W. Harold Petersen, RHU, DFP

The New Year is upon us. Most people use the first month of each year to be the time they reflect and plan out their goals and objectives.  Our hopes for the realization of our goals forces us to adopt new plans and sometimes new strategies for a new year. We fear not, because we are smarter, and based on things learned we are confident that our new goals will be achieved.

We have before us a scheme of things to make sure the new year will be met with all our efforts and success. Our sales calls must be based on a plan intended to protect the income that makes financial partnership possible. That is paramount for our client's income and is the key to our success. It is easy to excite people about making money through investments and planning, but we must not forget that the foundation for all retirement and financial planning is protecting what we have first!

As we pass into 2017 remember to insure clients who have purchased other insurance products, for these premiums must also be paid if the client should become disabled. 

Remember to segregate your clients’ personal insurance needs and check out all subsidiary insurance needs such as the buy/sell, key person, loan indemnification plans or other business related disability insurance protection.

Encourage your clients to become interactive by providing them third party disability insurance need calculators from organizations like Life Happens (www.lifehappens.org) and The Council for Disability Awareness (www.disabilitycanhappen.org).

Analyze your client's buy/sell disability plan to make certain the funding does not reduce when approaching the designated retirement age. This is a very important practice, as we know from studies that many people today are having to work into their senior years and push back retirement. If their existing buy/sell disability plan begins to reduce, this can be fixed by either replacing the existing plan with one that does not reduce or adding a "rescue plan" that would prop up the reducing portion of the existing plan.

Another concern is the probable need for a buy/sell agreement to increase every year or two as a business grows. If the firm is progressive and making money, DI insurance needs to be increased accordingly to stay in balance. Suppose the agreement was established when the firm had a value of $100,000—the buyout was $50,000 per partner. The firm has flourished and now has a total value of $4 million. Obviously insurance must be brought to this level, otherwise each partner is liable for $1.95 million buyout should the other party become disabled and the buy/sell agreement demands a buyout. This is why annual reviews are crucial for insurance professionals to keep their clients current with acceptable amounts of insurance.

With the insurance industry's preoccupation with retirement income, it is easy to overlook the very important aspect of senior-aged workers. Just because someone is over 65 doesn’t mean they are no longer working! Many people feel good about maintaining their relevance in the work force, and plugging their disability coverage gap is a heroic effort on a producer's part.

Income protection planning should be an integral part of your overall marketing and sales with your clients. The beauty is that you don’t have to find new clients frequently, just service your existing clients well!

As to us, as professional insurance producers, we should join and participate in associations such as the International DI Society and NAIFA, so you will be included in the dynamic and surging disability insurance industry. Associations are a great place to learn, network, and get motivated!

So what is your action plan for 2017? 

Disability financial planning is an ongoing practice and, if you want a bountiful year, take the time to bring the idea of adequate disability insurance to your clients and prospects. 

My introduction to disability insurance happened on February 19, 1948–my 21st birthday.  I had fallen deeply in love with a lady, Mary Jacqulyn Cecilia O’Meara, a dentist’s daughter who was employed at Mutual of Omaha, the nation’s largest exclusive accident and health insurance company.  I was home, Council Bluffs, IA, from college at UCLA.

My plan was to be a journalist.  It seemed to be my calling.  The Los Angeles Times had offered me a job, promising a six month apprenticeship without pay before deciding on offering me a permanent position.  My response was, “I appreciate your offer, but I cannot accept your terms.”  I needed to return to my hometown of Council Bluffs where there were only two newspapers, the Omaha World Herald and the Council Bluffs Nonpareil.  Neighboring Omaha had only two radio stations and no television stations, so the prospects of a job in journalism were very limited.  My friend and future wife convinced me to interview for a job at Mutual of Omaha.  I did.  It was a highly emotional experience for I was told about the existence of disability insurance and its potential for the future.

My family suffered through the Great Depression like most Americans, but we additionally endured a terrible drought which began in Southwestern Iowa in 1933 and lasted four years.  The corn crop failed, resulting in the loss of our farm, the farm equipment and our prized dairy herd.  Out of necessity, we moved to a rented house that was little more than a chicken coop.

For the most part, life was tumultuous, but not unlike many of the other folks who lived up and down the dusty country roads.  However, our ultimate financial undoing was my father’s disability.  He suffered a severe bout of sciatica rheumatism that totally disabled him for many agonizing years.

My magnificent mother led our desperate family.  She kept us alive by growing fruits and vegetables in a small garden and by working as a domestic for a meager income.  But she found time to hand sew the beautiful organdy high school graduation gowns of my sisters who were also working for their own room and board.  Being 13 years their junior, the odd jobs I landed were skimpy in wage, but served to get me through school and off to Los Angeles to live with my grandmother while attending UCLA.  A modest track and field scholarship helped.

