W. Harold Petersen, RHU, DFP

Membership Limited To People Who Earn Money 

Or Have AccumulatedMore Than One Million Dollars

There are many values and advantages in life to being a member of the Millionaires Club. The term “millionaire” came into use a century ago, according to Rich Karlgard, writer for Fortune magazine. It was used to refer to people who achieved a mass of wealth that exceeded one million dollars. A million dollars then would equate to about $20 million today, according to Fortune. If one does not make the $20 million grade and only makes it to $10 million (which is not uncommon), it makes a person a member of minor royalty in most towns in the United States.

Income earners (at most levels) are millionaires in the making. Earners own their future, so the future earned income is a substantial asset. Let’s compare. A person buys a house. This house is listed on his financial statement as an asset worth the price paid. The house carries a mortgage, but the equity value is listed on the net worth statement and is respectfully admitted to the person’s wealth estimate.

The House

 • Purchase price ~ $500,000

 • Down payment ~ $80,000

 • Balance ~ $420,000

 • 30 year mortgage

 • 6 percent interest

 • Monthly payment of $2,969.32 x 360 payments (ultimate cost) = $1,068,955.20. Plus the down payment of $80,000 makes the cost of the property $1,148,995.20.

Why does the person consider this house as a valuable asset? It costs more and more due to mortgage costs, taxes, property insurance, upkeep and repair. Does the person feel this is a good asset? The chances are he does and proudly lists it on the net worth statement. The value of the asset assumes the inflation factor will outperform depreciation, upkeep, taxes and repairs. It is a customary measure of wealth.

But what is the rationale for not insuring future earned income that has the potential of yielding much, much more? Earned income of $150,000 per year times 30 years (comparing it to the mortgage run) equals $4,500,000.

If one feels compelled to insure a $500,000 house, why does this person refrain from insuring a $4,500,000 asset? The chance of a home being destroyed by fire is substantially less than getting sick or hurt and unable to work—about one in 1,200 vs. one in 30!

Purveyors should portray the disability plan as a financial product that yields cash benefits to the insured that will provide a level of income that approximates the normal income flow enjoyed by the insured. Tax advantages notwithstanding, the amount of cash benefits needed by the insured is possible due to modern issue and underwriting limits. Such benefits (logically arranged) provide the solution of a continuing income cash flow when the insured becomes sick or hurt and unable to perform his job.

As purveyors of economic freedom, we should remember that we are duty bound to inform those people who are wise enough to listen. It is usually necessary to help lift their thinking about the dread they believe they will have over paying an additional premium for coverage they hope to never use (disability income). Life does not work in an absolute, programmed manner. It is filled with shock and surprise, which is why insurance becomes a desirable financial tool that can sustain an adequate level of income and a desirable peace of mind, along with the hoped for lifestyle; not just once, but multiple times during a working career.

Getting sick or hurt is the most probable bad thing that will happen to a person. A person should always remember that the body is a machine and is prone to break down and need repairs on occasion. Of all the hazards to our assets, disability is the one thing that can interfere with the performance and the value of those assets.

We can help the insured by making him understand that some things can be self-­insured. Other risks are believed to be covered by bank loans—a risk for the banker, not necessarily available on the day needed, and with no guarantee the loan will be made. A risk remains a risk unless it is covered by a guaranteed facility. The coupling of a bank loan guaranteed by an insurance product makes the continuation of adequate income something to truly depend on.

With the advent of new and enterprising approaches to the selection and underwriting of disability risks, a person need not be caught short by not having disability coverage for any and all situations. In the course of a working career, disability insurance can be called on to perform time after time. The cost of this peace of mind is of little consequence to “millionaires.”

Do Millionaires Need Disability Insurance?

The only difference between a millionaire and an aspiring millionaire, in terms of disability coverage, is that one needs insurance and the other wants insurance. An aspiring millionaire certainly has an absolute need for a well-designed disability financial plan, whereas the successful millionaire may not, but he absolutely wants to secure the wealth he has accumulated. 

Many articles are being published on the subject of planning for retirement and the funds that will be available for that purpose. The total of these amounts is then added up and spread over a period of time based on a guess as to how long such cash flow will be needed. This simplistic approach to a problem created by the living of life is to be applauded, for it at least focuses attention on a person’s cash flow problem that will exist, even though it is at best imprecise and should be of substantial concern.

The planners may use a timeframe such as two years, five years, 10 years or longer. The next frame is always “for life,” which is just a figure without reliability, for no one knows how long life will be. Most people would surely want to be sure of a lifetime cash flow. As we contemplate this matter, recent experience teaches us that some people will fade out of life at an unexpectedly young age and others will surprise the world by living long past normal mortality. Centenarians are now common in a culture that has long used age 80 for men and 84 for women as the mortality norm. In the year 2013, our family had the loss of a son-in-law at age 60 due to the unstoppable Lou Gehrig’s Disease. A productive attorney, a beloved father, husband and grandfather was taken away by an unpreventable disease. A few weeks later, an uncle (age 99) was anticipating his one century celebration when, within 19 days of his birthday, he died from a staph infection, contracted in a nursing home during rehabilitation for a broken elbow. Shock and disbelief spread throughout the family and our neighborhoods.

