W. Harold Petersen, RHU, DFP

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 from being a burial fund to one that provides an indemnification of loss of earnings at the death 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 not to accept risk, for he, as professor of insurance and finance at the revered Wharton School of Finance, certainly understood that 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.”

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 year 2007, only 26 insurers remained active in the DI business. The current total remains at that 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 for 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, 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 IDIS. 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 our modest conference fees. Our tenth annual conference was held in Nashville last October. Industry personalities came 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

 • The American College

 • Society of Financial Service Professionals

 • Million Dollar Round Table

 • America’s Health Insurance Plans

 • Association of Health Insurance Advisors

 • International DI Society We seek members from insurers, regulators, producers and educators. The caliber of our speakers and the significance of the subject matter is top drawer.

The International DI Society sets attendee records for the percentage of members who attend each conference. Its new member count increases each year. It is an impressive record that IDIS is chalking up, validating the need for this association. 

Here is a litany of some cases where the non-traditional coverages are needed to provide complete and adequate disability planning.

 • High net worth, too much unearned income or income reported through capital gains are examples of the traditional market refusing an application for more coverage. A real estate developer must report to work just like a W-2 employee, but because his income is generated by the sale of a building and income flows to the person on a capital gains basis, it does not mean the person has no need for a solid disability income replacement plan.

 • People engaged in certain occupations are rejected due to lack of understanding, prejudice, unfounded fear or lack of reinsurance. Artists, ship captains, pilots, offshore petroleum engineers, actors, professional athletes and writers are commonly rejected, as are many in the field of finance—hedge fund managers, floor traders and account managers, especially those whose duties involve managing personal accounts.

Highly compensated earners have the problem of obtaining adequate levels of disability insurance. This is reverse discrimination. Practical solutions with participation limits of 65 to 75 percent of income, regardless of the amount of income earned, are now available by planning a blend of traditional and high limit surplus lines disability insurance.

People are living longer, feeling better and are not being enticed by pension plans to retire young  or to withdraw from a successful firm. At age 60 most people have peaked and are at the top of their game. Often they are even more vulnerable from a “need for income” standpoint than their younger associates. Perhaps their retirement plans were badly crippled in a recent recession, or life changes have made it necessary to continue working for a living. Most traditional carriers only issue coverage up to age 63 and have even younger cut-off ages for some disability plans such as business overhead expense and buy/sell. New plans are ready to assist with disability insurance planning that consider the working citizen eligible to buy more or replacement coverage even into their 70s.

New financial disability plans provide the ability to issue supplemental monthly benefits to a participation of 65 percent for employee paid (tax-free benefits) policies and 75 percent for employer paid (taxable benefits) policies. Issue limits are as high as $250,000 per month. This does not mean an advisor should forget about the importance of the person who only needs an additional $1,000 or $2,000 per month in benefits.

A case recently placed called for $110 million of disability insurance on each of two owners of a mutual fund to fund their buy/sell agreement. The typical cap on buy/sell plans is $1 million to $2 million. An additional $100 million was secured to provide the “wanted” coverage.

Personal needs are seldom fulfilled for people who are well compensated. The U.S. Department of Labor sets the objective of 65 to 75 percent of normal income as a standard at all income levels. But group insurance is, for price reasons, capped at levels that create reverse discrimination for the more highly paid people in a group. Individual disability income issue limits may start at 60 to 65 percent of earnings, but this diminishes as a person’s income increases. A million dollar earner would be limited to 35 to 40 percent of income when his needs are 65 percent. This shortfall can be filled by supplemental high limit disability.

Insurance consumers are seldom denied the coverage they want except in the case of disability income—where the matter is not based on the presumptions of income to be earned in the future but instead on the value of the item to be insured. A fire insurance plan does not reduce the amount of insurance based on the person’s net worth, forcing him to use existing assets to finance the rebuilding of a fire-destroyed building. Yet this is common when we encounter a highly compensated person and, based on current income, he is judged to be able to continue a certain lifestyle, to offset the loss of a building or the loss of a business partner by simply using existing accumulations. Our underwriters frequently encounter such situations where the “want” replaced the “need.”

Producers are encouraged to describe the matters that exist in unusual cases and seek the help of the underwriter in crafting an acceptable plan. 

A well planned “dead death” estate without an accompanying “living death” estate is likely to result in delusion and despair, for statistically few people have the luxury of dropping dead. They suffer to death! The suffering period may be short term or long term, but whichever it is, the insured will consume accumulations that were intended for other purposes such as wealth creation or comfortable retirement. Disability income insurance is the logical antidote, but it is seldom available in the required amounts. Consequently, many producers tend to ignore the living death challenge because of its many shortcomings that may leave the consumer disappointed and the producer embarrassed.

As an industry, the insurers of disability have for various reasons not provided solutions for living death planning comparable to those available for dead death. Now a solution has been found. It comes from the creation of a package of disability plans that can be arranged to provide a true disability financial plan that provides adequate amounts of coverage not only for personal needs but also for one’s contingency needs, including those of a business.