Dad finally regained his health, and he got a job as a night watchman in a truck body manufacturing shop.  My parents, always driven by determination, managed to save enough out of their pitiful earnings to buy acreage of farmland.  They eventually regained financial freedom and bought their first new car.

All the suffering and denial of my family could have been prevented by the great product called “disability insurance.”  But no insurance agent ever told my father about it, and so he was left naked before the cold winds of adversity.  No social security or other social insurance then existed.  I experienced the painful economic demise of my family, and vowed to help prevent similar experiences happening to other American families.

After decades in the industry with an intense focus on disability insurance, my three sons joined me in business.  We did well in selling to and serving insurance brokers and financial planners, and eventually partnered with Lloyd’s of London as we were granted the esteemed status of Coverholder.  Slowly, we solved the problem of inadequate disability insurance available in the U.S. market by comingling traditional insurance with Lloyd’s plans.

We next went to work on making disability coverage available to nearly any occupation, even offshore oil drillers, entertainers and professional athletes.  Today, income protection is available to almost anyone including singers, farmers, astronauts and executives.  Even actors and actresses can be financially indemnified for the loss of their voice or the loss of their beauty when they can no longer command appropriate fees for their services.

The fundamental building block in life is the ability to work and earn money.  When that is prematurely taken away, all is lost.  Without an income, there is no way to pay for healthcare and health insurance, autos and auto insurance, houses and homeowner’s insurance, retirement, death and its consequences.  What can thoroughly replace the loss of ability to earn a living?  The answer is disability income insurance.

Slowly we have peeled back the superstitions surrounding disability income insurance and have created new coverage that can be used to create programs of disability insurance that can do incredible things at an affordable price to insure adequate income flow, build a solid retirement plan and cover business expenses as well.  This knowledge and logic has captured my attention and held my passion for nearly 70 years.  It has propelled my efforts to make disability insurance available to all persons who work to earn an income. 

Heroes are an important part of culture and civilization. Heroes stir the imagination of the mind and motivate the romance of the soul. A world without heroes would be a colorless and drifting world. 

Leaders study heroes. A knowledge of the past and the handling of crisis by heroes helps determine the plan of action for the battles and problems of today. 

Knute Rockne, the famous football coach, always took his team back to basics after each game. John Wooden, the legendary UCLA basketball coach, never concerned himself with the competition. He only prepared himself and his team to do the very best they could, at all times. 

The life insurance industry has serious problems confronting it. The companies and the agents are faced with a challenge for survival. A recent LIMRA study of MDRT members exposes the fact that our best producers are increasing income, but at a lesser rate than inflation and they are losing the battles for profits. 

Before we try to compose solutions to the problems we face let us look back in our history of life insurance and review the lessons learned from our heroes in the field. 

We immediately encounter a problem for our industry—an alarming lack in heroes. In our two hundred years of existence we have a long list of people who have recorded noteworthy accomplishments and persons of whom we, as an industry, are very proud. But who are the heroes?

In other industries, names like Henry Ford, the father of mass production of automobiles is known universally. We learned about Orville and Wilbur Wright in grade school, as we did Thomas Edison and Ben Franklin. There was Babe Ruth and Red Grange, Washington and Lincoln, Patton and Rickenbacker. But who knows about our life insurance heroes? Life insurance is one of America’s oldest and largest industries. It touches the lives of nearly everyone. There must be some heroes to study, some place in our history. 

Prudential, one of our industry’s largest life insurance companies, is a highly significant economic entity. Ask a friend to name the founder of that firm or any of its past presidents and you will find no recognition of a hero type. 

Perhaps the founder of our first American life insurance company, the Presbyterian Ministers Fund, 1759, should be considered a hero, except no one recognizes the name of the company or the founder’s name. 

Consider the Insurance Company of North America, 1794, and New England Mutual, 1835, as possible sources of hero nominees and no certain names come forward in our memories. 

Here is a possible nominee—Morris Robertson is considered the founder of the Mutual of New York in 1843. It was he who invented the modern agency system and is the father of the commission schedule we will labor under, fifty-five and nine fives! Who wants to remember the creator of a compensation system that has, from the beginning, experienced a 95 percent failure ratio of all who have worked under it? Historical? Perhaps. Heroic? No!

In 1863, we are taught in LUTC, James Batterson, an architect, traveled to London and there observed a money making business called “travel accident” insurance. He returned to the U.S. and formed, “The Travelers Insurance Company”—one of our highly successful companies that has sustained itself and makes us proud, but no hero! 

As to heroes we look for persons whose thoughts or deeds have influenced the course of history or the lives of many people. We do have two nominees. The first nominee is Elizur Wright, father of cash value insurance. Elizur was an early day consumerist who challenged the ethics of life insurance companies that kept the level premium reserves of policy owners who quit their policies. He contended a reserve not used for the welfare of the policy owner should be returned to the policy owner plus interest, since it rightfully belonged to the policy owner, not the company. 

