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W. Harold Petersen, RHU, DFP

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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: whp@piu.org.

The Wall Safe

Some words of wisdom to pass on to your clients:

Learning about disability insurance may seem boring to most, and to many uninformed Americans, it may seem like a lousy product to buy.  Literally, it’s just a piece of paper.  It has no moving parts, no wheels, no shiny chrome strips. You can’t ride on it, you can’t eat it, you don’t even hang it on the wall and display it to your friends when they come to visit you.  So it seems to be a lousy, uninspired product.  But from the dull words of policy terms and definitions come some very exciting situations and ultimate solutions to some of life’s greatest problems.  

What I propose to you is that by using the services of a trusted insurance professional combined with the disability products of responsible insurance companies, you can create economic safeguards that are just like having a wall safe right there in your office or your home.  Into that wall safe we’re going to place one hundred thousand dollars…a quarter million…a million…five million…more…however much it takes to make you feel comfortable in solving the financial problem that the living of life has created for you.

Now this is your money and it’s locked up in a safe to which you and you alone know the combination.  Anytime that you are sick or hurt you can go to this safe, dial a knob, reach in, and take money out to make those mortgage payments to maintain the living standard of your family and, in addition, purchase the best healthcare on earth.  That’s what I propose to do for you.

The money that is in that wall safe is not funny money.  It’s the same kind that I can reach into my pocket and pull out.  It’s the kind of money that we work hard for and the kind that we spend every day.

Consider two one-dollar bills.  Suppose that this represents money that we have earned.  What happens to this money?  One of these bills is going to disappear right before our eyes.  That’s called taxation.  That gets scraped off even before we get it deposited into our bank account.  We don’t even get credit for the float.  Here’s what’s left for our hard work—one dollar.  Now out of that dollar we hope that, after paying for the necessities of daily life plus the reasonable luxuries that we’ve become accustomed to that make up our standard of living, there will be a fraction leftover that we can put into an emergency fund.  Grandparents and parents were always saying “Have a little cash reserve put aside for a rainy day situation.”  That is still a good idea for anything other than getting sick or hurt.  Then it is a terrible idea.  Why?

Number one, you don’t know when you will get sick or hurt.  It may be tomorrow and you’ve only saved a fraction of a dollar.  That doesn’t buy much, does it?  The other thing is you don’t know how much you’re going to need.  After fifteen years of accumulation, you may not have enough to get over one heart attack or one bad automobile accident.

If you do have that auto accident or that heart attack and you use up all the money in the “rainy day” fund, there’s nothing left for a second go-around.  This is the way we get sick or hurt.  We get sick or hurt and recover, then get sick or hurt all over again.  So we’ve got to have certain things regarding the money in our wall safe that’s different than the kind of money that’s dispensed at the bank.  

What would happen if you had religiously lived within your means and there was a little money left over every pay cycle?  So you go down to the bank and shove the money through the teller’s window and say “Deposit that into my rainy day fund.”  Then comes that day you are found crumpled-up on the floor from a heart attack.  The first thing doctors tell you when you are afflicted with that situation is what?  Get the worrying out of your mind because that delays the healing.  But how do you stop worrying about a situation like that?  Why, you’ve got a “rainy day” fund.  You don’t need to worry.  You have money in the bank.  So you summon your spouse and ask them to withdraw money from your account and pay the bills.  Your spouse does as asked.  You feel good, the creditors feel good, and your spouse feels good.  Everybody is happy, especially the doctor and the CEO of the hospital whose standards of living have been maintained because you pay them so well.

You recover quickly because your “rainy day” fund allowed you to afford the best in medical care.  You are well.  You go back to work.  More time passes.  Bam!  A second heart attack.  You’re back in the hospital.  You once again ask your spouse to return to the bank and get some more money out in order to pay the bills and satisfy the creditors.  Unfortunately, the teller instructs your spouse that you only have sixty-eight bucks in your account and you owe thousands.  Now what do you do?

The “rainy day” fund is never sufficient, but with your funny little wall safe it is an entirely different situation.  First, when I say we’ll give you a wall safe and fill it with millions of dollars, all you are required to do is complete a disability insurance application and pay your premium.  Done.  The financial protection is there without years of accumulation.  Second, the money that lines your wall safe is in there free from taxation.  Neither your state government nor the IRS can get their tax-gathering hands on one penny of that money.  It’s all yours when needed.  Ultimately, if and when you do have that second heart attack—that second disablement—and you are wheeled-up to your wall safe, you carefully unlatch the door to see if there is anything left because you spent so much after your first heart attack.  You are very apprehensive.  Slowly you open the door and peek in.  Low and behold! A fresh stack of money to use as you see fit! 

The Sales Story

The following are words to instill in the American people to help them understand their financial needs so far as solving problems created by the “living of life.”  One of the important things that must be communicated to a prospect is that you, the producer, didn’t come there with problems to give to the prospect.  He/she had the problems before you got there.  You are there as a person who can help him/her identify those problems and to present to him/her some ideal solutions.

The living of life creates two distinct problems over which we have no control.  These are economic problems.  We’re born, we’ve got these problems.  All we can do is recognize them and try to neutralize them, but there is no way we can dodge them.  One is not more important than the other.

Problem number one is a dilemma that economists and insurance-minded people have referred to for nearly a century and a half.  It is the problem of “dead death.”  That’s where people are buried under the ground and removed from the face of the earth, never again to produce another dollar.  A business or a family (or both) suffers the financial loss of the income formerly produced by the income earner who passed.

There has been an obvious and tremendous need for something to replace that lost income.  That is the primary function of life insurance.  It is a substitution for the income that would have been produced had that income earner remained alive and at work.

Fixed in the minds of economists and students of insurance has been a corollary problem that has been tied to “dead death.”  That is the problem of getting too old to work and the economic consequences of being unable to produce income because the income earner is too feeble or senile.  It is with this thought in mind that life insurance cash values were perceived as a supplement to retirement funds and marketed in vast quantities.  Salespersons had a rather beautiful story to tell.  If you buy cash value life insurance from me, we take care of two situations: Income replacement in the event of your premature demise during your income production years, or for use in the sunset years of your life.  We fix it so that you have a continuing income supplemental of other retirement plans so that you can face your children as a bearer of gifts rather than as a burden of despair.