Of the two economic deaths, Dr. Huebner believed the living death to be the worst financially because the victim is here as a total consumer without being a producer. In the case of dead death, the family or business is spared the cost of the victim living and being an ongoing consumer.

The consequences of dead death are easier to manage than the living death. It is grievous and sad, but it is final and non-lingering. Life insurance in its various forms is available to offset the loss of the victim’s earning power. More than 1,100 life insurance companies offer dead death  solutions, but only 26 offer living death solutions.

The consequences of living death are far trickier, for choices have to be made which will hopefully provide a steady and sufficient replacement of lost income. Personal disability is a subject met with disdain by many people and is resisted as to possibly affecting them, but a business or professional office owner needs to be made aware that he may very well have multiple needs:

 • Personal annual income $1,000,000—disability needs $55,000 per month.

 • Overhead expense $240,000—disability needs $20,000 per month.

 • Bank loan $600,000—disability needs $11,500 per month.

 • Airplane lease $792,000—disability needs $22,000 per month.

 • Pension disability.

Additionally, people are living longer and working longer. Some are forced to continue working because of insufficient investment results or to sustain a certain lifestyle. Coverage for seniors working into their 70s and beyond is available.

Designers of insurance plans had little trouble in finding or inventing forms of life insurance to handle the dead death concerns. Disability insurance falls far behind in this respect because the underwriter is victimized by fear, prejudice and a lack of concern for those comparatively few advisors who deal in this field. By co-mingling the best of legal reserve insurance and the capacity and flexibility found in the surplus lines field, the many glaring needs left unattended by producers due to lack of product or unwilling underwriting now have very accommodating and reliable solutions.

Surplus lines insurance is sometimes referred to as the non-admitted market. This does not mean these carriers are unregulated. In fact, each state has specific financial qualifications to which a non-admitted carrier must conform each year. These requirements are frequently more stringent than those required by admitted carriers.

Earning Power

Retire? Yes, when passive income (earnings or savings) equals earned income, it will be financially safe to retire.

With an earned income of $100,000 per year, assuming a five percent increase in income per year from age 40 to 65, a client could reach a valuation of $4,772,710 (total accumulated earnings), yielding a passive income (at 5 percent) of $238,635.

Is the client there yet? Many people are not, because most Americans save less than 5 percent of their earned income. Compound the situation with an unprotected, income interrupting disability, and your client’s retirement lifestyle and legacy aspirations collapse.

Dr. Moshe A. Milevsky, a professor at the Schulich School of Business and the graduate department of mathematics and statistics at York University in Toronto, Ontario, recently wrote an article for the Wealth Advisor section of the Wall Street Journal entitled “How to Think Smarter about Risk.” The article states that “too many investors may be taking big chances with their money because they aren’t considering the most important asset of all…themselves.”

Dr. Milevsky uses terms we have used in our own efforts to get people to realize that they themselves are their best asset. He refers to the income one earns as “your human capital,” which will probably amount to millions of dollars and probably makes up 90 to 95 percent of the value of one’s total assets. We have used the term “Human Life Value,” which is the term chosen by Solomon S. Huebner, PhD, CLU, and founder of The American College of financial services.

To quantify this thought, we refer to:

A person age 45 who plans to work to age 65 and is currently earning $250,000 per year and expects to improve earnings by 5 percent per year. It is projected he will earn $8,679,814 during that time, according to a study conducted by and an income valuation chart created by the Purdue University Life Insurance Marketing Institute. This is the value of that person’s human capital for the 20 year period.

Dr. Milevsky challenges readers to rethink their insurance. Human capital is influenced not only by the stock market; it is vulnerable to the factors of death and disabilities. Life and disability insurances aren’t only about replacing this year’s lost income, but restoring one’s human capital value by anticipating ongoing earnings throughout his earning career.

Insurance should not be treated as a piece of paper sitting in a neglected drawer but as a part of one’s total asset allocation—something to be revised and rebalanced, just like one’s financial asset allocations. A person’s life insurance and disability insurance policies help hedge the non-market related uncertainty and fluctuations in one’s human capital value.

The value of one’s human capital begins in college. Dividends received on human capital are not solely the result of hard work, innate skills, fortuitous parents or sheer luck. These dividends can be traced to investment of time, money and effort during one’s student years. Surgeons who spent more than 10 years as undergraduates, medical school students, interns and residents have invested heavily in their human capital. They were investing their limited and irreplaceable elements of time.

Learning some cost accounting, micro economics and business statistics provides a good hedge for human capital. Modern forms of disability income insurance and cash value life insurance make possible the complete hedge that will permit the completion of financial plans should a long disabling sickness or accident take away the ability to continue to produce income at a rate consistent with retirement accumulation or wealth building goals by providing a source of cash flow equal to the earnings when at work.

If the interference is due to death occurring during one’s working career, the death benefits will supply some precious funding to help provide a family, a business or both with a death benefit hedge fund.

And if the life insurance is of a cash value design, it is then possible for the person to be able to complete his financial plans and approach his children as a bearer of gifts rather than as a burden of despair.

The only difference between a human body and a machine is that the human body has a soul. The body has very little value as to its chemical components, and at rest is an unproductive machine. But the body at work, like a machine at work, is very productive.