A bright spot occurred a few days later when a cousin who worked until age 90 at his law office celebrated unabashed and happily his 100th birthday.

To tackle the matter, we are well advised to look at this problem of life from the front end, not just the back, because we only know the beginning and not the ending. When we do a very specific and fundamental plan a thought becomes obvious: Will our money last long enough? Planning for a flow to provide an adequate stream of money to pay our living costs is the first concern of the retiree.

Tip: Start at the Front End of the Plan

A human being is like a machine. The only difference is the human body has a soul—other than that, it functions like a machine. Financially, the human body is of value when it works and produces. As a “thing,” the chemical contents of the human body is worth a mere $20, but a human body at work is capable of producing thousands, even millions of dollars. This simple observation gives rise to the belief that if people are to save some of the money they earn for retirement purposes, the “cash flow for life objective” establishes where and how we begin the retirement income plan.

The objective is simple to design. Pay yourself first, a stipulated amount every pay day. This is the “accumulation period of life.” The accumulated sum plus interest earned on the accumulations are the basics of the retirement fund. It is essential that no accumulation is missed, for the broken link will not hold together the endless chain, and that means a failed effort is tantamount to a failed plan.

We must realize that a child is born with a tremendous financial burden. During his life he faces the costs of food, shelter, clothing and medical expenses to survive. The first 20 years are normally absorbed by parents or guardians, but following that period the person faces all living costs plus the duty of accumulating funds for retirement. Between the first breath of life and the last breath of life the cost to live, retire and die may well exceed millions of dollars. Retirement cash flow is a requirement, but not the only cost that must be covered.

The idea of putting money aside on a regular basis is one of the tools with which a person can work, but what about the unpredictable factors a person must face, such as getting sick or hurt and being unable to work and produce income?

Asset                                Hazard                     Chances Are:

House                        Destruction by Fire             1 in 1,200

Auto                                  Accident                        1 in 250

Death                            Loss of Income                 1 in 150

Disability Long Term       Sick or Hurt                      1 in 30

This is a person’s most likely and probably hazard. Statistically, the chances of death are much less than the chances of becoming disabled due to sickness or accident. Of all the threats that confront peoples’ assets, becoming disabled should be—by far—the number one concern.

A valid point is that a retirement plan cannot be used as a comfort unless it is fitted with an adequate disability income insurance plan to ensure the completion of the intended deposits to an accumulation plan.

If the accumulations are dutifully made,  the completion of the retirement plan will be at its secure best. But in recognition of the problems of life, we must implement an adequate disability plan to carry the required plan to completion. This is possible because new, high limit disability plans make a disability financial plan that can dovetail with other assets to anchor a truly adequate and dependable disability retirement plan. 

The Custom Approach to Disability Financial Planning

(No More Missed Opportunities with New Products)

Part I

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.

Get out of that bed of pain a person must, for the world is passing him by. Therefore he will spend everything he has saved or accumulated to accomplish this overwhelming task. 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 insurance have, for various reasons, not provided solutions for living death planning like those available for dead death. But there is a solution. It comes from the creation of a package of disability plans that can be arranged to provide a true disability financial plan, providing adequate amounts of coverage for not only personal needs but also for all one’s contingencies, including business needs.

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, making living death quite expensive and often leading a family into some sort of debt. Of course, for a quick cash injection to cover small costs, the family can use an emergency loans provider, Happy Loan for example, but this isn’t a feasible long-term solution. It would be ideal if more insurance companies offered 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, who resist the possibility of it affecting them.

A business owner’s concerns can very well be vastly multiplied:

 • 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.

Senior Ages

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. Working to age 70 and beyond is becoming more commonplace.

Designers of insurance plans had little trouble in finding or inventing forms of life insurance to handle dead death concerns. Disability insurance falls far behind in this respect because the underwriter is victimized by fear, prejudice and a seeming lack of concern by 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, there are now reliable solutions to the many glaring needs left unattended by producers due to lack of product or unwilling underwriting. 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 qualifications are frequently more stringent than those required for admitted carriers.

Earning Power

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

(See table)

Is the client there yet? Many people are not, because most Americans save less than .05 percent of their earned income.

The “New World” of disability financial planning has only come to fruition because of an underwriting attitudinal change. Disability insurance has been miserly doled out according to the underwriter’s declaration of the applicant’s need. The prevailing attitude has been a concept of survival, not of sustaining a lifestyle. “Bread and water and a tent in the park” was and is the design of issue limits in the mind of the underwriter.