He became the first Commissioner of Insurance for the Commonwealth of Massachusetts in 1861. He successfully campaigned for the country’s first non-forfeiture laws. 

A study of the industry prior to Elizur Wright indicates that the life insurance business was not flourishing when all it had to offer was term death benefits. 

Cash values arrived at a time in history when banks were paying little or no interest on savings. The then rate of two percent interest on cash value reserves was received with enthusiasm. Wall Street recognized the virtues of two percent on a guaranteed basis and began promoting life insurance companies; especially mutual companies, for the stock brokers foresaw a great system for the gathering of money for investment purposes. 

The size, the acceptance and the utility of life insurance in America would have remained insignificant had it not been for the development of cash values in life insurance which made it possible for a customer to win, whether he lived, died or quit. 

Ironically, many critics of cash value life insurance would not have gotten an education that equipped them with knowledge to be a critic had it not been for the cash values in a life insurance policy paid for by their devoted and loving parents. 

The term insurance advocates have chosen to overlook that it was a consumerist who developed cash value life insurance. Today’s consumerists would tend to destroy it. Whatever happens as to the destruction or salvation of cash value life insurance in the future we can feel good about nominating Elizur Wright as a hero who lead a good fight. Millions of people, many business firms who needed capital and an entire nation profited immensely from his accomplishment. 

The next nominee for hero-ship is above this level of recognition and should be proposed for Sainthood. The nominee for the first Saint of the Life Insurance Business is Solomon Heubner, CLU, former professor of Economics and Insurance at the Wharton School of Finance and founder of the American College of Life Underwriters. 

This nomination is based not upon his efforts as a teacher, nor as a developer of the formalized education of CLU, but as a thinker and as an advocate of a concept of insurance that is the base for all that we as an industry have done since the Human Life Value Concept was introduced by Dr. Huebner in 1915. 

He taught us that the human body has a chemical content value of only a few cents, but the body at work has tremendous capitalized value as an income producing machine. It is that future potential that must be insured in favor of a family, a business or both, people who would suffer financially from the depravation of the income that would have been produced had the insured not been so inconsiderate as to die or to get disabled during his or her income producing years. 

The human life value lifted our sights from a burial fund idea to the idea of income replacement. The concept has to rank in significance to the development of the airplane, the invention of atomic power and the discovery of insulin and the Salk Vaccine.

From this concept has come the proper economic imagery all people should have of themselves. It has lifted attitudes. It has put one’s productive efforts into perspective. It has enabled families to maintain dignity and standards of living. It has enabled businesses to survive. It has enabled the families and persons of modest means to face the future with the same confidence as those who already have attained wealth and security. 

Personal economics changed because of Dr. Huebner. People are better off substantially than if he had limited his efforts to book teaching rather than concept teaching. He is one worthy person for the nomination of “Hero and First Saint of the Life Insurance Business”. 

Solomon S. Huebner, PhD, CLU, wrote the book Life Insurance nearly a century ago.  It has become the bible of the American life insurance industry.  Dr. Huebner has proven to have been an exceptional visionary.  It was his concept of the human life value that changed the perception of the life insurance product being a burial fund to one that provides an indemnification of loss of earnings of a family or business head.

Today our giant industry smolders in the mediocrity of flat and in some cases, diminishing sales results.  Companies searching for a fix to their problem have reached out to add non-risk bearing products to their portfolios.  In so doing, they are methodically entering the arena of life insurance's old nemesis by a side door.  Mutual funds, stocks, bonds and variable products are inherently wrapped in risk. And risk is often a reason given for defecting from the underwriting of disability insurance.

This man's ingenious appraisal of the future did not counsel the industry to not accept risk for he, as professor of insurance and finance at the revered Wharton School of Finance, certainly understood the mission of insurance companies is to provide the tools of risk management for people.

Indeed his book clearly set forth his recognition that from a risk management perspective, the living of life carries the risk of not only "dead death" but also the more frightening encounter with the "living death" which means getting sick or hurt and becoming disabled.  A disabled person is financially dead, but it is illegal to bury the victim.

This magnificent visionary pronounced the "living death" to be a greater financial hazard than "dead death" because "the victim is still here, a total consumer without being a producer, and in addition to living costs he faces the added expenses of hospital and doctor costs."

(NOTE:  The book, Life Insurance was first published in 1913.  Hospital insurance was not created until 1935—22 years later.)

The life insurance industry has not heeded the teachings of this visionary.  We have ignored and cast aside his admonition to protect people from the ruinous effects of disability.  One thousand, one hundred life insurance companies have not come to grips with the risk management service their markets anticipated.  At the zenith in 1975, 545 life companies offered disability insurance for sale.  By the year 2007, only 26 insurers remained active in the DI business.  The current total remains at a similar level.