With those glorious words, Americans have acquired trillions of dollars of life insurance protection.  For those that don’t subscribe to the life insurance cash value theory and prefer to buy term and invest the difference, there truly is no difference.  It is still a matter of trying to solve the primary need for income replacement in the event of “dead death” and the corollary problem of having accumulated something for the years of retirement through a side vehicle of mutual funds or real estate or some other investment.  Even though we have two different life insurance approaches, the problem of the “dead death” remains as it always has.

Problem number two is something economists and insurance professionals agree is a problem created by the very living of life, a problem which we refer to as “living death.”  That means getting sick or hurt and not being able to work—a person is dead economically because an injured or sick man or woman cannot produce new income.  A consequential reality to the “living death” is the expense of recovery or getting well which can harbor tremendous costs—doctors, specialists, rehabilitation, pharmaceuticals, nurses and hospital expenses.

One must get well because, as long as a person is lying in that bed, the world is passing him/her by while the survival of that person is rapidly consuming everything that has been accumulated thus far without producing any new finances.  One must try to get out of that bed and try to get well in order to become productive once again.

There is a simple solution to these economic problems of life.  That simple solution is guaranteed replacement income with an emphasis on the word “guaranteed.”  Unless the income is guaranteed, there is no way of knowing that it is going to remove that financial question mark from a person’s future when he/she dies or when he/she gets sick or hurt. 

Another statement for your clients who are wise enough to listen because you have something that is good for them to hear is in the form of a question: “Why do you need money when sick or injured?  Why does anyone need money when sick or hurt?”  So long as life’s monetary expenses don’t surpass generated income, the economic picture of life is not bad.

If we have an overage of income compared to expenses, we will have some discretionary income to do nice things, to purchase luxuries, to prepare for old age and emergencies.  There is a good chance a client of yours will have a brutal and very harsh awakening one day if he/she is ever involved with a period of disablement.  Statistics dictate that one out of three Americans will suffer a period of disability that lasts more than three months.  That is particularly consequential to the average American regardless of income.  Even high income earners are rudely awakened when they start putting the numbers together because they often find that they’re not adequately preparing for retirement.  Their lifestyles and habits of spending money leave little if any savings leftover.  For most, bankruptcy is only six weeks away according to Department of Labor statistics.

When a disability occurs due to an accident or an illness, a period of “living death” ensues.  What happens to earnings when this happens?  Income can conceivably carry on for a short period of time, but it ultimately ends when a person is no longer productive.  If a benevolent employer is involved, the disabled employee may continue to receive a paycheck for a period, but few businesses can or will continue paying a disabled person for very long.  No business can stand the pressure of paying two salaries to get one job done.  The employer has to eventually hire a replacement for the disabled worker.

As a person’s income begins its descent to zero and as expenses stay level, or most likely increase due to medical care costs not covered by health insurance, one’s savings or discretionary income suddenly becomes debt.  The opposite of saving takes place.  Now debt to modern day Americans isn’t frightening because we are a debt-oriented society.  We buy nearly everything on a debt basis.  We use credit cards to pay for almost everything including clothing and food, and we even buy our homes and automobiles on a mortgage/debt structure.  So debt doesn’t bother us and we learn to live with it.  We learn to use it.

Decades ago, debt was considered an economic sin.  Bankers and mortgagers were highly secretive and no one spoke publically about it. But that all changed when we moved from a cash society to a credit society in a very short period of time.

So most debt does not strike fear in the hearts of Americans except for debt from medical expenses.  People fear it instinctively because medical debt is uncontrollable.  As long as a person needs medical care and fights to stay alive, the debt situation will continue beause a person’s life depends upon those health services. 

When income surpasses expenses, the result is savings.  But when disability strikes income will drop and expenses will increase, causing an unwanted deterioration in savings which ultimately leads to a debt structure.  So how does one avoid this catastrophe?  We place sturdy economic propellants in place to stimulate income and maintain a sustainable level of expenses.  This is accomplished through major medical insurance and personal disability insurance.  The medical insurance keeps one’s debt controllable while the income replacement from the disability coverage provides cash benefits for living expenses.

Disability insurance is a money miracle and we can help excite our clients rather than allowing them the attitude that what they are buying through us is just a piece of paper that’s going to be folded up in a dark drawer someplace.  We need to continue to use stories like this to plainly show the need for disability insurance.  We need to make disablement and loss of one’s income relatable because it is a reality and an unfortunate possibility for every working American. 

Disability Insurance In America The Crucial Subsidiary Of The Life Insurance Industry (Part 3)

We must observe that group disability insurance renewals are unpredictable.  Plans are exposed to:

  • Cancellation by insurer or plan sponsor.  
  • Susceptibility to a change of broker of record.  
  • Business adjustments that may result in a group plan because of mergers, acquisitions or business failure.

Individual disability income is often:

  • Difficult to replace.
  • Kept once consumers are sold on it, and they tend to keep it for long periods, so the persistency is excellent.
  • Requiring no change of broker of record because of its sturdy renewal agreement that provides reliability of rates, coverage and commissions.

 

The Case for the Consumer
Most Americans are supported by income earned either by themselves or earned by someone else on whom they depend. Curtailment of earned income creates harsh financial consequences for those dependent upon it for the necessities of life.  Our Federal and State Governments have long recognized the vital necessity for our people to have a continuing flow of income when unable to work.  These governments have put programs in place to assist our citizen in having a continuing income cash flow.  

The need for continuing income cash flow has long been recognized by economists and scholars of finance.  Life insurance, once looked upon as a burial fund, was expanded to the concept of income replacement insurance for the survivors of a deceased wage earner with the publishing of the book Life Insurance, first published in 1913 and written by Solomon S. Huebner, Ph.D., CLU, Professor of Economics, Wharton School of Finance, University of Pennsylvania, and the founder of the American College of Life Underwriters.

In this book Dr. Huebner expressed his belief that disability income insurance clearly belongs in the life insurance group of coverage, for its purpose, like the basic purpose of life insurance, is to replace income when the earner is unable to produce it.  Up to that time in history disability insurance, then known as accident and health insurance, was considered to be a casualty coverage and was offered either by casualty companies or by specialty companies.

