   

Commercial lines coverage for a new building or equipment:  When a business client is requesting protection to cover the loss of recently acquired assets, this could be a good time to ask about BOE coverage.  When a small business owner or practitioner can’t work, the expenses of the business still need to be paid.  Asking your client if they own a business overhead expense policy can lead into a discussion about planning for a disability.   BOE coverage can provide reimbursement for certain qualified expenses and can help retain certain employees during a time of the business owner’s  disability.   

Employee Benefit (EB) Brokers
When working with a business on employee benefits, the concentration is often on health insurance and other group insurance products.   EB brokers have a great advantage, as many times their work involves consultation on group disability insurance (LTD) and working with key executives and/or the business owner(s).   The group disability insurance may not cover the high income earner’s full income.   For example, if the group coverage is designed to be 60 percent to a cap of $15,000 per month, those earning more then $300,000 will be capped out.  If an owner/executive has a salary of $450,000, plus an annual bonus of $200,000 or a pass through non-passive income of $200,000, the percentage of income replacement is much less than 60 percent.  An individual disability policy can help to equalize the coverage of the executive(s). These key members that run the firm and provide its leadership should have benefits equal to or greater than the employees they help to support.  If this inequity is not addressed, then the leaders of the firm may not have benefits of equal weight.   In addition, if the amount of key members exceed a certain amount, usually five to 10, it may be possible to get guaranteed issue individual disability insurance (GSI plans).  

Remember, you have to A-S-K to G-E-T.  More important,  you want to make sure your clients have the coverage to protect themselves and their families.  We hear about disabilities occurring to people every week.  Let’s make sure their incomes are protected so that they can concentrate on getting back to good health. 

Ability Insurance

You may have noticed that words are chosen very carefully in our insurance world.  If you review the language of any insurance policy, you’ll see that companies are quite deliberate with their use of language. 

There have been many articles written and studies conducted that have suggested that consumers, not familiar with our industry, misunderstand the term “disability insurance” (DI) until it’s explained to them by their advisor.   

There are various ways to describe disability insurance and we know that the name, in itself, can’t be changed, so that is why we focus on what disability insurance can do for our clients.  Of course, each policy is different and a client needs to be eligible for claim based on the contract that was bought. In addition, a disability policy may not replace someone’s income in full as there are issue limits and so forth.   But, when a client does qualify for a claim, that policy can be their financial lifeline to help them get through some tough times.  

Concentrating on ways that disability payments can help is another way to explain the importance of this product.   Dis-Ability, or lack of ability to work, also causes a lack of ability to earn money to pay for our monthly expenses.    

Let’s take a look at some “abilities” payments that a disability claim may help a client pay, partially or in full:    

  • The ability to continue paying monthly mortgage payments—which gives the client the ability to continue living in their home.
  • The ability to pay property taxes, homeowner’s insurance and monthly homeowner’s dues.
  • The ability to pay for common regular utilities and other expenses such as a cell phone, internet service, cable TV, home gas, electric service.
  •  The ability to pay for their required medical treatment(s), personalized health care (home care, respite care) and personal upkeep (haircuts, nail care, beauty care products, cosmetics).
  • The ability to pay insurance premiums (car, home, medical, life, LTCI).   Note: Most individual disability insurance policies have waiver of premium benefit.
  • Emergency repairs or unexpected medical expenses that need to be done (car, home, pets, family members, dental expenses). 
  • Emergency travel to see a sick relative or a funeral.
  • The ability to pay for basic home maintenance such as landscaping, snow plowing, house cleaning and extra costs that may be incurred in order to live in a house designed for someone that’s disabled. 
  • The ability to help pay for a child’s education (private schools and/or college). 
  • The ability to continue to pay credit cards or other debt that was incurred before the disability occurred such as college loans your client has been paying.   
  • The ability to have some relief that money will continue to be received while on claim.  The mental stress caused by financial pressures can be a challenge for even healthy clients.   
  • The ability to provide for one’s family, such as:  Music lessons, gymnastics, school supplies, new school clothes, shoes, food, medical care, Boy Scouts, Girl Scouts, Little League, school tutors, test preparation classes, swimming lessons, ballet, religious school, summer camp, etc.
  • The ability to have cars:  Car payments, car insurance premiums, gas, car registration, repairs and maintenance.
  • The ability to maintain dignity and pride that the provider can still provide in some capacity.  The ability to not feel that they made a mistake by not insuring themselves and becoming a possible financial burden on family and friends.
  • The ability to watch their savings be maintained instead of being possibly depleted by not having insurance. 

What would you add to the list?   

Everything starts with you, the advisor.  Educate your clients on the need for disability insurance.  What’s your client’s plan?  Take a few minutes to walk through how that conversation will flow with your client, client’s spouse, or your client’s adult children.

Disability Insurance: Insuring Peace Of Mind

When discussing individual disability insurance (IDI) products with a prospective client, you could share many real-life examples of how IDI policies have protected families from financial ruin. 

For example, from the website www.lifehappens.org, there's the story of Dr. Valerie King, a single mother with three young daughters. After Dr. King had a series of surgeries to treat her ulcerative colitis, she found herself disabled and unable to do the work she loved. Fortunately, years earlier, Dr. King was protected with the IDI coverage she unexpectedly now needed—ensuring a bright financial future for her young family.