To do something about this sad and concerning condition, the International DI Society (IDIS) was created.  Its mission was: 1) to salvage the industry and stop the exodus of companies from disability insurance while encouraging the companies to help provide income protection for the American income earner, and 2) to generate interest and awareness of the need of people and the opportunity for sales of disability insurance.

The International DI Society is working with the leaders in financial services education (The American College and America’s Health Insurance Plans, which have developed credentialed courses in disability insurance).

We set up regional training seminars on the subject of disability insurance on campuses of colleges which offer insurance matriculation.  In times past, Florida State, Michigan State, Notre Dame, USC, the Purdue Life Insurance Marketing Institute, Tulane and others have conducted advanced disability seminars.

Can disability insurance be profitable to the underwriting company?  It has been in the past and is once again doing so, but many of the values to a company are out of sight or unmeasured, such as the many tangential sales of other products, the commissions to entice and maintain loyal producers and the good will coming from the delivery of claim checks to people who are still alive and boastful of the company that has served them well.

Committed and dedicated believers in the necessity for America to have a strong disability insurance industry are joining the International DI Society. The Society cannot achieve its dynamic growth alone.  It needs and deserves the support of the companies in the industry, financial and involvement support.  Progress to date has been financed by modest membership fees and modest conference fees.  The twelfth annual conference will be held in beautiful Charleston, SC, this month. Industry personalities will come to celebrate the induction of the Society as the newest star in the galaxy of professional insurance organizations:

• National Association of Insurance and Financial Advisors

• National Association of Health Underwriters

• National Association of Independent Life Brokerage Agencies

• American College

• Society of Financial Service Professionals

• Million Dollar Round Table

• America's Health Insurance Plans

• Association of Health Insurance Advisors

• International DI Society

The Society seeks members from insurers, regulators, producers and educators.  The caliber of speakers and the significance of the subject matter is top drawer. The International DI Society sets attendance records as to percentage of members who attend each conference. Its new member count increases each year.  It is an impressive record IDIS is chalking up, validating the need for this association. 

Expert Opinions
Noah Webster: Estate means all of a person's possessions, especially after death

Solomon S. Hubner, Ph.D., CLU: There are two kinds of death: Dead Death and Living Death (disabilty).

Thought Processes:
1. A person’s possessions may be fully or partially owned. Some possessions may be illiquid and some virtually worthless. With possessions that are assets come possessions that are debts and liabilities. For these reasons, much effort is made to plan estates in the event of expiration that will provide for liabilities and the support of dependents after death. Life insurance is the common tool for such planning. 

2. Dr. Huebner teaches that, “the only difference between Dead Death (death) and Living Death (disability) is six feet of sod, and if anything the Living Death is the worst, economically, because of being a consumer and not a producer.”

3. We deduce from these learned thoughts that having an adequate dead death estate without having an adequate living death estate is like being half-clothed before the winds of adversity, for most people do not have the privilege of dropping dead—they suffer to death.

4. It becomes equally as logical to plan for an adequate living death estate as it is to plan an adequate dead death estate. Dead death is certain, but living death is only a high probability. But a lengthy disability will destroy the best of well-planned dead death estates. One without the other is a snare and a delusion! 

Dimensions of the Living Death Estate
Surveys by U.S. News and World Report magazine, and separately by the U.S. Department of Labor Statistics, indicate that people of every income level must maintain a cash flow level of 65 percent to 75 percent of normal or they will be forced to liquidate accumulated assets. 

The Solution
1. Secure all the disability income insurance a U.S. company will issue to the person. If the amount falls below 65 percent individual paid (or 75 percent of employer paid) of normal average income (average for preceding twelve months) seek supplemental coverage to make up the difference. 

2. Apply for supplemental coverage to make up the difference between 65 percent or 75 percent of normal income cash flow and the amount issued by the U.S. carriers. 

3. Identify target risk and insure them outside the disability estate. Such target risks could be bank loans, business buy-out, overhead business expenses, contract completion and obligations that are of a temporary nature. College years of one’s children are an example of a temporary supplemental need. 

The examples to the right show how it works.

People have difficulty in securing sufficient amounts of disability insurance to use in creating an adequate living death estate. Adequate means a planned source of cash flow sufficient to support a person’s standard of living during periods of disability without invading savings, retirement funds, or other assets which were accumulated with other purposes in mind. 

There is a tendency on the part of the insurance companies to restrict the amount of disability insurance which they will issue to an arbitrary amount that is typically inadequate. Such arbitrary limits imposed by the carriers leave the consumer inadequately insured. Insurance companies do not impose such inadequate limits on the insuring of other assets. 

Take fire insurance or auto insurance as an example. The underwriters of such coverages do not force a person to accept a low amount of insurance on the theory that the proceeds commingled with other wealth could be adequate to rebuild the building or purchase a new car. Life insurance is usually issued in adequate amounts to perform the task for which it is intended.