A Little History of a Special Industry
The genesis of the American disability insurance industry was more an unplanned evolution than a planned event.  Like other forms of insurance in America, the concepts were copied from successful plans used in England.  Our history is imprecise because what transpired in our short but dynamic past resides in the spoken word.  Little recorded history is available.

We do have some documentation that can help build a reasonable history of the industry’s development, but other areas must be filled in by presumption.  For example, there are records to show that an Englishman by the name of William Gybbons negotiated with some marine insurance underwriters in 1536 to insure his life for one year.  The death benefit was approximately $2,000; the single premium was about $80 in current values.  We have no record of why the insurance was purchased, but we do know that Mr. Gybbons used the insurance—he died four days before the end of the contract period.

The underwriters were dismayed at their loss and regretted that, in their greed, they got away from their core business which was to insure ships and cargo—the most prominent form of wealth recognized in those days.  Their reluctance to pursue life underwriting paved the way for the development of a life insurance industry in England that found its way to America in 1759.  

In 1835 New England Mutual Life was chartered.  Soon thereafter a number of mutual life insurance companies were formed, but sales were not brisk.  The product in that era was dismal. It was a term death benefit and was bought in small amounts, usually to cover funeral expenses.  In those days the value of a life was measured by possessions and not by the person’s ability to produce future wealth.  The life insurance industry got a big lift following the success of Elizur Wright in forcing a non-forfeiture law through Massachusetts legislature in 1860.  His effort marked the beginning of cash value accumulations in a life insurance policy.  

This was a time in history when banks were paying zero interest to savings customers.  Life insurance companies started crediting two percent interest on the policy reserves, and Wall Street financiers soon recognized that two percent was better than zero percent.  Investment firms encouraged life companies to sell the idea of cash value life as an insurance savings and retirement plan.  As life sales increased, so did the commissions of Wall Street firms that served as investment counselors to life companies.

Casualty companies sustained a high interest in writing workers’ compensation coverage, and some, for a period of time, had rather aggressive departments that offered forms of individual accident and health coverage.  Ultimately these plans were abandoned due to the modest production experienced by the companies.  The life and casualty companies’ lack of interest in disability insurance left a large niche for specialty companies to enter the field.  The well-known New England based disability companies stressed non-cancelable coverage, while a few of the specialty companies introduced commercial or cancelable coverage.

A Change of Nomenclature—a Change of Name and an Industry Crisis
In 1959, the insurance industry appointed a Blue Ribbon Commission whose objective was to standardize insurance terminology.  Accident and health insurance was assigned to a sub-committee, it performed a task, but it failed to bring about the desired results.  No segment of the insurance industry was mis-served more by a change in nomenclature than disability insurance.

The insurance laws of all the states demand the annual filing of the Uniform Convention Statements by each insurance company with each jurisdiction in which it has a Certificate of Authority to do business.  These statements, which were designed by the National Association of Insurance Commissioners (NAIC), contain a section clearly labeled “Accident and Saúde Insurance.” This umbrella term covers all forms of insurance that provide compensation to consumers for losses due to accident or health causes, but it was originally coined to refer to what we now call disability insurance.  In spite of this clear-cut terminology mandate by the NAIC, the commission on terminology determined that “health insurance” should become the umbrella term for all accident and health insurance coverage.  As this usage was instituted, promoted and filtered down, new terminology habits developed that resulted in miscommunication.  As an example:

The International Association of Accident and Health Underwriters became The National Association of Health Underwriters, the important word “Accident” was omitted from the name of the industry’s original “disability insurance” organization.  The term “health insurance” to the public means “medical insurance” and to the NAIC it means disability and miscellaneous coverage listed in the convention statement as “Accident and Health Insurance.”

Protecting Agents and Brokers
In Chicago, by 1930, the Accident and Health Conference was formed by insurers to protect and enhance their interest in the accident and health insurance field.  The Bureau of Accident and Health Underwriters had been formed earlier on the East Coast for similar reasons, but Midwestern and Western domiciled companies were refused membership thereby creating the need for another similar organization. 

The Accident and Health Conference was first headed by Harold R. Gordon, a visionary whose memory is perpetuated by the presentation of the annual Harold R. Gordon Memorial Award given by the National Association of Health Underwriters to a person who has contributed distinguished service to the industry.  Mr. Gordon realized that not only should companies be organized to protect and enhance their common good, but insurance agents and brokers likewise should be organized to protect and enhance their common interest.  He found little interest among casualty and life agent associations to counter the expansion of government into the accident and health field.  He therefore guided the formation of the Chicago Association of Accident and Health Underwriters to address these and other needs.   He assisted in creating associations in other cities, and in 1930 he helped organize The International Association of Accident and Health Underwriters to firm up a national posture. 

Great Triumphs
The A&H conference and the A&H bureau ultimately merged to become the Health Insurance Association of America.  With the Insurance Economics Society, which was established in 1917, the HIAA and the NAHU worked effectively to offset proposed legislation at Federal and State levels that was deemed contrary to the interests of agents and brokers.  The legislative triumphs of these organizations seem impossible in light of the comparatively small numbers of involved people and the modest budgets with which they operated.  But the facts are there.  Determined, motivated people held back the tide of legislation that would have socialized the accident and health insurance industry and destroyed the finest health care system in the world that was created by the positive support of free enterprise accident and health insurance.

The first cash-sickness law was passed in 1942.  In the years following, a number of states proposed similar laws to provide payments for sickness disabilities that would approximate the accident disabilities benefits provided by Worker’s Compensation for accident disabilities.  Such laws would have cut deeply into the potential market for disability insurance, denying both carriers and agents a rightful business opportunity. With the Insurance Economic Society pointing out such legislative efforts and with the HIAA and the diligent members of NAHU lobbying against such laws, the passage of cash-sickness laws has been held to five states in the nearly 61 years.

The triumvirate was seriously tested in 1948 when President Harry S. Truman endorsed a socialized medicine bill known as the Wagner-Murray-Dingle Act.  This was one year before the first major medical plan was introduced and only nineteen years after Blue Cross was invented.  In the same year, 1929, the first major health maintenance organization, Ross Loos was established in Los Angeles.