Artificial roadblocks were inserted into the issue formulas consistent with the century-old concept of “need” as opposed to “want.” Whereas Dr. Huebner’s declaration was that the only difference between the living death and the dead death is six feet of sod, that concept was acceptable in 1915 because the only disability insurance at that time was offered as a limited benefit rider on a life policy. In those days we were barely beyond considering life insurance for a burial fund. Since then we have developed a more sophisticated attitude as to the uses and needs for life insurance, but disability insurance has remained locked in the doldrums. Any thoughts about liberalizing disability insurance were met with a lack of understanding and disdain on the part of insurers.

It is now more than 95 years since Huebner declared his concept of living death. We are in large part still mired in the mediocrity of thought and the hypocrisy of insurers that claim to be the friend and protector of consumers while seeking only the collection of premiums without venturing far (if at all) into the field of risk. Attempts to lift the issue limits, broaden the uses and set out to insure people on a want basis instead of an artificial needs basis consistently met with failure.

Persistence has its rewards. The logjam has been broken by the astute design and use of disability plans underwritten by carriers in the excess-surplus lines market. This aged and dependable market now provides solutions to high-limit disability wants to supplement the traditional market’s issue limits, so people who earn a million dollars a year or more can be insured on the same ratio of income to benefits as more modestly compensated people. Further, this market allows the many people who are denied disability insurance because of their occupation to now be insured adequately and with the same benefit to risk ratio as all other occupations.

The days of one disability policy to serve the needs of all people have come to an end. We have entered the era of disability financial planning. This long-sought capability has become a reality because of new underwriting attitudes, new product designs and new, flexible and substantial issue amounts.

The neglect of the disability insurance needs of people has been due to the unrealistic and punitive underwriting attitudes of the disability insurers in the past. Product design passed from one generation to the next with the same tired prejudices and antiquated beliefs plaguing the industry. As a result, little modernization of products and practices has been brought forward to enable one to do an adequate and professional job of disability insurance planning—until now.

New Era Underwriting: Simple, Fast and Easy

Multi-life underwriting includes fast, simple and easy underwriting for those folks who are a part of a multi-life group. Features such as guaranteed issue or guaranteed to issue are now available. Members of a cluster of persons being insured simultaneously all benefit from “happy underwriting.” Numbers from five or more or a percentage of all the eligible employees in a group are insured with only a minimum of underwriting. Faster, easier, simpler without the concerns of rejection or modification—that’s the value of these new collective underwriting programs.

Discounted premiums add to the allure of the cases being applied for on a multi-life basis. These advantages leave only the risk of being underinsured or being engaged in what may be an unacceptable occupation to certain insurers. That problem is frequently handled by another insurer that offers a supplemental plan that is recognized as being acceptable to the insurers who offered the base amount of coverage. This supplementation enables high income earners to build a true disability financial plan covering up to 65 percent or more of a person’s earned income, whether it be from salary, commissions, bonuses or any combination of those sources of income. The Council for Disability Awareness (CDA) studies reveal that a person is only adequately insured if the total benefits of his/her plans amount to 65 percent of normal earned income cash flow.

High limit supplemental disability plans have been reservedly offered for more than 30 years. This means they are tested, they are sound, and they are accepted as a necessary adjunct to underwriters of many disability plans wherein that insurer’s issue limits are inadequate to fill the needs of the consumer. Such plans do not discourage other insurers, whether it be an individual or a group plan, because the supplement completes the 65 percent objective of providing an adequate income amount.

Questions of financial concern are viewed more favorably than in the past as underwriters have settled into the world of disability financial planning and recognize business use of disability insurance underwriting.

Recent cases totaling $100,000,000 on each involved insured for buy/sell funding have been placed. Such demands for great sums of benefit protection help purveyors realize the enormity of risk presented to the underwriters. It helps to understand that the underwriters shoulder great responsibility to the insurer to be careful and accurate as to justification of amounts applied for and the soundness of the physical condition of the applicants.

Understanding the size of the risks to be assumed helps with the patience factor, but companies have in general recognized delay is no longer an acceptable stance, and most companies are now practicing expedient decisions.

Without writing an encyclopedia on the 12,000 known diseases listed in the new Merck Manual, here are some guidelines to help bring about a quick and easy—and therefore profitable—end to each case a purveyor pursues.

First, purveyors are wise to write a supplemental letter to be submitted with the application to help the underwriter move quickly on his decision to accept, reject or offer modified coverage. Here are examples of what should be in the supplemental letter in order to get quick and usually favorable results.

The Art and Science of Disability Insurance Underwriting

Underwriting need not be a barrier to profitable DI sales. Underwriters still need to have a good feeling and a good description regarding the risk they are considering. A 40-year-old person becomes disabled to age 65. At the rate of $20,000 per month for 25 years, that means a potential risk of $6,000,000.