A machine or a body occasionally breaks down. It is important to get it repaired quickly and back into production. Mechan­ics charge substantial amounts to fix a machine. The human body is more complex, and pre-produced replacement parts are not always available. Therefore, we must hire the most expensive mechanics on earth to get the body productive again. They are called doctors.

As a society, we have learned to fear the cost of human body repair. More than 85 percent of Americans have sought out insurance to help pay for the costs of such repair. It is called medical insurance.

The people who own productive machines do not insure repair costs, but instead they insure the loss of production. This is called business interruption insurance.

Somewhere our society got confused. Although medical costs can be horrendous and insurance against such costs is desirable, the loss created by medical costs pales into insignificance when measured against the income lost because of a disabled, broken down body. This kind of income interruption insurance is called disability insurance.

But as logical as income interruption insurance seems, it is not pursued with vigor by either buyers or sellers. As a result, only 27 percent of Americans have any disability insurance in force, and of those with these plans the vast majority have a wholly inadequate amount of coverage.

The human body at work will, in the course of a career, produce a fortune. An income of $250,000 per year with a 5 percent annual increase in productivity (age 45-65) will rise to more than $630,000 in the year designated for retirement. Certainly this asset is a very important one. If it makes sense to insure a $30,000 diamond, an $80,000 automobile and a $700,000 house, it has to make financial sense to insure the one thing that makes all else possible—a person’s human capital income. Experts believe a person should insure at least 60 percent of normal income flow. Because few plans are available in this amount, some disability financial planning will be required. It can be done.

A Brief History Of Health and DI Insurance In AmericaThe genesis of the American health 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 much of 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 to build a reasonable history of the industry’s development, but other areas must be filled in. 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 for a single premium of 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 the loss and regretted that, in their greed, they got away from their real purpose, which was to insure ships and cargo, the only wealth recognized in those days. Their reluctance to pursue life insurance paved the way for the development of a life insurance industry in England.

 In 1759, the first life insurance company was formed in the United States. That company, the Presbyterian Minsters Fund, still operates successfully today. In 1794 a general carrier, the Insurance Company of North America, was formed, but by 1804, INA had sold only six life policies. Discouraged by the results, the company discontinued writing life insurance until 1957.

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 had 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, 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 no-forfeiture law through the Massachusetts legislature in 1860. His effort marked the beginning of cash value accumulation in life insurance. Cash values added living benefits to the death benefit plans.

It was a time in history when banks were paying zero interest to savings customers. Life insurance companies started crediting 2 percent interest on the policy reserves, and Wall Street financiers soon recognized that 2 percent was better than 0 percent. Investment firms encouraged life companies to sell the idea of savings and retirement concepts and, as sales increased, so did the commissions of Wall Street firms that served as investment counselors to life companies.

We need to correct our nomenclature so that all participants in the industry use the same names and references. There is ample room for argument that most life insurance companies should also offer “living death” insurance, and our industry should cooperate more fully to offer adequate amounts of insurance to cover this client’s needs. The industry should also work on making risks more easily acceptable.

Much education is needed so workers can appreciate the value of their earnings and the high importance of adequately insuring the income asset.

This 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 insurance industry.

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 market. Some were unsuccessful; others had remarkable success. Some of the greatest fortunes ever made in the business were made by specialty health insurance entrepreneurs. Despite these successes, however, most life and casualty companies remained aloof from the health insurance business.

The largest premium-producing segment of the entire insurance industry today is health insurance. That unfortunate choice of words—“health insurance”—made in the early 1960s by a select industry commission appointed to standardize insurance terminology, 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 Company became the first U.S. insurer to offer insurance benefits for sickness. Three years later, the Franklin Health Assurance Company, 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. The creation of the Travelers Insurance Company in 1863 by James Batterson, an architect from Hartford, CT, gave some stimulation to the sale of accident insurance. While on a trip to England, Batterson was impressed with the brisk sales of travel insurance to persons traveling by rail. His endeavor to duplicate the practice in the United States was so successful that the company expanded into all forms of insurance, including property/casualty, life and annuities. Today it is one of America’s largest multiple-line companies.

A milestone was reached in 1890 when Royal Maccabees Life, at that time a fraternal life insurance society, offered a true disability policy. This carrier is believed to be the first in North America to issue disability insurance.

Public Awareness

In 1907, the first non-cancellable, 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 prompted many Americans to abandon hunting and gathering and begin working for a paycheck. With earned income, one could buy a house instead of building a shelter; one could buy comfortable clothing instead of wearing an animal’s hide; one could buy food that tasted good and was nourishing instead of eating only to survive.

With dependence on a paycheck, people became captives of their work. Employers often forced employees to work in hazardous and unhealthy conditions. Injuries on the job and industrial disease caused serious problems for many. In 1908 the federal government enacted the Workers’ Compensation Law, intended to bring relief to the vast numbers of people who were devastated by the financial effects of disablement.

Up to this point, disability insurance was considered a form of casualty insurance. Disability and medical plans were considered casualty coverage by some and life coverage by others.

