When structuring and choosing an individual disability insurance policy and the available riders, understanding the importance of partial disability is essential. While on the surface it would seem self- explanatory, the intricacies can make the difference in your explanation of the plan to a client.
As you know, our industry tends to use language that is somewhat unique to the insurance world and individual disability insurance is not any different. When we think of someone working part time, many of us would think that the rider to describe this would be called a partial disability, which could be a separate rider or built into the policy. Like many industries there is an evolution of product design and riders—which helps to explain the reason for the naming of the partial and its successor, the residual disability rider, which, again, can be a separate rider or built into the policy.
In the evolution of today’s individual disability policies we’ve seen product ingenuity which has either resonated within the industry or has gone by the wayside. Originally when individual disability policies were developed they were designed to cover total disabilities, and if you could work you were expected to go back to work and be off claim.
Eventually companies added a partial disability provision that would allow for someone to go back to work on a part time basis and still receive a benefit from a qualifying disability claim. This provision was appropriately named “partial disability.” This provision may or may not be found in today’s modern policies. The classic version of partial disability, in general, would only pay for partial disability for six months, or for some other limited time period, and it would pay 50 percent of the total disability benefit. Of course there were maybe some slight variations, but this is what we saw as most common. This was much easier for companies to administer in the low technology days when it was more common to use calculators and not computers.
The insurance industry is very dynamic and companies needed to differentiate themselves. Thus, an improved partial disability started to evolve in the marketplace. They had to change the name so there was a distinction between the old and new definitions. The new, modern definition of partial disability became known as a residual disability, which is essentially a partial disability on steroids. Instead of just paying 50 percent of the base benefit for six months, or some limited time, a formula was now able to be administered and used to pay claims.
The formula is really quite inventive and the industry should thank the mystery innovator(s) who most likely spent months or years with the actuary, claims, underwriting, and marketing departments. You could just imagine the reactions when this new type of partial rider was being presented by the innovator(s).
The formula takes an average yearly income for a disabled client and comes up with an average historical monthly base income. Once we have that historical monthly base income, we can see how much income the client makes when they go back to partially working and come up with a percentage of income loss. For example, if a client made $240,000 per year for the past few years, the average monthly income would be $20,000 per month. If the disabled client went back to work part time and made $5,000 per month, then $5,000/$20,000 would be 25 percent of the previous monthly income, which is a 75 percent loss of income, which would allow for 75 percent of the monthly total disability benefit to be paid. As the client goes back to work for longer amounts of time, their income can grow, and the residual rider would adjust accordingly. So, if now the client’s income is $15,000 per month, $15,000/$20,000 would be 75 percent of the previous monthly income or a 25 percent loss of income, in which case 25 percent of the monthly benefit would then be paid out for a qualifying claim.
There was a time in our country’s economic history in which inflation was more prevalent and had a real impact on the planning process. While inflation could still be a major factor in our daily lives, the rates have been very low for the last couple of decades. If we do have a period where inflation becomes a major factor, then the indexing part of the residual rider will be a provision that claimants may come to appreciate during a long duration disability claim with stable or decreasing partial income.
The theory in the indexing provision of the residual rider is that if someone has a very prolonged partial disability then inflation would erode the residual formula. Think about our example above, where a client was making an average of $20,000 per month and then became disabled. Let’s say the disability will never allow this person to work full time, but they can work on a part time basis making about $10,000 per month for the foreseeable future. Using the regular formula, $10,000/$20,000 would be a 50 percent income loss and then 50 percent of benefit would be paid.
The $20,000 base monthly benefit is in today’s dollars, but let’s say that the disability will last for the next 20 years! Eventually the base monthly average income of $20,000 will be in old, uninflated dollars, which would make the payment always 50 percent of the total disability benefit. You would have 2020 dollars used in the base of the residual formula and, in 10 years, you would have 2030 dollars used as the divisible dollars.
For the formula to be equitable for both the client and the company, the same dollars should be used in the formula. Therefore, most residual riders will have a provision that will index the base monthly average by using an inflation formula so that the dollars are inflation adjusted. This is the reason you’ll see an inflation indexing provision in the residual definitions of modern individual disability policies.
In our example, eventually the payment would be greater than 50 percent as the monthly average income increases based on the inflation factor being used. For example, in 10 years the base $20,000 could inflate to $24,000, in which case the $10,000/$24,000, would be 41.6 percent of the inflation adjusted base monthly income, which would result in a 58.4 percent income loss and a payout of 58.4 percent of the total monthly disability benefit.
The residual disability provision of individual policies has evolved even more in the past few decades. Some examples of this evolution include, but are not limited to, changes in the percentage of income loss needed to be on claim or stay on claim, minimum payout floors, allowing or extending residual payments even if there is not a loss of time from work or duties from work.
Companies are consistently tweaking and modifying the provisions of this rider as new policy versions are developed. As always, please read the specimen contract of any disability policy you are reviewing or presenting for details about how that individual policy is designed to payout for partial and/or residual disabilities.
An Interview With Eugene Cohen
2009 Honoree International DI Society’s W. Harold Petersen Lifetime Achievement Award. 2015 Honoree of NAILBA’s Mooers Award for Excellence.