The underwriter must know the applicant’s occupation. The underwriter’s guides will place the applicant in a category. If he is a doctor, lawyer, tuna boat captain, executive, salesperson or veterinarian, he will be put into the category agreed to by the chief underwriter and the reinsurer. But there may be variations in each category.

If he is a veterinarian the underwriter must determine and classify him as to his practice: Is it small animals only or large and dangerous animals? If he captains a tuna boat, is he an owner of the boat or is he an employee of a firm which owns the boat? Tell the underwriters about the firm. Is this a seasoned firm or the new venture of a person who has heard that tuna fishing can be very profitable? These are examples of risks that may defy the simple categories for veterinarians or tuna boat captains. Find out, and send a supplemental information letter with the application. How much experience has this person had? Who was his former employer? Did the veterinarian’s elephant client become ill and die; did the boat captain’s previous boat sink unattended, or was it involved in a maritime accident?

Character of the applicant is very important in underwriting. Take the case of the doctor. Does he perform surgery? What kind? Has his license ever been suspended? Why?

These kinds of questions will evolve from the case. The producer is in a much stronger position in anticipating questions like these and putting the answers forward rather than waiting for the underwriter to dig them out.

So, too, come trailing questions on the applicant’s health history: duration of an illness or injury, age at onset, age at complete recovery, occurrence of any similar symptoms since the recovery. Other information requested may include doctors’ statements, health care facilities used, and dates.

Before fatigue and discouragement set in, think of this communication as if you are writing a letter to a friendly underwriter whose interest is in making this application into a good case. This is your team. Together you will complete this case and deliver a joyous product: an income and guaranteed cash flow should the client become disabled.

Financial underwriting is understandable. It may on occasion involve an accountant to put the matter into simple terms. This is particularly true of business cases, which can become complex as they involve law, co-mingling of passive and earned income, and legitimate deductions.

In the modern world of disability insurance we have to consider group and individual plans, employer contributions and disability financial planning.

In individual plans the underwriter will want to know what other forms of insurance are in force and what other passive income the applicant might have or is eligible for at some future date. Having this information, the underwriter can program around passive income such as military reserve pay and previously earned pensions. He can program around group insurance, whether paid for by the employer or not, and give credit to the coverage subject to taxes. The goal is to deliver at least 65 percent of normal income cash flow.

We now enjoy many business coverages to augment personal needs, which can go as high as $500,000 per month, overhead expense for any number of owners in a firm up to $100,000 per month or more, buy/sell funding up to $100 million, high limit plans, venture capital indemnity, key person, and kidnap ransom coverages. 

An event significant to everyone who engages in the business of insurance directly as a purveyor or indirectly as a consumer recently took place as the hallowed Lloyd’s of London marked its 325th year as a leader in the international insurance marketplace. Prior to the corporate formation of Lloyd’s, many persons and many of the schemes that were discussed, like viewing the LTL Shipping Cities to see how you could be assisted with the logistical side of the operation, were once utilized as a means of lowering the high risk involved in shipping goods out into the market for distribution and consumption.

A manufacturer, as an example, could lose his life’s work-the production of the items he had for sale. A textile manufacturer could lose his entire fortune if the fabric became damaged, shrunk or faded during its trip to the distribution destination. Foods spoiled for lack of refrigeration and animals for butchering were targets for hungry and greedy pirates. Other exposures were dreaded, for it meant loss of cargo and ship. Weather, war or insincere or larcenous people could pilfer, rob and destroy the ships and cargo.

Banking had no answers, and even a strong navy couldn’t be everywhere at once, so the schemes of sharing risk became primary to merchants and shippers. Slowly the idea of hedging the risk became popular. Underwriters would announce their idea of taking on portions of the risk in consideration of a premium to be charged. The underwriters weighed the premium to be charged against the safety record of the ship’s captain and owners, age, size and structure. The safer the risk, the lower the premium.

Such plans had problems finding enough people to make up a list of participants in time for the sailing. Next was the problem of collection and safekeeping of the funds and the distribution after a disaster.

The popular coffee houses were part of the answer. Many people frequented them. The consumers became aware of other ship captains and owners and the safety records were made known, for it was good for their shipping business.

Edward Lloyd catered to these people. He located his coffee house conveniently on the wharves, offered a cozy, friendly environment, and furnished ship and shipping information plus paper and pen as a convenience. Earning acquaintanceship with many and showing an understanding of what needed to be done made Lloyd’s the hands-down favorite as the headquarters for the new corporate organization to be known as Lloyd’s of London.