Physicians and hospital administrators recognized the great value of having people insured for hospital, surgical and medical costs.  They encouraged people to buy it, and the pressure of such endorsements spurred the sale of hospital/medical insurance.  Commercial carriers soon developed plans to compete with Blue Cross organizations.  Consumers, stunned by the high and rising costs of hospital medical care, encouraged friends and relatives to buy health insurance.  Labor unions used the popular fringe benefit as a bargaining chip in negotiations with management.

As doctors and hospitals profited by having their bills paid in full, and on time, they were able to invest in the latest equipment, new technologies and continued specialized education and training.  Insurance benefits provided a cash flow that enabled more research and development, new medicines, new procedures and facilities.  

In just a relatively few years, we have witnessed the creation of a dynamic health insurance industry.  Unwanted by most of the traditional casualty and life companies, it became a complex of specialty companies, Blue Cross organizations, HMOs and some casualty and life companies.  In total, it is America’s largest insurance segment, serving 85 percent of the American people.  In its dynamic growth the hospital-medical interests of consumers, distributors and underwriters have swamped the industry’s concerns and interests in the basic coverage—disability insurance.

Reassessing Priorities
Ironically, as good as our life and health Industry is, we have gotten priorities out of order.  The Life Insurance Marketing and Research Association tells us that only 27 percent of American income earners have any form of disability insurance, but 85 percent have some form of medical care insurance.  Logically disability insurance should be the primary insurance need for people, for it provides the essential funds for the necessities of life.  Medical insurance provides for the necessities of life for doctors, hospital workers and the medicine merchants, but it does not pay the mortgage, buy food and clothing, or educate the children of the insured.  Despite this peculiarity, we have much to be proud of and much yet to accomplish as an industry.  We need to correct our nomenclature and be specific as to reference of “disability” or “medical insurance.”  We need to produce substantial amounts of disability insurance for the wellbeing of the people, and we need to encourage more life companies to come to the aid of the industry by getting wholeheartedly into the disability insurance business.

In a free-enterprise society, businesses are run with the objective of earning a profit.  Insurance companies are supposed to make a profit, but there is a priority difference between a commercial non-insurance venture, where profit is its first priority and an insurance company’s first obligation which is to serve the public good.  The public is to first be served adequately and fairly.  If this is unacceptable to the insurance company, it may opt out of underwriting insurance and turn to some other field of endeavor.  In the highly regulated insurance industry, companies are not always permitted to selectively choose to underwrite only forms of insurance deemed profitable to the company irrespective of what consumers may want or need.  There are recent examples in the property/casualty business of companies being required by our Regulators to make coverage available to accommodate consumers.  Firms granted the special privileges of underwriting insurance are obligated to perform for “the public good.”

The Society of Financial Service Professionals
Insurance and financial professionals are the logical flag bearers in the efforts to save, sustain and promote the disability insurance industry.  It is in their personal interests and their clients’ interests to encourage insurers to get into the disability insurance business on a wholehearted basis.  New simplified underwriting procedures by most disability carriers have removed the barriers of the immediate past as to getting policies issued quickly and fairly.  

New products now available enable planners and advisors to do a truly professional job in offering disability financial plans for persons and for businesses.  Increased issue limits enable planners and advisors to adequately insure people of high net worth, of high compensation, and to include needed coverage for persons engaged in out of the ordinary occupations.

Recent efforts to alert planners, advisors, insurance commissioners and life companies to the demise of this crucial segment of the life insurance industry is resulting in very favorable response.  Writing more disability insurance and being constantly aware, its purpose will rebuild a dynamic disability insurance industry.  In doing so we will be getting back to our roots of recognizing there are two kinds of economic death and that insurance is primarily about risk, not simply gathering premiums for investment purposes.

Disability Insurance In America—The Crucial Subsidiary Of The Life Insurance Industry (Part 2)

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The experience of collecting premiums and investing reserves was probably the beginning of our industry’s inclination to view life insurance companies first as financial institutions and second as insurers.  Life companies in general do not respond well to underwriting risk.  Understanding this helps us to see how a separate insurance industry, the health insurance industry, developed between the life and casualty segments of the market.

Exploring the Niche
In the earliest stages of development, specialty companies that addressed the niche between life and casualty insurance provided the exploration of the accident and health insurance market.  Some were unsuccessful while others had remarkable success. Specialty accident and health insurance entrepreneurs made some great fortunes.  Despite these successes, most life and casualty companies remained aloof from the accident and health insurance business.

The largest premium-producing segment of the entire insurance industry today is “health insurance.”  Health insurance premiums are measured by the co-mingling of disability and medical insurance premiums.  That unfortunate choice of words “health insurance,” made in the early 1960s by a select industry commission appointed to standardize insurance technology, has confused consumers and industry people ever since.  Our nomenclature has shifted and changed over the years, prompting substantial arguments with each turn.

Along with the changing labels was a transition of interests in the kinds of insurance banded under the heading, “health insurance.”  In 1847, the Massachusetts Health Assurance Co. became the first U.S. insurer to offer benefits for sickness insurance.  Three years later, the Franklin Health Assurance Co., another Massachusetts insurer, began issuing accident insurance plans.  Neither company enjoyed sustained success.  Even then the designations were confusing because health companies sold accident plans and accident companies sold sickness plans.

Public Awareness
In 1907, the first non-cancelable, guaranteed renewable disability policy was issued in the United States.  This development confirmed the public’s awareness of the need for insurance protection against loss of income.  The Industrial Revolution had prompted many Americans to abandon the survival occupation of hunting and gathering for working for a paycheck.  The choice was not difficult.  With earned income, one could buy a house instead of building an ugly, drafty shelter; one could buy stylish and comfortable clothing instead of wearing an animal’s hide; one could buy food that tasted good and was nourishing instead of eating things only to survive.

With dependence on a paycheck and losing the primitive activities involved with grubbing existence out of the earth, people became captives to their work.  Many employers, enjoying employment power, often forced employees to work in hazardous and unhealthy conditions.  Injuries on the job and industrial disease caused serious financial problems for many.  In 1908 the federal government enacted the Workers’ Compensation Law, a law that was intended to bring relief to the vast numbers of people who were devastated by the financial effects of disablement incurred on the job.  

The case for disability insurance got a substantial intellectual lift when Dr. Solomon Huebner published his concept of Human Life Value, which he defined as the capitalized value of a lifetime of earnings, a person’s greatest asset, and a potential loss which should be addressed as a very serious insurance need. 