A few insurance company executives saw a profitable future in underwriting disability insurance. They were concerned, however, about the government’s encroachment into the field with the proliferation of Workers’ Compensation and industrial disease laws. In 1917 several companies organized the Insurance Economics Society, an organization intended to monitor legislation and expanding government involvement in disability insurance and to lobby against such legislation.

The society was not activated for the next 13 years because of the economic conditions brought about by World War I, the Roaring 20s and the Great Depression, all of which consumed the attention of legislators. No new disability insurance legislation was deemed serious enough during those years to merit activating the society.

The case for disability insurance got a substantial intellectual life when Solomon Huebner published the book, Life Insurance, in 1915. Here Huebner explained his concept of Human Life Value, which he defined as the capitalized value of a lifetime of earnings—a person’s greatest asset and one that should be insured against loss.

Two Deaths

Huebner 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 consequences. Of the two, living death is worse financially because not only is the income lost, but the victim lives on to consume the family’s resources. Huebner specifically referred to hospital and medical expenses, in addition to lost wages. He wrote and spoke of this predicament at least 14 years before the first hospital/medical insurance plan was created in America.

In the same book, Huebner expressed the view that “disability insurance clearly falls within the life group of coverages.” This was the signal for life insurance companies to wholeheartedly embrace disability insurance and lift it from the domain of the casualty companies. Unfortunately, this did not occur. Currently, less than 10 percent of our life insurance companies offer disability 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 field in the 1920s 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 on themselves to collect benefits. Improper and careless underwriting during the boom years of the 1920s compounded insurers’ devastating results. Discouraged, the life companies left the disability field and did not reenter it until the 1950s.

The life companies’ lack of interest in disability insurance left a large niche for specialty companies to enter the field. Casualty companies sustained a high interest in writing Worker’s Compensation coverage, and some had rather aggressive departments that offered forms of individual disability coverages. The well-known New England-based disability companies stressed noncancellable coverages, while some of the specialty companies introduced commercial or cancellable coverage.

An area of common interest developed during the 1930s, 40s and 50s around the form of insurance then called accident and health, health and accident, accident and sickness, or sickness and accident insurance. The nomenclature was controversial. Some held that “A” comes before “H” or “S.” Others held that sickness offers to a condition of health, not accidental injuries, and that since sickness caused more claims than accidents, the term sickness should come first. At this point the terms referred to disability insurance, not medical insurance.

Protecting Agents

By 1930 the Accident and Health Conference was formed by insurers in Chicago to protect and enhance their interest in the accident and health 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.

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. Gordon realized that not only must companies be organized to protect and enhance their common good, but insurance agents must likewise be organized. He found little interest among casualty and life agent associations to counter the expansion of government into the accident and health field, so he guided the formation of the Chicago Association of Accident and Health Underwriters. He assisted in creating other associations, and in 1930 organized what is now the National Association of Health Underwriters (NAHU).

Great Triumphs

The A&H conference and the A&H bureau ultimately merged to become the Health Insurance Association of America (HIAA). With the Insurance Economics Society, which was established in 1930, HIAA and NAHU worked to offset contrary legislation. 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 health insurance industry and destroyed the finest health care system in the world.

The first cash-sickness law was passed in 1942. In the years following, 20 to 30 states proposed similar laws to provide payments for sickness disabilities that would approximate the benefits provided by Workers’ 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 Economics Society pointing out such legislative efforts and with 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 50 years of efforts of these organizations.

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 19 years after Blue Cross was invented by the faculty at Baylor University. In the same year, 1929, the first major health maintenance organization, Ross Loos in Los Angeles, was established.

Physicians and hospital administrators recognized the great value of having people insured for hospital, surgical and medical costs. They encouraged their patients to buy it, and the pressure of the endorsement spurred the sale of hospital/medical insurance. Commercial carriers soon developed plans to compete with Blue Cross organizations. Consumers, stunned by the high costs of medical care, encouraged others to buy health insurance. Labor unions used the popular fringe benefits as a bargaining chip in negotiations with management. Today, the purchase of medical insurance is deemed a necessity by most people.

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 education and training. A cycle was created that provided funds for research and development, new medicines, 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 biggest insurance segment, serving 85 percent of the American people.

Ironically, as good as our industry is, we have gotten priorities out of order. LIMRA, the Life Insurance Marketing and Research Association, tells us that only 27 percent of American income earners now have any form of disability insurance, but 85 percent have some form of medical care insurance.

Our health insurance business started as disability insurance, and it stands to reason that disability insurance should be our primary insurance need, for it provides funds for the necessities of life. Medical insurance provides 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 our children.

Despite this peculiarity, we have much to be proud of and much yet to accomplish as an industry. We need to correct our nomenclature. We need to get our life insurance companies wholeheartedly in the disability business, and we need to adopt a cooperative spirit among health care providers and the public.

The New Market: Want vs. Need

Insurance producers may not have movie stars or star athletes as clients or even prospects, but among his or her clientele and prospects, there will likely be many nicely compensated people. These clients and prospects who are categorized as wealthy, or rich, are typically thought to not need disability insurance.