Another Milestone for a Grand Organization

Thursday, March 27, 2014, marked the celebration of the 325th anniversary of the Lloyd’s of London insurance market-founded in a 17th century London coffee house frequented by merchants and ship captains seeking to spread marine and cargo risks. It is incredible to think that such a respected and historical-yet modern-institution as Lloyd’s began more than 300 years ago.

The western world at that time squabbled over exploration, expansion and an increase in global influence. European nations were at each other’s throats, declaring war on a regular basis. King Louis XIV sat on the French throne, while William and Mary were crowned monarchs of Britain. Lines on maps were continuously being drawn and redrawn, making the safety of trade and shipping routes, regardless of whether they needed additional items like shipping warmers incorporated along the way, all the more important and precarious. These were the seedlings of what we now know as the modern insurance industry. The monetary distribution of risk of loss of life and property-Lloyd’s was at the beginning.

Throughout its tenure, the Lloyd’s market has been housed in various locations throughout downtown London, expanding with the industry. The market is currently headquartered in a revolutionary contemporary building completed in 1986 at One Lime Street. It was at this location that Queen Elizabeth II inaugurated the Richard Rogers-designed structure and has since returned to lead in the anniversary celebrations of the esteemed organization.

The queen and her husband, the Duke of Edinburgh, arrived at Lloyd’s by limousine to much fanfare. A regal red carpet covered the front steps and the streets were lined with locals and tourists lucky enough to catch a glimpse of the royal couple as they made their way through a guided tour of the building and its many historically significant objects. Inside the great underwriting room and atrium, thousands of Lloyd’s brokers and underwriters looked on as the queen and Lloyd’s Chairman John Nelson made rousing presentations to the members of the market. The pomp and circumstance was truly fitting an entity of such history and service.

Thank you to Joe Russo, editor of the weekly newsletter “The Communicator,” for allowing us to insert his excellent article on the queen’s visit to celebrate the 325th birthday of Lloyd’s. Russo is a history major (UCLA).

Broker World enthusiastically agreed to let us take a timeout from Disability Insurance Insights to bring to readers this delightful story. Next month, back to basics.?

The remarkable fact that people are living longer, working longer and are involved longer in business obligations such as buy-sell agreements presents some concerns for clients and opportunities for purveyors.

The client’s concern is that a number of disability buy-sell plans have provisions that reduce benefit amounts as the insured ages. This runs contrary to what is happening in life, in that people are likely to be obligated to business planning that, when created, viewed business life slowing at a relatively young age, and reducing benefits acted as a hedge against the cost of providing the promised benefits. This became double jeopardy because the business was likely increasing in value and, therefore, increasing the obligations of the participants in the agreement.

Many traditional disability buy-sell insurance policies begin to decrease in value as the insured reaches age 60, and for many plans the benefit amount decreases by 20 percent per year and ceases entirely at age 65. A solution to the disability buy-sell funding is replacement of a sick and dying plan with a perky, full-benefit plan. There are two ways to protect the consumer:

 1. The purveyors can now replace the plan for participants at or near age 60 with a new full-benefit plan that does not reduce benefits automatically at age 65 and is available to provide coverage beyond age 65. Such plans are now available from several sources.

 2. Or purveyors can use a new step-up plan that increases new benefits each year equivalent to the old, dying plan’s annual benefit reduction. The new plan joins the old and the coverages provide non-diminishing benefits as the old plan dies and the new plan carries on its duties by providing the level of benefits intended. The new buy-sell plan would join with the existing plan to provide an endless benefit journey to the end of the insured’s buy-sell needs.

Another factor that may give producers solace in replacement and enthusiasm to exploit this substantial business opportunity is recognition that the policies to be replaced are not truly non-can policies, but conditionally renewable policies. These policies terminate if the buy-sell agreement ceases or if the insured is no longer involved with the agreement.

The disability insurance buy-sell plan is a great marketing tool because it spotlights many sales opportunities tangential to disability and life insurance. In 1962, disability insurance was not considered necessary in business insurance. The Purdue University Life Insurance Marketing Insti­tute recognized that there were many business needs going unrecognized and unattended. Many large life producers, general agents, regulators and writers were invited to a weekend at the university to study and consider the business uses of disability insurance.

Early publicity aroused curiosity on the part of insurers, and slow, very cautious attempts to enterprise the new market became apparent. As a result of this historic meeting, an entirely new market opened, consisting of key person disability, loan payment disability, and buy-sell funding disability. New and fresh, the market was attractive to life producers who had concerned themselves with their clients’ problems and with life coverage. Now the aspect of disability became an awareness and an attention-gatherer.

Historically the market opened at a time when industry sources were pulling back. Carriers were concerned about the potential of many claims, and big claims were opting out of underwriting the disability risk altogether. From 545 companies offering disability insurance in 1975, the number tumbled to 26 companies by 2005. It may not have stopped then, except for the influence of the newly-formed International DI Society, which brought together insurers, regulators, purveyors and educators to address this concern as an industry.