Two Economic Deaths
Dr. Huebner further observed that there are two kinds of economic death, Dead Death and Living Death, that can bring on the catastrophic situation in which a person no longer can produce income, and all who had depended on that income will suffer dire financial consequences.  “The only difference,” he stated, “between the Living Death and the Dead Death is six feet of sod,” and of the two, Living Death is the worst economically because the victim is still here, a total consumer, without being a producer.  And, in addition to the living costs there are the mounting added costs of hospitals and doctors. (Author’s Note—hospital insurance had its beginning in 1935; major medical insurance in 1949, long after his description of living death.)

In the same book, Huebner expressed the view that “disability insurance clearly falls within the life group of coverage.”  This was the signal for life insurance companies to wholeheartedly embrace disability insurance and to lift it from the domain of the casualty companies.  Unfortunately, this did not occur on a wholesale basis.  The all-time best ratio of life companies being in the disability insurance business was 32 percent.  Currently, fewer than two percent of our life insurance companies offer disability income insurance.

Beyond the experimental efforts to combine disability coverage with life insurance, little effort was given to bringing living death insurance to the American people.  The few life companies that did enter the accident and health insurance field in the 1920’s were seriously hurt by the 1929 stock market crash.  People out of work and desperate for income were filing false claims, malingering on legitimate claims and even inflicting injuries upon themselves to collect benefits.  Improper and careless underwriting during the boom years of the late 1920’s compounded insurers’ devastating results.  Discouraged, the life companies left the accident and health sector and did not re-enter it until the 1950’s.

To be continued next month…

Disability Insurance In America The Crucial Subsidiary Of The Life Insurance Industry (Part 1)

The disability insurance industry in America is at a crossroads.  One road leads to oblivion because many insurers have chosen to exit this business.  The other road leads to monopoly because only a few life insurers have chosen to remain in the business.  Tragedy for consumers and financial services professionals is the terminus of either road.  Loss of this crucial subsidiary of the life insurance business may occur unless a substantial cooperative effort is made to salvage it.

In 1990, 350 of the 1,100 chartered life insurance companies in the U.S. underwrote disability insurance.  This number has precipitously dropped to fewer than 40 according to industry statistics.  These few companies do not have the combined financial strength to take up all the potential disability insurance needs of the American people.

This tenuous condition is due to a variety of factors.  One of the factors is that there are apparently only several remaining reinsurers of individual disability insurance.  This results in the policies of the few active disability insurers being very similar in plan design and price, and all have similar modest and often inadequate amounts of benefits to offer due to the monopolistic position of the reinsurers.

Another factor that affects disability insurance is the mindset of the insurance companies’ management.  Chief executive officers are frequently selected from other industries such as banking, accounting and finance, and it is natural for them to view the companies they manage as financial institutions.  Without insurance experience, they have little understanding for consumers’ needs.  They believe disability insurance is a disintermediation factor that works against their attempts to accumulate premiums for investment purposes.  Disability insurance entails a claims obligation that sends money back to policyholders during periods of disability and, in addition to the actual claims costs, enormous claims reserves must be quickly built.  Annuities and life insurance do not present such volatility and are considered safer risks.

Current State of the Disability Industry
Eight companies account for 73 percent of the non-cancellable disability premium in force according to studies made by Milliman, and 16 companies account for 94 percent of such premium in force.  This is nearing monopoly and this trend continues unabated.  Free-market disability income insurance could disappear.  Government programs, utilizing the disability income insurance machinery it already has in place, could provide the system for a nationalized plan.

Although health care reform over the last several years has forced most Americans to have some form of medical insurance, according to the U.S. Department of Labor, only 27 percent of income earners in this country have disability insurance—which means 73 percent are without invaluable protection.  This lack of disability insurance is arguably a greater public need than the need for medical insurance.  This indefensible position of the life insurance industry is an invitation for government expansion into this arena as we have previously seen with healthcare.

The disability income insurance industry is in need of support.  It is important to consumers and producers that the disability insurance business be saved and strengthened.  America and Americans will be best served by a strong, innovative and competitive disability insurance industry.  

Insurance agents, brokers and financial planners are important advisors to American consumers because, for many consumers, they are their only financial educators.  Disability income insurance commissions are important to producers because they offset the continuing deterioration in commissions earned from some of the other insurance and financial products they sell.

Agents, brokers, advisors, planners and producers dedicate considerable time and effort, and invest direct hard-dollar expense, to pursue the quest of planning for the financial security of their clients.  Fundamental to financial well-being of clients is the creation of an income cash flow, under any contingency, adequate to match the outgo (expense) cash flow. 

Of concern are the easily recognized contingencies that affect cash flow: Unemployment, business failure, getting too old to earn money, getting sick or hurt, and, in consideration of dependents, the aspect of death.  Being rich, or at least having a passive cash flow sufficient to be used as a substitute for earned income, is the single best solution for all these contingencies.

A financial plan is then conceived and the parts are put together to create, for the client, a plan that will bridge the chasms of diminished or disappearing cash flow.  Loss of job and business failure is typically dismissed from awareness with a shrug and a comment like, “I just have to start over with a new business, or a new job, and I will have to use my rainy day reserves.”

In financial planning, attention quickly focuses on creating a retirement income cash flow.  A plan is set up to channel funds into the plan that will serve as the depository and distribution vehicle that will create and deliver the retirement income cash flow.  Death is certain, but it is hard for some people to accept the fact that death could happen before one fully collects his or her retirement income proceeds.  With uncertainty and reservation the client agrees to buy some life insurance, which in most cases is to offset loss of future earned income.  Many people who do admit they could get sick or hurt refuse to believe they will ever be disabled.  They state, “I come from healthy stock and I’m a careful driver.”  Even if I should have an accident I will not be disabled long and I will be sure to make my retirement plan deposits.  These clichés are often heard by advisors and planners from uninformed and careless prospects and clients.

The Question
Perhaps such clichés murmured by consumers are also thoughts of advisors and planners as they think about their own mortality and morbidity and financial plans.  Maybe?

Rejoice
We who are agents, brokers, advisors and planners have at our disposal the ultimate financial planning tool.  A brilliant financial plan can be created that is unlike anything outside the insurance business.  Our unique and dynamic financial planning tool is our renewal commissions, especially those guaranteed for the life of the policy.  In cash flow terms it produces the equivalent of millions of dollars of wealth. It outperforms the best of investments.  It is magnificent deferred compensation and the finest of passive income.  