Such thoughts are crystallized by years of exposure to the concept of need created by insurers that base their issue and participation limits on an attitude of “bread and water and a tent in the park.” These insurers have fear and concern over large disability plans and, additionally, are limited by lack of reinsurance.

There are disability insurance facilities that can satisfy those who want more disability insurance than has been available from the conventional markets.

As an example of need…?

We would assume that Tony Hawk is a want type person. He is an idol of young people, but a name unknown to most older adults.

Tony Hawk could have been the kid next door to any home, in any town in America. Most people did not know him or know about him.

Hawk started skateboarding at age eight. He is now 43. In between those years, he invented 80 air-bending tricks and won 73 first place titles in skateboarding competitions. He earns more than $9 million per year defying gravity on a toy that was once the domain of 12-year-old boys.

His brands generate $300 million per year in retail sales: clothing, skateboards, arena tours and, above all, video games. Yes, there’s more to gaming than the smash bros brawl iso that starts tournaments around the block. In fact, the video game world is in its early stages of development, the game makers need to get a feel for their surroundings in the industry to know what is required of the players. And these video games can branch off into many other options to explore, such as mod lists and cheats, something every gamer needs to survive! Take a look at this trainer by FLiNG for an example. Anyway, accepting these facts about gaming, we turn back to his merchandise – skateboards are always an important one to think about. Before, it might have been overlooked as something youths do on a weekend to socialize, now it is a renowned and self-made sport, no longer undermined. This might be reflected in the fact that eleven million kids use skateboards in the United States, more than the number of kids participating in organized baseball. He has propelled a modest toy business into an industry that does $5.7 billion per year in sales, and this is part of the reason the very same industry tries to build and develop the best electric skateboards of the present times, to keep innovating a product that can’t be changed all that much.

ESPN aired the first X Games, a faux Olympics for “alternative” sports. This helped launch his business empire and a very rich deal with the firm Activision for his video games.

This is America. New, dynamic ideas come from guys next door. Probably no self-respecting professional insurance producer would even consider submitting an application to an insurance company to insure the often injured, crazy kid who lived next door. For this reason a special risk facility is an important resource for 21st century producers. This is the 21st century, and special risks are increasingly common.

A few fine companies remain active in the disability insurance field and offer excellent coverage, but they restrict it to certain income earners and in limited amounts. Clients and prospects should be encouraged to buy all such coverage that they can acquire.

Adequate amounts of disability reinsurance have been difficult for those traditional disability companies to obtain. This has forced these companies to ration the amount of coverage they can offer, and this leaves many insureds with inadequate amounts of disability insurance.

Restraints on disability reinsurance also limit the ability of carriers to offer insurance to unusual occupations and to persons who are out of the ordinary physical risk, such as competitive skateboarders.

The want market requires the capacity and the willingness of underwriting to bring adequate solutions to their desires to have a disability plan commensurate with other risks in the need market.

Take the Disability Case of…

A medical management firm has more than 300 emergency physicians under contract. Since the doctors are 1099 contractors and not W-2 employees, the traditional group disability carriers could not offer a plan. With a 90-day enrollment period, the voluntary program was offered. A 30 percent take-up was achieved, allowing for a guaranteed issue multi-life plan with an annual premium stream of $67,000 and commission to the producer of $10,050.

This type of case can be arranged on a mandatory or voluntary basis, with guaranteed issue. It can be on a group or multi-life basis. It can be a list bill or direct bill.

Take the Death, Disability and

Disgrace Case of…

A very large insurance company was preparing a new multi-million dollar television advertising campaign. The campaign involved a new spokesperson who was to convey trust and confidence for this insurance institution. The concerns were: 1) what if the spokesperson were to die during the campaign; 2) what if the spokesperson were to become disabled during the campaign; or 3) what if the spokesperson were to fall out of grace as a result of an unlawful or immoral character act?

An insurance policy was built to cover death, disability and disgrace, which would allow the insurance company to recoup their costs of the advertising campaign.

?Benefit: $20 million

?Annual premium: $250,000

?Commission to producer: $37,500

Take the Group Disability Case of…

A law firm with 160 senior partners. The lowest income of these partners was $1,500,000. The group disability plan was a strong one with a maximum monthly benefit of $35,000. This provided only 28 percent of the lowest paid partner. Not nearly enough. Management decided to secure a minimum of 65 percent of income replaced to a maximum of $100,000 per month. On a mandatory plan an additional $65,000 per month in benefits was obtained.

Annual premium: $736,000

Commission to producer: $110,400

The want market is waiting to be enterprised. Moving into this new market is going to be challenging and rewarding for those who accept the challenge and who apply the creativity to make it work.

  To start the year 2015, we encourage producers to consider the untypical and highly profitable markets such as the gigantic “Want Markets.” A want market consists of people who have a desire to purchase our products, not because of a need, but because of a want. Are there many such people? Yes! There are many. We will discuss specific markets from time to time.

 Petersen International Underwriters has been largely built on creating products and underwriting to fit the desires of people who may not have an actual need for a product but have a strong desire to fortify their well-being with insurance to back up their cash flow. The market is huge, for it encompasses everyone who is capable of living outside the “Need Market.”