The subject of business uses of disability insurance was used by writers and lecturers, which sustained a limited interest in the subject. Consequently there was little enthusiastic support and improvement in product and underwriting in the “new” market.

Of the 1,140 life insurers then in business, 545 offered some form of disability insurance to their clients. Very few of the carriers, however, ventured into the arena of business disability insurance, including buy-sell agreements, which seemed to be the most feared of all cases to the underwriters.

In general, the few carriers that offer buy-sell coverage still have inadequate issue limits to fully fund the terms of the agreement and/or maintain issue limits on impaired or upper age risks. Some insurers have become proponents of bigger and better plans for the business market, but the new market still suffers from a lack of sincere and aggressive solutions to meet client needs. The compensation for these cases is usually very profitable for the purveyor, but simple, quick and easy solutions are evasive  and discouraging. Some large and dramatic cases do receive notoriety, which spurs the movement on. This area of service is important for clients in meeting acute needs, and for producers it remains an exciting and very profitable market.

Insurance is an unappealing product: It has no moving parts. It has no chrome strips. You can’t eat it, ride in it or sit on it. You don’t even hang it on the wall to show your friends. It is just a piece of paper that gets tossed into a dark and dusty drawer, never to be thought of again until it is time for the next premium to be paid.

Except for disability income insurance. It moves. It follows you everywhere. It has attractive accessories called options. It is edible, ride-able and sit-able. As a matter of fact, its cash benefit will buy anything.

Envision it as a wall safe filled with money. Its words may be stored in a dark and dusty drawer, but the word pictures are always in focus to enjoy.

Here is peace of mind and tranquility from the knowledge that you and your family will never be hungry, will not have to give up your home, and will be comfortably clothed. Educational endeavors will not be curtailed and retirement plans will not go unfunded.

Getting sick or hurt and being unable to work affects millions of Americans every year. The financial result is that 48 percent of all home mortgage defaults are traceable to this cause. The statistics are grim, and they suggest this devilish problem could happen to anyone.

“But I Have Insurance…”

 • In the case of a sudden accident or a prolonged illness, life insurance serves no purpose, for it cannot be eaten and it yields no cash, except for modest undrawn cash values, unless you die.

 • Medical insurance only supports the lifestyle of physicians, nurses, hospital administrators and other health care workers. It does not pay your client’s rent or buy food and other necessities of life. It is of limited value in a cash crisis.

 • Retirement plans? Unless dutifully funded to completion, such plans do not redeem the beginning, glowing promise of a lifetime of income without working to earn it. It is, instead, another anemic savings account.

 • And long term care? It may provide a minimal existence for a disabled wage earner, but what does the rest of the family do for survival?

Fortunately, the clients of the advisors and planners who read this article do not have to choose just one kind of insurance. They will be able to afford a selection of coverage which together will provide a program of complete personal protection.

If there was a law that limited you to just one kind of personal insurance, which would you choose?

 • Death insurance—pays a beneficiary.

 • LTC insurance—pays nursing home bills.

 • Medical insurance—pays physician and hospital bills.

 • Disability insurance—pays you cash.

By logic and by statistics, disability insurance should be the choice.

Financial Freedom

Financial freedom is the result of good financial planning. Financial planning starts and ends with income planning. Life is just a cash flow, and unless the income flow equates to the outgo flow, financial chaos ensues.

The greatest financial tool yet devised by the mind of man is guaranteed replacement income insurance, and of these types of insurance, disability income is by all measures the most critical and the most desirable. 

There was a famous coach of the UCLA Bruins basketball team who, to this day, holds the record of winning the National College Championship 10 times during his career. He was a superb mentor and motivator to young and old alike. His name was John Wooden, but the world called him “Coach.”

Wooden was paid modestly for such incredible accomplishments, but this did not bother him because his evaluations of life’s rewards were not measured in dollars but in knowing that each day he practiced doing the very best he could.

That was a different time, because today coaches in collegiate sports are paid unbelievable sums of money, and professional athletes and coaches are paid even more.

Financial Risks Faced by Athletes

Although the numbers are high, they must be put in perspective. Whether an athlete is 19 or 39, the reality is that his most recent paycheck may be his last.

While not all athletes are paid on a game-by-game basis, most are contracted to sustain performance standards, usually on a multi-year basis. There are many variations in contract terms, but generally the stipulation is that an athlete may be released from his contract if he is placed on the disabled list.

Income earned through product endorsements is another area of significant risk that can be mitigated by insurance for an athlete. But what happens when star athletes get into trouble? Such an act may jeopardize an endorsement contract. Disgrace insurance can support the replacement of that income should it be diminished or lost.

The money that athletes are paid must be used to create a lifetime of income. Even with expert advice, this can be difficult because of the following:

 1. The athlete is at higher risk of falling victim to a career-ending injury or illness before earning enough money to fund a satisfactory retirement.