The industry average-sized annual premium on an individual disability income policy is $2,300.  One average-sized case per week for 50 weeks out of the year can produce $100,000 of premium in-force.  In ten years the in-force premium is $1,000,000 per year.  Based on a 10 percent renewal commission, a producer would have renewal income of $100,000 per year.  

The Dynamic
To save $1,000,000 to create passive income would require saving $1,000 per month from after-tax earnings for a period of more than 83 years.  A disability account of $1,000,000 in premiums can easily be accomplished in ten years or less.

To be continued next month…

Who Amongst Us Has Evaded Disablement?

I volunteer to go first.  Privileged I feel in the fact that I have been spared the physical discomfort and the financial anguish of not being able to perform the duties of my occupation except in three cases throughout my 69 year long career.  

The First Time
At the age of 33, I mysteriously became afflicted with Polymyalgia Rheumatica which typically preys on elderly persons and more so women than men.  However, the victim is frequently of Scandinavian descent, which I am.  My case lasted for three months and resulted in my only personal disability insurance claim.  After a 30 day elimination period, my claim amounted to two months of benefits of $500 per month.  

That $1,000 (tax-free) was especially appreciated because of family economic obligations and having a business to support. The $500 monthly benefit was the maximum benefit amount underwritten at the time.  I yearned for more, but the power of the pen was in the hand of a very conservative underwriter who was further restrained by a lack of reinsurance support.  Although this was from the company I represented, my limitations were the same as the people to whom I had sold individual disability plans.

That was when I realized that during a disability claim, the insured person always wants more insurance, but the folks who had the privilege of making underwriting rules back then thought of “adequate” benefits being enough to provide food and water and maybe a tent in the park.

My family was superb through the entire ordeal.  They patiently took me to seven doctors looking for a cure.  The last doctor, like the others before him, was credentialed as a specialist.  His specialty (educated in England) was listed as gynecology!  I was too sick to care.  This man did his exam and returned to lay a pamphlet on my lap labeled Polymyalgia Rheumatica.  He recognized my problem immediately.  

We started a heavy regimen of steroids, monitoring my system frequently and concluding with a cure over a five month period. It was a difficult recovery.  The time was suffering time, complete with heavy aches and pain of such severity that the attempts to try to concentrate on business were futile.  The only way out was to stick with the burden of heavy steroids and wait for the medicine to conclude its task.  

It finally ended.  The experience brought home the significant need people have for income replacement insurance. 

The Second Time
Decades ago, my wife and I stopped in Miami to visit friends on our way to an insurance convention in Puerto Rico.  The opportunity to pig-out on shellfish was too overwhelming, so we purchased sacks of clams and proceeded to eat all of them. It was a great party. 

While walking through the Miami airport, my ankle started stiffening.  Walking it out did not work.  By midnight, a doctor was summoned for fear the unknown condition would keep us from our Puerto Rican travel.  The condition, finally identified as gout, worsened.  Crutches were needed and then a wheelchair.  My dutiful wife stuck by me and toiled to get me to our meetings and the festivities planned for the convention.

I spent the balance of the Puerto Rico event hopping on one foot to get to desired locations.  

The Third Time
I had another bout of gout.  It was painful, but manageable.  No total disablement, just total discomfort.

I eventually found freedom from gout.  My life has been freed of disability for many years, but the lessons learned have been foremost in my mind ever since.  I fear not for me, but for others.  I am a deep and devoted believer that the magnificent machine—the human body—can stop its normal functioning at any time and bring about a collapse of earnings and financial despair.

As we focus on these thoughts of disablement, we recognize in ourselves and in people whom we know the freedom of the machinery that propels our lives.  Each episode is a lesson that provides us a story to share with others; not for entertainment purposes, but for lessons to help us cope with the things that may go wrong and with our normal activities being necessarily changed temporarily or permanently. 

A disablement may therefore affect a sick or injured person and also the people who depend on that disabled party to sustain the normal cadence of life.

High-Limit Disability Insurance Planning

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.

Even Great Executives Need Disability Insurance Advice

I recall the Los Angeles Times newspaper carrying an article with the headline: “Executive On Leave Since Injury.”  The article was of local and national importance because it involved the CEO of a large national company that provides many jobs in several major cities.

The firm is a stable older firm that has been pressured by Wall Street to get its stock price up.  Investors were not happy because the stock price has been stagnant for several years.

In response to the investors’ call for action, a new, highly-regarded CEO was brought in to run the company.  The new CEO’s quick and immediate actions were calming to Wall Street.  Things at the company became very promising and the great stress that pervaded the firm was easing.  Management was beginning to relax now that the stock price had stabilized and was heading up.

Significantly, the story pointed out that the 55-year-old CEO injured his spine in a skiing accident in Aspen, Colorado, over a holiday vacation.  It reported his condition as “stable,” a word chosen to minimize apprehension, but the article also laid out the fact that the CEO was on leave and his duties were being attended to by a top-ranking vice president of the firm.  Further details were suppressed for privacy reasons.  No information as to the expected duration of the leave was expressed.

Hard-driving companies have little patience for disabled executives to recuperate.  Business must be tended to daily and with vigor.  The disabled executive hopes to begin tenderly working-up to, once again, being a hard driving executive.   I hope to be wrong, but my feeling is this man will almost immediately be permanently replaced.  This is a sad happening in the career of a professional manager.  If he recovers and becomes a viable candidate for a new management position, he will have a new start, but disappointment will continue to depress him.  A new position, at this age, will likely be with a smaller, lesser-known company.  Compensation will suffer and his ego will smart for some time. 

But he may be permanently paralyzed to the degree he will not be eligible for a new job.  If he recovers, or if he remains disabled, his personal financial concerns are great.  The story and my assumptions, based on experience with executive disability insurance, helps all of us in being alert to the income cash flow needs of executives when their unfortunate turn comes to be disabled.

The U.S. Department of Labor Statistics studies consumers spending habits on a monthly basis.  They suggest a person must have an income cash flow of 65%-75% of normal in order to stay even.

Solutions to the Shortfall
Optional Supplemental Income Insurance – To Create an Adequate Disability Financial Plan.