 Want market people are those who have wealth and cash flow. If these folks don’t have a pressing need for such insurance, why would they buy it, even if it was offered to them?

 But what about a superstar on the Forbes celebrity list? People would assume that an actor, for example, with a multi-million dollar yearly income is so wealthy that his financial concerns, including insurance, are non-existent. Would this actor and his managers be interested in acquiring disability insurance if it was available in an amount that would be significant to his well-being? Yes! Does he really need it? Probably not. Would be buy it? If properly presented, yes!

 At age 50, let’s say, his mortality expectation is 30 more years. Has he assembled a fortune from past years’ earnings that is sufficient to provide a lifetime income capable of sustaining his current lifestyle? If so, why does he keep on working? Ego is only a partial answer.

Yearly earnings:              $43,200,000

Probably tax liabilities:       22,464,000

                                         $21,836,000

A pending rough divorce    11,232,000

                                        $10,604,000

 These are gross figures. Reports of celebrity earnings may be interesting reading and flights of fancy for the reader, but yet to be paid are: talent agency 10 to 15 percent off the top, business managers, bodyguards, a full staff of house managers, cooks, chauffeurs, gardeners, nannies, nurses, trainers, managers at three homes, a private airplane and a battery of automobiles.

 Maybe he will not save any money this year. Suppose he suffers a permanent total disability, never to work again. This could be very serious. At this young age he must live off of his interest earnings and not use up his capital.

 One million dollars at today’s yield of 4 percent is $40,000 per year. This is a sobering thought and a modest amount, considering his monthly need is somewhere between $2 million and $3 million.

 But on the other hand, it is a good bet this actor insures his homes, cars, jewelry, art and other replaceable possessions. Why does he do that if he can afford to go without insurance? Because the modest premium compared to the substantial potential return is a wise business decision!

 Then doesn’t it follow logic that if he were to lose his irreplaceable ability to earn income and stand to lose tens of millions per year (taxable), would not $3 million, $7 million or $10 million tax-free be a good and wise business decision?

 Some actors stay popular forever. Others become outdated and find their days are numbered, much like athletes who have only a few years to make enough to last a lifetime. We have learned some new words and have adopted new philosophies in insuring highly-paid people against loss of future income versus the concept of replacement income.

 The superstar needs $1 million or more per month and, interestingly, such benefit amounts can be programmed.

 There are other “want” lists to attend to, such as physicians, attorneys, CPAs and fund managers. Look at business journals for other “want” candidates. If you do not find solutions to fulfill your prospects’ “wants,” go to an underwriting source that is willing to provide coverage for the “wants” of your prospects.

 These are real desires of real people, and solutions to these desires will make you a special delivery purveyor worthy of their confidence and referrals.

My wife, Jacquie, and I were invited to join Tom Petersen, vice president of Petersen International Underwriters, on an evening cruise around the harbor in San Diego. We invited some of the board members of the Young Advisors Team (YAT) of NAIFA to join us.

The cruise got off to a happy start. Jacquie was happy to be in conversation with the young YATs who were aboard. The night was beautiful. The cruise ended and we tied up. During the exchange of good night pleasantries on the yacht, Jacquie missed a step and fell. She ended up face down with her head jammed under the far tail seats on the yacht.

Tom Petersen, who has had professional first-aid training, quickly came to Jacquie’s aid. He recognized that she was badly injured. He expertly slid her back from the precarious position she was in and commanded a call to the paramedics. Shortly thereafter, four paramedics arrived by ambulance. They expertly shifted Jacquie to a stretcher and onto the waiting ambulance. We arrived at Scripps Mercy Hospital twenty minutes later. This excellent hospital, ranked in the top 100 in the United States, immediately moved into action, giving Jacquie comfort and reassurance that she would be all right. The next morning we were absorbed with getting Jacquie tended to.

Why should this be of interest to our readers? Because it happened to careful, unsuspecting people, quickly and most severely. The anxiety and helplessness only added to our combined misery. The costs we knew were going to be unbelievably high, but fortunately we had little concern about that aspect of this accident. The toll on Jacquie and her robust attitude in life was difficult enough to observe and suffer. The challenge on the family and friends was a terrific concern.

On the first day following the accident, surgery was performed on her broken hip and the attending orthopedic surgeons wrestled with what to do about her smashed shoulder. Two days passed before they concluded that a complete rebuild of the shoulder was necessary. More surgery, more waiting and more anxiety added to the frustration.

Fortunately, Susan and Mark Petersen were able to spend the entire week helping me cope with the problem at hand. Their counsel and company helped us to endure.

At the end of the week, it was decided by the hospital and the attending surgeons that Jacquie could be taken by auto to a facility near our home. The hospital in San Diego was more than 100 miles from where Jacquie and I live. We selected the Henry Mayo Newhall Memorial Hospital in Santa Clarita, which is only 12 minutes away from where we live. The very distinguished and impressive Scripps Hospital was delighted because they appraised the Henry Mayo Hospital as an outstanding rehabilitation hospital. We made the change and it worked out to be a very good experience.