 2. Temptations to acquire automobiles, boats, planes and other luxury items often override the effort to save and invest.

 3. The earned income is gross income—it must be used to pay agents, business managers and advisors.

 4. An athlete typically has fewer than 15 years to reach a savings goal, while most people are in occupations that have a 40-year lifespan in which to create savings. Thus the challenge of creating and funding a sustainable passive income for retirement is more difficult for someone who will likely retire around age 35.

DI to the Rescue

The most serious peril for an athlete is his career being cut short by disability. He faces forced retirement with each day at work, but DI insurance can offset the great compensation that would be lost. This highly important coverage brings about the recognition of a business opportunity, where tall benefits equal tall premiums and tall commissions.

Uncommon risks such as these can be handled by professional insurance advisors. Athletes are typically served by brokers whose practices are not necessarily limited to serving athletes only. This arena presents a profitable source of business for many advisors.

An interesting challenge that underwriters in this area face is adjusting to a plan that does not work on the law of large numbers. In a DI insurance plan, where common occupations are insured, the underwriter attempts to insure thousands of individuals, usually with modest benefit limits. Professional athletes defy this design, as relatively few people possess the required skills and the size of the benefits must properly replace the vast incomes found in professional sports. The risks are high and abnormal.

Expertise and daring are required to bring forward a plan capable of handling the dimensions of the risk. Fortunately for athletes and their financial planners, there are specific underwriters who can and will rise to the challenge, making navigating the field of sports DI insurance simple and rewarding.

The athlete is only a piece of the professional sports pie. Numerous staff members are required to recruit, train, organize, equip, schedule, care for and rehabilitate the athletes. There are well-compensated coaches, physicians and many others who will be interested in insuring their future with DI insurance.

They and the athletes they support need an advisor to bring to them the necessary income protection through disability financial planning.

Estate planning is an exercise intended to arrange a person’s personal and business affairs so that accumulated wealth is transferred in the most advantageous way (timing, cost and tax savings) to intended beneficiaries. A plan typically contemplates the disposition of accumulated assets and is thought to be primarily advantageous for people of attained wealth, based on accumulated tangible assets.

Overlooked in many estate plans is the asset of capitalized human life value. This invisible asset may well be the person’s most valuable and substantial asset. Overlooked, too, is the fact that few people simply “drop dead.” The reality is that more often than not there is a “suffering period”—a living death, or disability, that can be either a temporary or permanent condition—that will immediately have an eroding effect upon an estate plan, many times totally preempting it. An estate plan without disability insurance to support it can end up in a serious financial snag.

Insurance and financial advisors do not ignore the “living death” problem because of lack of sophistication as much as the fact that there have been few practical solutions available due to lack of product or adequate issue limits.

Adequate Personal Disability Insurance

There are now some products that can be utilized in putting together a disability financial plan that will perform very well. Step one is the guaranteed delivery of an adequate amount of income for the victims and their families, businesses, or both, to support an acceptable lifestyle without invading savings, retirement plans or other accumulated assets.

Separate surveys conducted by U.S. News and World Report and the U.S. Bureau of Labor have provided startlingly similar statistics that confirm the necessity for a person, regardless of income level, to have an income cash flow of 65 to 75 percent of their normal income in order to cope with the economic hardship and possible financial disaster that follows a period of non-productivity due to a disability.

This level of coverage has been virtually impossible to achieve with the disability insurance issue and participation limits insurance companies commonly offer. Insurance and financial advisors find, on an earnings chart, that the higher the income earned by their clients the lower the percentage of income that can be insured. In the past, this has been a great discouragement to advisors because creating an adequate disability financial plan often crumbled under the unsuccessful search for a product powerful enough to deliver adequate minimum cash flow.

Today supplemental disability plans are available in individual or group disability plans. The combined coverage will deliver an adequate percentage of normal cash flow for the client if disabled. Where a supplemental plan is in place, assets that are put aside for an estate plan will not have to be used in part or in total to support a disabled person’s lifestyle, and the substantial asset of future value of the person’s working life will not be irretrievably lost. With adequate disability insurance, a client will be substantially indemnified for the loss.

Business Uses of Disability Insurance

Other disability financial plans intended to deliver peace of mind and security for the disabled victim, family and business include combinations of monthly benefits and lump sum payments that fit every conceivable need. Plan design must be accompanied by a willing underwriting attitude to get the amounts desired. The good news is that all this is now available.

Insurers of such disability financial plans do not deny coverage because of a person’s high net worth or high unearned income. If the insurable interest is obvious and the plan need is correctly documented, very substantial amounts of disability insurance can be arranged to fulfill the need exposed by a disability financial planning expert.