Who should have proposed supplemental disability insurance to the CEO?

  • The employee benefits broker?
  • The casualty broker?
  • The life/financial broker?

Who did?

Probably none of the above.  The subject of supplemental disability income insurance was probably brushed aside by both the CEO and his advisors because of the assumption that company benefits would be adequate.

The unfortunate CEO we have discussed should have had high-limit disability insurance to sustain his lifestyle.  He may never work again or he may slowly recover.  His health, his stamina, his ability to produce on a 24/7 basis will forevermore be questioned.  An adequate disability program for temporary need or permanent need is the salvation of his life and lifestyle.  Every executive needs advice, for financial reliance on the company provided plans will result in extreme disappointment and economic hardship.

Producers must co-mingle business plans and personal plans to keep their clients financially whole during periods of disability. 

Marketing Disability Insurance For Profit

Insurers and producers of disability insurance are pleased to be advised that the year 2015 produced the highest level of profitability in more than 20 years as reported by Milliman, the outstanding consulting actuarial firm, some months ago.  This regular survey of disability insurers started over 35 years ago.  It gives the industry the best look at itself and serves to determine what adjustments are needed, if any, to attain and maintain profitability.

During the 1990’s disability insurers tried to hide for concern that business would be written, increasing their exposure to the losses that were being incurred.  To respond to the concern, many carriers left the disability business to concentrate on producing life insurance and annuities which they deemed to be a safer cover to insure.  Those few carriers that remained in the disability business had concern about the volatility of the business.  They used to delay in underwriting to discourage the sale of disability insurance.  Producers tried to cope with this environment, but many, bitter and offended at the underwriting tactics then used, defected from the disability insurance market altogether. 

Slowly carriers timidly started a new approach to disability underwriting, for by 2005 what many CEO’s referred to as financial hemorrhaging had stopped.  Once again carriers were issuing coverage and actually starting to encourage producers to write their disability products.  Industry efforts were working.  Companies eased stringent underwriting demands.  The Life Insurance Foundation for Education (LIFE, now Life Happens) added a great effort to the promotion of disability insurance, including its now highly effective Disability Insurance Awareness Month (DIAM) held in May each year in an effort to educate consumers as well as producers.  Its positive slogan, “protect your paycheck,” caught on and has been used to stimulate and popularize the marketing of disability insurance. Marketing this kind of insurance can be somewhat difficult, but many insurance vendors use healthcare marketing services to make sure they’re marketing their service adequately and ethically.

In the same time frame, the Council for Disability Awareness (CDA) was formed.  This is a cooperative effort of companies pooling resources to make members of the public aware of their need to protect their incomes.  In 2005 the International DI Society (IDIS) was created to provide a platform for disability insurance and to gather the strength of the industry pillars, insurers, regulators, producers, and educators in the common cause of rebuilding the once neglected disability insurance industry.

According to the Milliman studies of the 70 companies writing non-cancellable disability business in 1979, the number dwindled to 26 by year 2005.  At one time 545 of the 1,100 life companies in the U.S. offered disability insurance for sale. 

In the last 60 years, we have made progress in overcoming largely unfounded fears and concerns that worked to prevent income earners from being able to insure themselves a cash flow if they became disabled.  At first, there was a concern over the color of the shirt collar worn by the applicant.  Applicants who wore blue collars were the underwriters’ preferred class and they were warmly considered.  White collar people were suspect and deemed unwanted for their incomes were often higher than blue collar people.  The fear was these workers “probably” had savings and investments, so they either didn’t need the insurance or they could live lavishly on their passive income.  

Adding further to the fears of insuring white collar people was the concern of determining when and if such a person was truly disabled and qualified to receive benefits.  Their manual duties they thought may be nil and hard to analyze.  From such fears came the definition of confining and non-confining sickness, which would also require a person to be necessarily and absolutely confined to their home or a hospital to be eligible for payment.

But the temptation for more premiums urged the underwriters to look more favorably on white collar workers and to even lighten the definitions of disability.  The collar concerns have vanished and have given way to measuring a person’s disablement based on inability to perform his/her regular duties of the job or similar language.  But that victory in favor of the applicant gave rise to other concerns.

How does the industry feel about aviation occupations, offshore oil rig workers, fishing boat captains, entertainers and professional athletes?  In general, underwriters don’t want to insure people with these occupations, but very favorable supplemental sources are available to provide quality coverage for them.

These efforts have encouraged more life companies to enter or re-enter the disability business. Competition continues to encourage better products in response to the public awareness of the need for disability insurance to be looked upon as a primary financial planning tool.

The American College, in conjunction with a large and reputable disability insurer, made a study of disability insurance in the work force, its problems, and its relevance to the well-being of Americans.  This study substantiates what many producers have individually researched, but it is a study that is absolute and cannot be doubted.  It deals, however, with employed people.  Self-employed people have to be treated according to their individual circumstances.

The concerns about the use of group insurance include how to moderate issue limits, taxation of benefits if the employer pays the premium, and lack of coverage for bonus and/or profit-sharing income.  Also, the group insurance is cancellable and could result in a very difficult situation for an insured because there are no conversion guarantees should the group be cancelled or the insured decide to leave the group.  

Milliman also studied the group disability market and exposed the problems inherent in using that form of insurance to provide income security to people.  This study also alerted us to the many substantial needs for special plans of disability insurance brought into focus by the group DI study, plans such as buy/sell, key person, loan/lease, severance disability, venture capital, and the big one, retirement plan disability insurance.

Disability insurance is, in the opinion of many who are familiar with the underwriting process, thought to be the most intense and challenging of all underwriting efforts.  It involves being part doctor, lawyer, CPA, business person, psychologist and soothsayer.  Included in the underwriters’ consideration must be other coverage in force, eligible government benefits, occupation, work experience and income.

Much of the arduous individual risk selection has been usurped by Guaranteed Issue, Guaranteed to Issue, and streamlined and simplified underwriting.  Irrespective of these breakthroughs, there is industry respect for the people who produce the excellent results for insurers while performing excellent service, making the sale of disability insurance once again joyous and profitable. 

New products have entered the market making possible issuance of as much as $500,000 per month of benefit, up to $100,000,000 to fund buy/sell agreements, and up to $50,000,000 per person for other uses.  These issue amounts plus fresh issue attitudes make possible a whole new realm of coverage for purposes of disability financial planning.