From time to time we will feature an interview with Eugene Cohen, who has dedicated over 57 years of his life to learning, teaching, and supporting brokers in the agency’s quest to help consumers protect their incomes from the tragic effects of a disability. With the help of Victor Cohen, we will chronicle many of Eugene’s life lessons, advice, strategies, and what drives him every day to mentor those who wish to help their clients protect their incomes. Disability insurance is one of those products that can change the trajectory of an individual and a family’s life and is crucial for every financial planner and insurance professional to learn about and offer to clients.
This is the first part of our series with Eugene Cohen, CEO and founder of the Eugene Cohen Insurance Agency, Inc. The agency started as a disability insurance brokerage MGA and has grown to over 35 team members who are all focused on the wholesale service needs of financial professionals for disability, life, long term care and annuities.
Victor: Let’s start at the very beginning. How did you get started in the disability insurance business?
Eugene: Well, I had graduated from Ohio State University as a business major. I was newly married, looking for work.
I received an introduction from an employment agency to interview with an insurance company. They happened to specialize in offering disability income protection. At first, I was very concerned about working in this industry. I was 23 years old and I knew some people who used to sell insurance. They didn’t make it. That didn’t sound so uplifting. But after my interview at this insurance agency, I was really excited about the need for disability income protection.
Victor: Were you an immediate success?
Eugene: Like anything, it took time…but not too much time. You have to remember, after three months I was working on straight commission. And I had the greatest motivators in the world chasing me every day.
Victor: What’s that?
Eugene: I call it, “The mad dog of daily expenses.” Expenses! Rent, utilities, car payments, food, clothing…that “mad dog” was chasing me.
Victor: What else do you think led to your early success?
Eugene: Besides having a desire to succeed and natural competitiveness, I read many motivational books. And one thing they all had in common—they were all very positive.
When I started training at that first job–in a career shop—I noticed there were negative agents and there were positive agents. In high school I played football and also was a wrestler and I love sports. You’ll notice that there are spectators and the players on the field. The spectators get to judge, scream, play armchair quarterback and be negative. While the players were making it happen on the field. The players have to be motivated, focused, keep a positive attitude…they have to perform or be taken out of the game.
I knew I always wanted to be like the players on the field. Stay focused, stay motivated, keep a positive attitude—because what I was selling could change people’s lives! The game of life is a serious business and disability insurance can save individuals and families from the financial effects of a tragic disability.
I also found out very quickly that, like every business, the insurance business is a relationship business as well.
I also learned back when I started that the phone was one of the best ways to build relationships. Even in today’s world of email and instant messages, the most effective communication is by phone and now by video conferencing systems like Zoom.
Victor: Where did you get your leads?
Eugene: Back then I was using the yellow pages…can you imagine that? Now it’s easy. You have so many focused resources, such as Google, LinkedIn, lead services, etc.
Victor: Who did you focus on calling? Were there certain occupations you felt could use your services more than others?
Eugene: Everyone needs disability insurance, but the product seems to resonate more with certain occupations and income levels. I decided to work with professional people and business owners.
Victor: Why them?
Eugene: Doctors, dentists, attorneys, and all types of business owners…the need for disability income protection is so strong. That need is the same today as it was 57 years ago.
Victor: Did you have a prepared script you’d use when you’d cold call these prospects from the phone book?
Eugene: “Hello Mr. Jones, this is Eugene Cohen speaking. I’m a specialist in disability income protection, which is a policy to provide you with an income if you got sick or hurt and couldn’t work. Do you have anything like that?” That’s all I would say.
Most would say, “No, I don’t have anything like that,” in which case I would say, “I’d like to stop by and talk to you and explain the concept of disability income protection.” I was amazed because I was getting appointments!
In the rare situation when someone would say they already had a policy like that, then I would say, “When is the last time you have had the policy reviewed in comparison with your income? I’d like to stop over and introduce myself to you.” And I’d work on setting up an appointment.
People were willing to talk to me. I was on the phone every single minute.
Victor: What role do you think disability income protection plays in a person’s life?
Eugene: The way I look at disability income protection in my own mind is…this wonderful policy is like a silent partner that’s guarding a portion of my income. Could you imagine not having virus protection on a computer? It’s that silent partner, guarding the computer. Could you imagine driving without car insurance or having a home without homeowner’s insurance?
It really is very simple. If I couldn’t work due to a long and extended accident or sickness, I would need help paying my bills or risk wiping out my savings or at least taking a good chunk out of it.
Victor: So, even while becoming a top producer, there had to be times when a prospect didn’t end up buying the insurance. How did you handle that? The disappointment.
Eugene: As a new agent, when I didn’t make the sale, I would try to understand why and try to learn why someone wouldn’t buy. It’s all in the perspective you take and I learned that every time someone said “no,” it became a positive learning experience in that regard. And that’s when I discovered and started fully understanding the four objections that anyone who sells a product will hear at one time or another and how to overcome them. Those four objections are the same today as they were back then.
Victor: What are they?
Eugene: If someone does not proceed with purchasing a product or service, it’s usually due to one or more of four basic objections, regardless of whether the objection is real or just a delay. No Need. No Money. No Hurry. No Confidence. I believe these are universally true, regardless of the product or service you are presenting. It could be an insurance policy, a house, a business, even a TV or washer and dryer. It’s important for the person making the presentation to know how to address each objection in order to get to the root of the true issue and be able to adjust in order to move forward.
Victor: We’ll continue this conversation in our next interview. Thank you so much for sharing your experience, knowledge and love of this business.