Overhead expense, salary continuation, key person indemnification, loan/lease and mortgage coverage, and funding buy-sell, employment and severance agreements are among the popular business plans that can be put into place with ease and affordability.

Change has come painfully slowly in this important and interesting arena of disability financial planning. The industry has reached a level with product development and underwriting flexibility so that we can fulfill the complete disability planning needs of clients.

From the book Life Is Just a Cash Flow we learn that sound financial planning begins and ends with income planning. Proper income planning is impossible without adequate amounts of disability insurance.

Solving this devilish problem of adequate cash flow during periods of disability is professionally satisfying and rewarding to client and advisor. These truly are the best of times in disability planning.

The great patriot Benjamin Franklin reminded the world that the only things certain in life are death and taxes. The world listened, and life insurers produced not only death insurance, but planning to help arrange the greatest financial efficiency of benefits and tax consequences in favor of the insured. Today these programs are labeled “estate plans.”

Overlooked in Franklin’s observation were the absolute and never-ending expenses to live. In 1915 a new voice expressed the “other” facts of life. That voice belonged to Solomon Huebner, PhD, CLU, who described in his book Life Insurance that from a financial perspective there are two kinds of death: dead death and living death.

According to Dr. Huebner, living death is financially the worst of the two kinds of death because the victim is still here but is unable to produce new income. Unfortunately, estate planners and financial planners often deprive their clients of complete financial plans because they neglect to offer solutions to the living death peril—disability income replacement.

A dead death financial plan lacks balance if the living death portion is left unattended. Statistically, the chance of a living death occurring during a client’s working career is much greater than death occurring during that time. According to the Council for Disability Awareness:

 • During a working career, a person will not show up for work 17 times because of being sick or hurt.

 • One out of three people will suffer a disability lasting 90 days or longer.

 • Of these disabilities lasting 90 days or more, the average length of the disability is two and one-half years.

These are grim statistics, and they highlight the probability that a disability could happen to anyone—anywhere at any time: New York City, September 11, 2001 and Haiti, January 12, 2010 are but two examples.

Disability: Short Term and Long Term

Experience teaches us that when people become disabled money concerns are heightened because fewer than 20 percent of the population has an adequate disability financial plan that will pay enough cash benefits to be a true substitute for their paychecks. Simple math illustrates that with a spending need of $10,000 per month and a disability that lasts for two and one-half years, $300,000 will be consumed just for personal cash flow. Such an amount of money would put a big dent in anyone’s personal savings. Additionally, there are the other concerns:

 • What if the disability lasts longer than 30 months? What if it lasts 10 years (costing $1.2 million) or 15 years or longer (costing $1.8 million)?

 • What if another period of disablement follows the first disability? There may not be a sufficient period of time to replenish the used accumulations.

Do living death situations really last 10 or 15 years or longer? Yes. A close friend of mine who was an executive in the field of technology was stricken with brain cancer 17 years ago. While he has forestalled death, he has been disabled and unable to work all that time. He is a nice person who has been helpless, financially, to deliver the security and comfort for his family that he intended to provide.

Some in the industry might recognize the name of Robert Sluyter, CLU, RHU. He was a primary mover of the American College’s Registered Health Underwriter (RHU) designation. Sluyter was hit by an automobile while jogging and he barely lived. This World War II Marine hero and champion tennis player spent his last 12 years of life as an invalid. He had planned a sophisticated and pleasurable retirement for himself and his family.

Saving: A Glorious Thought but an Inadequate Solution

In the beginning of the adventure to save and accumulate, it is easy to gloss over the perils that one might face along the way. In working toward the realization of the goals in a plan to create wealth and to fund a lifestyle free of labor and worry, formulas are established on the assumption that cash flow will always be there to provide the funds for saving and investing.

Such assumptions are easy to understand, yet it is difficult to comprehend what will happen when cash flow is suddenly reduced or ceases altogether. What alternatives are available to continue, should a reduction in cash flow interfere with the plan?

Americans’ savings customs have changed! The beginning hard line thrift and savings in early America was referred to as “Yankee thrift”—when no one ever spent their capital—never! As our society moved through the agrarian period into the Industrial Revolution, two factors changed our savings attitude: a regular cash flow (paycheck) and temptations to spend on the newly created products and services that became available. Further down the road, access to higher education and consumer psychology made us easy prey for Madison Avenue advertising. The next challenge was easy credit and government programs of tax advantages in saving and retirement plans.

Time out! Today the question is: 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 a complete financial plan there must also be a “waiver” of shelter, food, clothing, and all the living costs and obligations. 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 supporting living death estate or financial plan is a snare and a delusion.

New plans of disability insurance are available to make such planning possible. Higher limits, easy underwriting and comprehensive coverage and obligations beyond living costs such as loans, contract obligations and business expenses can be easily and adequately handled at an affordable premium cost!