Underwriting is an essential key instrument in the quest for new markets and new profit opportunities.  It has opened new attitudes for companies and new opportunities for purveyors of these concepts and products.

A Family’s Last Paycheck

Of the emerging affluent people in the United States who have recently purchased life insurance, the vast majority have done so to provide some financial protection for their families. 

Instinctively people recognize the need for an income—and that is good.  What is not as readily recognized is the need for an adequate amount of income—and that is not good.  Especially so if an inadequacy can be traced to faulty logic used in the planning process.

To assist in quantifying income amounts, many financial professionals recommend buying a minimum of between seven and ten times annual salary to replace income and adequately protect a family of average means.  

I believe that such over-simplified quantifications are dangerous when calculating what in reality could be a family's last paycheck.  While seven to ten times an insured's current earnings would provide income for his or her beneficiaries, how do you know it's adequate without performing a proper analysis?

Life insurance is typically sold as a lump sum benefit.  Originally that was appropriate because life insurance was thought of as a burial fund.  With few exceptions, life insurance continues to be sold as a lump sum, single benefit product. This is acceptable for a single sum need.  But when Americans need income protection for a family, there is good reason to believe a monthly cash flow for living expenses is the appropriate concern.  One last paycheck is difficult to perceive.

In my study of income cash flow, I have recognized that an income earner may receive only one more paycheck if disabled—the same as when death occurs.  Yet in either situation, the family living expenses continue on relentlessly.

Disability insurance has dealt with income continuation for the past century.  Some formulas learned in the arena may be more appropriately used in quantifying a person's "last paycheck," than what has been learned from the delivery of a single sum death benefit.  There are settlement options that can be used to distribute the single sum on a controlled monthly payout over a selected period of time, but the quantification of the payments is seldom used as a guide to determine how much life insurance is enough to provide an adequate family income cash flow.

Quantifying the Insured's Intent
In the section of the Disability Financial Planning course labeled, "Personal Economics 101," a chart designed to calculate the value of future earned income puts this matter in focus.

If the insured is only concerned about leaving an income that would provide bread, water and a tent in the park, a modest amount of life insurance or disability insurance might work. But if the insured feels real love for and pride in his family, an income representative of attainment between now and the end of his career requires a markedly different formula to quantify the amount required.

For example, if the proposed insured lives and keeps his health, he will produce an immense amount of money over the course of a career.  A $100,000 annual income earner, age 37, who works until age 65 and enjoys a 5 percent annual increase in earnings due to proficiency and inflation, will have produced gross earnings of $5,840,260 during that time.

Taxes and other deductions will diminish this fortune by approximately 40 percent, leaving net spendable income of $3,504,156.  This fortune will average $10,429 per month over the 336 month career span.  Yet if the insured should die or become totally disabled, this fortune will not be created. By the magic of life and disability insurance, the equivalent of this fortune can be guaranteed for future delivery.

But how much of this $3,504,156 personal fortune from future earnings should be insured?  If advisors are recommending seven to ten times annual income at the beginning of a person's career, the family will be grossly under-funded as to the asset value of future income.

For example:

  • Gross annual income of $100,000 X 10 = $1,000,000 face amount of protection (the life insurance formula)

Upon distribution that could generate:

  • Passive income flow from a $1,000,000 bank CD at 0.5 percent= $5,000 annual or $416.67 per month;
  • Or from a $1,000,000 annuity at 3.0 percent=$30,000 or $2,500/month (interest only).

In either case, a bank CD or annuity, the metered-out proceeds are far less than the wage earners projected average monthly earnings of $10,000!

In most cases, the amount of life insurance required to produce the ideal benefit amounts has to be tempered by the insured's ability to afford, or willingness to pay for, an amount of protection that will produce an adequate income cash flow in the event of death or disability. The perfect solution may require time to assemble.  This is a part of financial planning and is the reason consumers should have frequent reviews of their life and disability plans.

The choice for the consumer must not be between life and disability insurance.  For complete personal protection, the consumer needs an adequate amount of life and disability insurance.  One without the other is a dangerous delusion.

This is a call to arms for purveyors of life and disability insurance.  Consumers are in need of help.  Americans are resoundingly interested in providing income for their families, yet current statistics clearly demonstrate that people do not buy, or do not buy enough, financial protection to achieve their objectives.  To put together a plan that will deliver an adequate cash flow in the absence of the income earner, or the ability to earn, is an educational process.

Consumers may be willing to buy something, but they still need to be sold if they are to enjoy an adequate plan of protection. This is a job for an informed and dedicated professional, not a mail order policy or an online policy-dispensing machine.

The Cost of Long Term Disability
Similar to the difficulties in determining an adequate amount of life insurance, the cost of long term disability is not easily measured.  How can we measure the loss of educational opportunities or the cost of shattered lives or altered personalities?  How can we measure the cost to society when boys and girls who are potential doctors, lawyers, architects, teachers or scientists are denied the opportunity for training because their fathers or mothers died or became disabled and were unable to finance the necessary education?

How can we measure the cost of heartbreak when the family's treasured possessions must be sold to provide money to put food on the table or pay the rent?  How can we measure the cost when a dynamic individual loses all initiative and hope because of a disabling accident or sickness?

The cost of not having an adequate amount of disability insurance can be so high that it can't be measured.  But an adequate amount can be had for an affordable premium.  The cost can be limited to the amount of dollars required to provide adequate income cash flow.  A disability involves the inevitable discomfort and physical pain that accompanies the disease or injury.  Only an adequate cash flow will flush away the stress and promote healing.

A sole proprietor would pay the cost of an adequate disability plan if he can imagine his business and income fading away because he can't manage it any longer.  A doctor would pay the cost to sustain cash flow should his his clients be forced to go elsewhere.  An employer would pay the cost of adequate coverage to replicate the salary of a key person or disabled partner (and his replacement).

However it is paid, the cost of disability—or the cost of death—is inescapable.  The cost will be paid in loss of savings, loss of homes, loss of pride, humiliation, shattered plans and shattered lives.  Or it will be paid the easy way, through payment of premiums on an adequate disability income plan and a life insurance plan dedicated to be the "last paycheck" of the insured.