Various forms of supplemental disability insurance, including high limit disability insurance, have been designed to supplement traditional coverages. These plans enable consumers to gather adequate amounts of disability insurance so that the two financial problems created by the living of life—living death and dead death—can be handled with equal effectiveness.

The concept of the Human Life Value came upon the life insurance scene with little attention. During the Roaring Twenties, the attitude of people was to get rich fast. Their attention was on investments in oil wells (often dry holes), and exotic cattle herds (many of which did not exist), and Florida land (much of which was swampland). 

The realization that wealth is an accumulated result of income did not manifest itself in minds dulled by the short lived boom period of that decade. 

The economic crash of 1929 brought back into focus that which became obvious as a result of the Industrial Revolution—income on a regular basis is the ultimate solution to economic needs. 

America, the land of the free, was largely an agricultural nation prior to the Industrial Revolution, and money meant very little. A living was grubbed-out of nature by many people. 

Though independence from employment sounded good, the fact was that life was harsh and uncomfortable. Few people had all the required talents of making clothes that would fit well,  finding and preparing a good tasting variety of foods and building homes that were both comfortable and attractive. 

It was soon evident to many persons that there were indeed advantages to exchanging one’s efforts and skills for a paycheck—the proceeds of which would enable a person to enjoy professionally made clothes, well built homes and nutritious and good tasting food. 

The Great Depression brought back the realization that income is not only desirable, but indispensable. 

The changing of economic conditions developed a realization of the logic of a smoldering thought that was first exposed in the textbook Life Insurance, printed in 1915—that insurance against loss of income due to death was an issue of immense proportions to the affected family members.

The smoldering embers flamed into a sweeping prairie fire, as life insurance companies responded to the cue and began enlarging the consumer’s interest in life insurance from a burial fund concept into an income replacement concept.

“Live, Die or Quit!”, the most famous and effective life insurance sales talk ever developed, extolled the virtues of cash value life insurance and the comfort one has in knowing that it is a no-lose proposition: it pays a retirement income if you live beyond the working years of life; it pays the face amount (income replacement) should one die during the productive years of life; and if, for some reason, one would be forced to quit the policy, the cash values would be returned. 

Although delayed by economic events, the capitalized value of human life set the world of life insurance on fire. Adjusting for expected increases in sales due to a growing population and a dynamic economy, it is possible to detect the effect this concept had on the life insurance industry. More companies were started, the average policy size increased, the proportions of utilization increased, and workers’ unions endorsed the concept and the need and started placing life insurance on the negotiation table as an important part of compensation bargaining. 

At a time when the life insurance industry is struggling with problems and crisis, it is time to review the teachings of the person who first foresaw the need and the potential of life insurance as an essential economic tool for people to use in their personal financial planning. 

A review discloses that these teachings were taken out of context for some reason. 

Dr. Solomon Huebner did not envision financial planning as being devoted to only protecting accumulated wealth by tax deferment, tax shelter or as a fund to pay off estate taxes. Yet our greatest efforts as an industry relate directly to using life insurance on some tax-favored basis. 

Financial planning today is designed to protect the accumulated wealth rather than the income that produced the wealth and the future income that in most instances far exceeds in capitalized potential that which has been accumulated to date. 

Peculiarly, we have aroused professional motivation with such out-of-context phrases as “estate planning” and “tax plans” and “financial planning.” Few if any letterheads or business cards of today’s life insurance purveyors carry the legend “Income Planning.”

And if the legend on the business card was “income planning,” could we be sure that the purveyor clearly understands the total concept of the great Guru himself who stated: “Disability income clearly falls within the life group of coverages and is just as urgent and logical as life insurance in its ordinarily accepted forms.”

Furthermore, he observed: “The only difference between the Living Death and the Dead Death is six feet of sod, and if anything, the victim is worse off financially due to hospital and medical expenses without being a producer, and certainly the family would be better off financially with the victim gone than with him on its hands.”

In a U.S. News and World Report article, way back in 1956, Dr. Davis Gregg, CLU, then president of the American College of Life Underwriters, stated that the greatest weapon one has against inflation is one’s income. Without income, even for a short period of time, a person loses ground in this battle in which a loss of income may never be regained. 

Kiplinger’s Changing Times magazine related to the necessity of income by observing: “Even the individual of limited means can pay off big bills and big debts if only he maintains a regular income.”

An article published in the National Underwriter and written by Donald Melig, CLU, former president of the American Advanced Life Underwriters Conference, brought forth very forcefully that a change in economic law and theory could put many life underwriters out of business. He was, of course, relating to the fact that many of today’s life underwriters are only selling life insurance as it fits some tax law or tax situation. 

The statistics are clear. The American people are vastly underinsured from an income replacement point of view and of the two economic problems created by the very living of life itself, dead death and living death, the living death situation is the one most poorly attended to. 