Now after five weeks in hospitals, we were able to bring Jacquie home. She is recuperating nicely. She faces another three to six months of careful living before she can be considered healed.

Our business, accident and health insurance, has exposed us to many injuries and recoveries, but they are words used to describe other people’s problems, not our own. When you live through the anguish, the worry and the hardships inflicted by a personal happening, it reiterates the concern and care you develop for others. Because of this great business we are in, this has given us the insight to proper insurance selection and the proceeds to afford the best care available. Not everyone would be as fortunate as we were to be aided by outstanding hospitals and professionals to provide the right care. Not everyone would be able to afford the best doctors, hospitals and consultations.

Aside from the inconvenience and suffering, we came out of the accident in good shape. Jacquie will return to a normal life and be thankful for a responsive family and outstanding medical care.

We have always felt our business had several dimensions. One was to create and market top quality health care products, and the other was to provide the sincere care and advice we would give to our own family. This attitude has prevailed for three generations, and this pleases us.

Thank you, readers, for your concern and good wishes for Jacquie. We feel we have done our best and she will return to being a loving and caring human and a vital part of the spirit of Petersen International Underwriters.

Season’s greetings to all from PIU.

It was learned in second grade. The significant necessary elements of life are food, clothing and shelter. It was premature at that stage of life to put any qualifications on these elements, such as their affordability, but sooner or later the cost of these items must be woven into the tapestry of life.

Point one is that food, shelter and clothing cost money. Who will provide the money for these elements? The first few years of life, parents or guardians provide the money. In the maturing of mind and body, we are expected to provide our own money to support ourselves. When that plateau of life arrives, the follow-up question is, “How do we create our own money?” The answer is obvious and universal: “We earn it.”

Earning money is essential to the process of modern life. We clamor to learn how to earn money through education that qualifies us to perform duties for which others are willing to pay: doctors, lawyers, accountants, sales, administrative help, laborers, artistic efforts, construction, painting and an endless list of things to do that will be bought by others or will be offered by the individual on a contracted basis.

It matters not what occupational road one chooses. The individual is at the mercy of life’s demands. The cycle begins at maturity and picks up other obligations along the way, such as education of children and providing for them. Medical care, transportation and preparing for one’s own retirement become folded into the necessary costs of living life to its fullest.

Along the way, we meet people who have ideas to help our cause. Financial planners offer ideas for better use of money earned; retirement schemes are unfolded before you and if not convinced by advanced age to save, save, save, plans to make up for lost time are suggested, packaged irresistibly and offered along with continuing services from the provider.

All these concerns manifest themselves in life’s adventure, but the common denominator is always money. When we are well, healthy and at productive work, life is beautiful. When our health breaks down, we have serious problems. A sudden accident or prolonged illness is the greatest hazard to life’s fulfillment.

Statistically, one is at far greater risk to experience a breakdown in ability to earn money due to accident or sickness than any other hazard we face in life.

Statistically we face the hazard of our home being destroyed by fire, one chance in 1,200; or an automobile accident, one chance in 250; or death, one chance in 150; and disability, one chance in 30. Yet we reach out to buy fire insurance, auto insurance and even life insurance to protect our family. Why is this?

The unintentional consequence of listening to people defame the noble value of disability insurance on the theory that it is too expensive may result in a tragic decision, for nothing could be further from the facts. Let’s compare.

If one insures a house, its replacement cost of $800,000 seems adequate. The insured feels that if the one chance in 1,200 should occur, you and the house would trigger an $800,000 benefit. Not so! The lot on which the house stands has a value, so the replacement cost is minus the lot value.

The auto is stolen. The car, bought a few months ago, cost $84,000. But of course it is subject to the devaluation of the auto due to time and mileage. So the settlement may be considerably less than the insured amount.

Life insurance is sold on a lump sum basis. If you buy a $1 million policy, it may well pay that amount, but although the actual benefit amount could be soothing, it would be inadequate. A DI policy will pay a monthly benefit over two and one-half years (on average). As an example, a disability lasting to age 65 would amount to $730,000, but what if it lasts beyond age 65? Then the disability plan becomes a $1.2 million plan or more. We must not be confused as to the benefit amount for the disability plan replacing lost earnings in total and not on a lump sum basis.

Those who have studied this phenomenon believe the cause is unwillingness for people to believe they could actually be unable to perform the duties of their occupation or that they could be disabled forever. For the well-being of people, the purveyors of disability insurance must persistently propose the fact of life which is the greatest hazard to living life to its best.

The human body is like a machine. It requires fuel to function. Food is the fuel to provide body repair, energy to be productive and to be reproductive. We have created ways to offset the loss of life monetarily by having life insurance in place to provide for one’s dependents’ ongoing costs of living; the cost of repairing or replacing a damaged or stolen automobile; the cost of repairing or reproducing a home due to tornado or fire. These factors provide a feeling of security and financial well-being, but the loss of ability to be productive is a final and irreplaceable loss. When earning power is lost, all is lost.

Disability income replacement insurance is the most important of all insurances.