What about the IDI policy owners who never had to make a claim?  How have they benefited from their IDI policy?  Has their money been well spent?  As you know, an insurance company has to manage it so that there are more people that never make a claim than those that will. 

So, let's consider an incredibly important benefit every IDI policyholder enjoys—whether they make a claim or not—the benefit of peace of mind. This psychological benefit pays every minute of every day the policy is in force.  From personal experience, this is a benefit that can't be underestimated.

Over the years we seen clients use their policies, but we’ve seen more not use them.   Thankfully, we’ve never needed to make a disability claim on our policies.  For all of us though, we’ve received tremendous benefit in knowing the policy was available and actively protecting our income.   That knowledge has been priceless to us and all of the policyholders that have bought disability income protection.    

Conversely, we dread to think how we would have felt if we had been disabled and we did not have IDI coverage. The psychological toll would certainly have been as devastating as the financial toll—perhaps even more so. 

In life we have all kinds of safety nets in place like DI products. These safety nets may never be used, but they regularly give us that priceless benefit of…peace of mind. 

If someone skydives they usually have a backup parachute, which you’d think would be vitally important.  While rarely used they do have substantial value.  If you have a client that enjoys cruises, could you imagine paying less for a cruise without lifeboats?  Would one even consider taking a cruise if there were no life vests or lifeboats attached?   Would you buy a car without airbags or safety belts?  These are worthwhile investments and wouldn’t even be contemplated by most clients.   

While we have never jumped out of an airplane, we certainly would not skydive without a backup safety parachute. We do take cruises and we drive all over the country. Knowing there are airbags in our cars makes us feel safe—as do the lifeboats on the cruise ship. They allow us to travel with peace of mind. Knowing we are doing our best to protect ourselves puts us at ease. We are more relaxed.  We personally value the feeling of knowing that we have prepared for the unpredictable—the feeling of being able to do as much as we can, ahead of time, to prevent something tragic.    

Taking the cruise and car analogy further, if someone offered you a discount cruise on a ship that had no life vests or lifeboats, would you board that boat to save money? How about if someone offered you a discount on a car without airbags and other safety equipment? Would you take the deal? Better yet, would you put your children or spouse on that cheaper boat or in that less expensive car? 

Disability insurance products give responsible, successful, caring clients the incredible opportunity to protect their incomes from stopping and the devastating effects that can have on their families.   Yes, the financial benefits of IDI protection will be there if needed but, whether a claim is made or not, peace of mind will always be there for the life of the policy. 

Disability Insurance: True Value Versus Perceived Value

Value perceived can influence  the buying decision for many clients. We were always taught the miracle of insurance: That you can pay pennies for the potential dollars received.  When we present life insurance, we talk about the annual premium for the total death benefit received.  Say, for example, we have a 40 year old who is being presented $1 million of 20 year term insurance for about $600 per year.  The value…$600 for $1 million is pretty clear value.   It’s the pennies for dollars classic example.   

Now take the same 40 year old and who is being presented disability insurance.   Say the illustration shows that he can buy $5,000 per month of coverage, payable to age 67, for a premium of $2,000 per year.  This is the way disability insurance is typically presented, and for some consumers this presentation does not emphasize the true value of the policy. These policies are so valuable that it’s important that the presentation doesn’t de-emphasize the true value.   Think about it, we are presenting a monthly benefit and quoting an annual premium.   

So what is the potential monetary value of that disability policy?   If the 40 year old above gets disabled a year and a half after buying the policy, so that the elimination period is satisfied on the 42nd birthday,  the yearly payment could be $5,000 a month, times 12…or $60,000 a year.  If the disability lasted to age 67, then that could be 25 years of payments, or approximately $1,500,000.   So that $2,000 per year in premium would have the potential to be as much as $60,000 per year or, depending on when the claim starts and the elimination period is satisfied, $1.5 million…which brings us to the pennies for dollars.  

Now, the actual total payout would be based on the client’s age at the time of claim, elimination period, and benefit period.   Also, if a policy has an automatic increase, cost of living rider, catastrophic disability or other riders, then the total payout can be even higher.   For example, if that 40 year old also bought a $10,000 a month catastrophic disability rider then a qualifying claim could potentially triple the payout amount.  $5,000 per month base benefit + $10,000 per month of catastrophic disability would be $15,000 per month x 12 months x 25 years—up to $4,500,000 of payout.  Again, the actual payout would be based on the elimination period and age at claim.  

If you look carefully at many of the company provided illustrations, you may be able to find the total potential payout.   We have found that some companies will calculate the potential payout based on the base policy only and some will calculate the total potential payout by taking into account the catastrophic disability rider and/or the cost of living rider (COLA).    

Make sure to emphasize to your client the potential annual benefit and potential total benefit of the contract.   In describing the monthly benefit, it may also help to quote the premium in a monthly amount as well.  Having aligned dollar amounts and units can help clients understand the true value better than misaligned dollar amounts.   

The miracle of insurance is that a client can transfer risk for fractions of the true cost of replacement.   The ratio of premium to potential payout needs to be identified for your client so that the real value can be presented correctly.   The miracle of insurance…paying pennies for dollars.