Life underwriters must share some of the blame for not emancipating their clients from the slavery of uninsured income protection, but they can in large part be partially excused from dereliction of professional duty because of their companies’ stubborn resistance to provide decent and adequate disability income insurance plans for income earners in all occupations. 

Solutions to many of the problems of life underwriters will be found if we return to the basics. Our business’ greatest potential is yet to be realized. The best is yet to come. 

There are product answers to fill the income protection needs of all persons, regardless of occupation or income needs.

Living costs 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. Income must equal outgo, or as economists think of it, “cash flow.” 

But three problems in life–death, disability and old age–render us unable to earn income to keep the cash flow in balance. 

Fortunately, these problems have an antidote: replacement income. Life insurance can be used to finance care for surviving dependents. Retirement income plans will, if fully funded, provide a comfortable cash flow when a person stops working. And disability income insurance provides replacement cash flow for those who become disabled and unable to work. 

This view–that life is a cash flow–has led to the conclusion that income planning should be the cornerstone of financial planning. 

Further, we believe no comprehensive income plan is complete without an adequate amount of DI insurance. In this article, we’ll look at some ways to achieve this planning goal in today’s admittedly challenging DI market. 

Yes, planners do face challenges in securing adequate amounts of DI coverage for highly-compensated persons. And some planners find availability a problem for clients who work in occupations many insurers deem unacceptable. 

However, the market is not without hope. Recent DI product and underwriting developments have created answers to many recognizable disability financial planning needs. Specifically, new forms of high-limit DI are becoming available to provide producers with a market for the additional insurance not offered by the primary carrier.

Sold through networks of life and disability brokerage agencies, with the help of international capacities, these supplemental DI coverages are designed to imitate common DIs currently available from primary carriers. For instance, their definitions are identical to those in the base policies and their terms and conditions mirror those of the base products to the extent permitted by state regulations.

Hence, they provide a solution by virtually wrapping around the base DI contract. These new products can be used to "solve" a wide variety of DI problems. 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 addition, in today’s market, maximum DI issue limits hold coverage to modest amounts.

This is a problem because most income earners, regardless of income level, have spending commitments that consume 65 percent to 75 percent of normal income cash flow. Those commitments mean a prudent person should secure DI insurance in the amount of 65 percent to 75 percent of normal earned income. However, if upper income earners can secure DI at only 50 percent of their income, or perhaps only 40 percent or 30 percent, then they end up with 

insufficient coverage.

Most DI agents are well aware of the problem. But they have been frustrated in recent years because they have often found it difficult to obtain suitable additional coverage. Now, with new forms of high-limit DI becoming available, a market is opening up to help meet the need.

2. Well-paid executives often suffer reverse discrimination because their firms’ group long-term disability plans have a benefit "cap" to keep the cost of the plan low.

The 60 percent 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. But excess disability coverages can be superimposed over the group LTD to provide the 60 percent to 75 percent of normal income coverage that most employees need.

Again, this coverage can be secured through the high limit DIs now on the market.

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. But assigning the benefits this way robs the family of its critical protection should disability occur.

In this situation, the client can use supplemental and bank loan indemnification coverage to insure these special situations without impairing the personal disability estate. Such special risks can be insured separately, outside the personal program.

4. Good planning calls for business owners to establish a properly funded disability buy/sell agreement. The problem is that many insurers limit coverage to 80 percent of purchase price, have modest issue limits, and refuse to cover persons over the age of 57. But specialty DIs can help. These products can be structured to handle jumbo buy/sell plans of up to $200,000,000, in amounts up to 100 percent of purchase price, and include persons aged 57 and over. (An added plus: These plans do not reduce benefits starting at age 60.)

Let’s return to the original point: Using the concept that "life is a cash flow," it stands to reason that people must have income to match outgo when disabled and unable to earn.

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, on the other hand, 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 high-limit supplemental DIs in their financial plan. There may be additional costs for the coverage, yes, but it is affordable to most of the intended clients and the coverage will relieve concerns about short-term liquidity—thus freeing clients to concentrate on long-range investment strategies. 

The disability insurance industry has some confessions to make to insurance consumers. I will offer some suggestions here with hopes of drawing attention to the industry’s critical need for expansion. 

Recall that for over a century the life insurance industry has been selling disability insurance. About 90 years ago, the late Solomon S. Huebner, founder of the American College of Financial Services, declared in his acclaimed Life Insurance that disability insurance is a part of the life insurance group of coverages. He also said disability insurance is as logical and needed for personal security as is life insurance. 

Confession #1: All life companies have not offered disability insurance. After hitting a high point of 535 disability insurers, the defections dropped the total to 250 in 1990 and down to 26 in 2003. This is totally unsatisfactory. Twenty-six companies cannot cope with the incredible task of insuring the payroll of American income earners. 