Experience teaches us that when people become disabled, money concerns are heightened because fewer than 20 percent of us have an adequate disability financial plan that will pay enough cash benefits to be a true substitute for a paycheck and offset or absorb other needs such as business expenses, loan repayment and funding obligations in business matters. Savings for most people will not be enough to provide an adequate cash flow for a long enough period of time. Simple math illustrates that with a spending need of $10,000 per month and a disability that lasts for two years, $240,000 will be consumed just for personal cash flow. This would put a big dent in anyone’s personal savings. Additionally, there are the other concerns that:

 • The disability may last longer than 24 months. What if it did last for 10 years ($1,200,000), 15 years ($1,800,000), or longer?

 • You could be disabled again shortly following the first disability. There may not be a sufficient period of time to replenish intended accumulations.

Do “living death” situations really last 10, 15, 20 years or longer? Yes. Take the case of a close friend, Ian Clark, the father of our associate Robert Clark. He was a computer executive who became stricken with head and brain cancer 24 years ago. He forestalled “dead death,” but was disabled and unable to work all that time. He lived on. He was a nice person who was helpless financially to deliver the security and comfort for his family that he intended to provide.

Some readers of the Wealth Management magazine, published by the American College, knew Robert S. Sluyter, CLU, RHU. He was a primary mover of the American College Registered Health Underwriter designation (RHU). Bob was hit by an automobile while jogging. This financial planner barely lived. He lasted 12 years as an invalid. He was a World War II Marine hero and a champion tennis player. He had planned a sophisticated and pleasurable retirement for himself and his family.

Dead death people we bury or burn. Their pictures and memories remain with us. Living death people are just as dead, financially, but of course we do not bury them. Society shuns them. It is disconcerting to talk to people who are wheelchair or bed bound. Even though they live on, mired in despair and worry for the sub-par life forced on them, we find the encounter unpleasant, and the cadre of friends dwindles. In the desperate effort to live and sustain life as best they can, the incomplete wealth accumulations and retirement funds have had to be fed into the yawning financial pit of living.

In the beginning of the adventure to save and accumulate, it is easy to gloss over the perils that a person faces on this adventure. Toward the realization of the goals in a plan to create wealth and to fund a lifestyle free of labor and worry, the formulas are established on assumptions that are easy to understand, but it is difficult to believe that cash flow can suddenly be reduced or cease altogether. What alternatives does the person have should a reduction in cash flow interfere with the plan?

Americans have been scolded about their inadequate and paltry savings habits. Our savings customs have changed! The beginning hard line thrift and savings in early America was referred to as “Yankee thrift,” in which a person would never ever spend his capital. Never!

As our society moved through the agrarian period into the Industrial Revolution, we recognize two factors that changed our savings attitude—a regular cash flow paycheck, and temptations to spend on newly created products and services that became available. Sophistication developed by access to higher education and the study of consumer psychology made us easy prey for Madison Avenue advertising.

Our next challenge was easy credit and government programs of tax advantages in saving and retirement plans. This was enhanced by our easy acceptance of the belief that “it can happen for me.” Our trusted insurance industry placed emphasis on non-risk programs which were sought by the insurers and rejection or de-emphasis of the potential destruction to an individual’s hopes and dreams.

The daily news gives the warnings that go unheeded by people, for unless and until it happens to them they dismiss the possibility that they could be the victim of a hit and run driver, a terrible cancer or a long term heart condition. These are some of the income interrupters over which people have no control. Business failures are responsible for many deficiencies in “assumed income and assumed wealth.” Enron, MCI/WorldCom and Bernie Madoff’s Ponzi scheme are bitter reminders that businesses do fail; and therefore intended accumulations do not get realized.

Business failures, mergers and acquisitions are example of man-made events. People can do something about these. They adjust their lifestyle, they find new jobs or start businesses, and, temporarily disappointed, they grit their teeth and move on in life. As advisors it is our duty to realize that our clients can perhaps overcome the disappointments created by the acts of man. We must also remember that the acts of providence—dead death and living death—are acts over which we have absolutely no control. We can die during our career days and not be able to produce or to receive an income flow that will generate the accumulations we set as our goals.

There is a simple solution to the dead death problem, which is to equip the client with a life insurance benefit that can guarantee the delivery of the accumulations he had in mind. But life insurance costs money, and if income is reduced or cut off due to the providential act of a living death, the plan may have to be reduced or stopped. What about waiver of premium? Absolutely. This fixes it so the client can enjoy keeping the life insurance in force to provide the cash to fund the accumulation target for his heirs.

But time out! Who will furnish the cash flow to continue building the accumulation fund and/or the retirement account in the event of living death? If the cash flow failure is due to the client becoming disabled due to an accident or a sickness, the waiver of premium on the life insurance is of small value because the client did not die and the premium on the life insurance is all that is waived. In the financial plan there must also be waiver of rent, food, clothes and all the living costs and obligations—the ongoing costs involved with the living of life. The need for adequate amounts of disability income replacement designed to perform its various tasks is a paramount planning challenge. A dead death estate or financial plan without a supportive living death estate or financial plan is a snare and a delusion. New plans of disability insurance are now available to make, for the first time in history, such planning possible.