Confession #2: Insurance producers not equipped with a product and not encouraged to sell disability insurance have not tended to consumers’ well-being. Consequently, only 27 percent of income earners have any disability coverage and over half of that is inadequate according to industry standards. 

Confession #3: Most life companies aggressively seek “retirement income plan” life insurance but bypass the risk of forced retirement (disability) entirely. This reckless action has been considered as malpractice in several prominent court cases. 

Confession #4: The industry has defaulted in its duties to perform professionally for the insured, even though it knows about the critical importance of a well-planned disability program. It has pretended it did not notice that the industry has overlooked, ignored or specifically determined not to counsel people on disability insurance. 

Some CEOs fear potential losses arising from disability insurance. Yet, risk assumption is the function that insurance charters anticipate and it is widely accepted that there is inherent loss potential in any form of insurance. This fear exists even though the disability industry has seen more profitable years than loss years over the past century. 

Confession #5: Financial planning begins and ends with income planning, and proper income planning is impossible without adequate amounts of disability insurance. The industry has neglected this. 

What can be done about this? The life insurance industry must respond to this call or face the very real risk of having disability insurance nationalized. Our national government has long had a great conversation about people having an income cash flow and has created several programs to provide income to people when they could not produce income themselves. You know these programs well–Workers’ Compensation (disability insurance), employment compensation, Social Security retirement, Social Security disability, state disability plans and tax advantaged retirement accounts. 

Today, the constant march toward quasi-socialized medical insurance and the attempts being made to withdraw favorable tax advantages in life insurance plans indicates the current mood of government. 

Where is disability insurance in all of this?

In 2002, eight insurance companies accounted for 69 percent of the non-cancellable disability premium in force according to Milliman USA. Sixteen companies accounted for 94 percent of such in-force premium. This trend is continuing unabated to the point that the business is nearing monopoly. Free-market disability income insurance could disappear. Government programs already have a system in effect to administer a nationalized plan of disability insurance. 

Now Consider This:
Roughly 88 percent of the American people have medical insurance. But lawmakers feel this is unacceptable and so they pass law after law to deal with the issue of the 14 percent who are uninsured. These laws propose involvement based on governmental concern about the public. 

Meanwhile, only 27 percent of American income earners have disability insurance according to the Department of Labor statistics. So 73 percent are without disability insurance.  Regardless of the income level, it seems large numbers of people live within a few months of bankruptcy. 

The above does not pass the test of simple reason. Medical insurance does not yield cash for food, clothes, a home or other financial obligations a person has undertaken. Disability insurance is what provides a cash flow from which big bills and big debts ultimately can be paid, even health insurance rate costs. 

This lack of disability insurance is arguably a greater public need than the need for medical insurance. The life insurance industry’s indefensible position to let the business dwindle is an invitation for government expansion into this area. 

In sum, the giant, robust life insurance industry needs to embrace more fully the form of insurance called disability insurance. Just 26 insurers cannot be expected to protect the earned income of all American wage earners. 

This commonly used phrase is indicative of the frustration people have trying to manage their financial affairs in a positive way. The US Department of Labor statistics helped us out by surveying the questions. This is what we learned.

Example: 

Income before taxes – $62,857

Average annual expenditures – $49, 067

• Food $6,372 (12.99 percent)

• Away from home – $2,619 (5.34 percent)

• At home – $3,753 (7.65 percent)

• Housing – $16,895 (34.43 percent)

• Rented dwellings $2,860 (5.83 percent)

• Mortgage, interest and charges $3,594 (7.32 percent)

• Apparel and services $1,725 (3.52 percent)

• Transportation $7,658 (15.61 percent)

• Gasoline and motor oil $1,986 (4.05 percent)

• Health care $3,126 (6.37 percent)

• Entertainment $2,693 (5.49 percent)

• Insurance and pensions $5,471 (11.15 percent)

• Everything else $5,127 (10.45 percent)(Source: Consumer Expenditure Total Survey (77.37%), U.S. Department of Labor, U.S. Department of Labor Statistics 2010.)

At an early age we were told the three most important elements in living are food, shelter and clothing. The survey shows food costs at 12.90 percent, shelter at 34.43 percent and clothing at 17.25 percent. These three items total 64.58 percent. Since those early, simple days we have created habits of expenditures that equal 49.07 percent.

Readers may take exception to some of these findings, but they are only to serve as a guide and not as an absolute. As an example, health care may vary widely due to the physical experience of the person(s) involved. It seems the allocation to pensions is realistic. We think entertainment can vary by choice. Transportation is a variable depending on the person’s need for work and health care needs. The last item, “everything else” is a variable that can be adjusted in many ways. 

Now we must study the key to the question, “income”. The object here is to recognize the challenge we all have in tailoring our “outgo” to be less than our income. We must realize that seldom will these items meet or be compatible. The interruptions of income are many, such as business failure, loss of job, loss of a court proceeding, care for a dependent and the two things over which we have absolutely no control – death and disability. 

Death, which is final and often instant, is the least of these two hazards. Disability is likely to be lingering and out of control. The person quickly changes from a productive healthy person to a weak and non-productive person. This peril is life’s greatest challenge for it has no dependable ending and there is nothing that can be done except to try more doctors, different treatments and distant hospitals. All savings are consumed; all necessary borrowing stops; the insurance funds are exhausted. Only despair waits. What does a person do? Possible solutions:

The Budget:

• Based on a monthly net income of $19,000.

• There is an elimination period chosen by the insured

• Three months = $57,000.

• The ultimate cost based on loss of income for 2 years = $456,000.  20 years = $4,560,000.

Covering the Cash Flow Shortfall By:

• Living on interest from principal

• Because we should never, ever use our principal (an old Yankee concept). 

Use Savings:

• $4,560,000 at five percent interest = $19,000/month

• To save $4,560,000 at the rate of $1,000 month = 4,560 months or 380 years and $5,000/month = 912 months or 76 years.

• To cover 2 years of disablement needs  $456,000. To accumulate this amount would require saving $1,000/month for 38 years or $5,000 month for 7.6 years

Borrow Money:

• If money can be borrowed at all:

• Borrow $19,000/month for 20 months = $380,000

• Repay over 60 months = $7,888/month

• Interest costs @ 9% = $1,555/month

• Total interest cost = $93,280

• Repayment must be made out of $19,000 net income flow

Friends/Relatives:

• If they sacrifice “their reserve” for use by another person, they could become the ultimate victim. The answer has to be “NO!”

Plead Charity:

• There are new tough laws and penalties for trying to transfer or hide assets. All assets must be expended before there can be any relief via charity.

Establish an Insured Disability Cash Flow Account:

• Potential capitalized benefits, age 45-65 (20 years) at $19,000/month = $4,560,000.

• $19,000/month x 24 months = $456,000

There is a happy solution. The best solution is disability insurance. It is flexible and removes all hazards from the most likely peril a person faces-getting sick or hurt. 

Advances in medical science and survival rates suggest a likelihood of long term disablement occurring frequently, ranking this condition as a more serious business problem than the death of a principal of a firm. 

Most business agreements recognize and deal with the problem of death of a principal. Comparatively few deal with the difficult problem of disability. One reason is that a simple insurance solution to a principal’s disablement has not been available in sufficient amounts to solve the problem. The problems recognized in buy-sell plans available from customary insurers can be handled by the use of high limit plans to supplement plans of inadequate amounts. 

When a principal dies, it is a specific event that calls for an obvious response. The firm or the remaining principals should be empowered by a buy-sell agreement to buy out the deceased principal’s interest from his heirs, and the heirs are obligated to sell at the agreed upon price. The resolution is simple and usually is funded by life insurance intended for that purpose. 

When a principal becomes disabled and unable to perform his duties, the solution is to remove the principal from the firm through a previously agreed upon buyout. As long as the principal is alive, he may be useless to the firm. He may be economically dead, but it is illegal to bury him. An agreement effective over a period of time, usually one year, obligates the firm or the other principals to buy out the interests of the disabled principal at the previously agreed to price, and the disabled principal is obligated to sell. 

Disability Insurance is the most logical and affordable funding solution to this situation. Not all such plans are adequate to the task. That is the domain of High Limit Buy-Sell Disability Insurance to round out a suitable and an adequate plan. 

If a buy-sell agreement does not exist, or if the existing agreement only deals with the advent of death, brokers should seek a copy of a specimen disability buy-sell agreement for the client and his advisors to review as a guide to creating a well designed agreement. 

Other Factors
Erosion or termination of coverage.  Many buy-sell policies reduce 20 percent per year beginning at age 60 and become zero by age 65, at which time the plan terminates. Some carriers offer an extra premium rider to eliminate the reductions, but the policy still terminates at age 65. 

The high limit buy-sell disability plan can handle both problems. It will increase coverage annually to offset the reductions in the basic plan, and the high limit disability buy-sell plan does not have an automatic age termination. Many people over age 60 or 65 are involved in buy-sell agreements with the accompanying liabilities. 

Noncancellable Aspects
A buy-sell policy is not a fully noncancellable contract. If the insured is no longer a party to the buy-sell agreement, the plan terminates. It is therefore conditionally renewable even though it is termed as a “noncancellable” plan. The high limit disability buy-sell plan is also conditional to the insured’s inclusion in the buy-sell agreement, but renewability and rates are guaranteed in three to five year increments. 

Other Duties
Business owners have concerns besides the adoption of an adequate and responsible buy-sell plan. The disabled principle needs the comfort of a fixed and known salary continuation plan for the short term and personal disability income for the long run.