W. Harold Petersen, RHU, DFP

Everyday life forces people to be consumers. Very few of us could survive on earth without paying for the necessities and the facilities that we use every day.

The human body, a magnificent machine, cannot survive without food for energy, growth, reproduction, healing wounds and preventing disease. Shelter is required or life can be snuffed out by the elements.

Clothing, even though it has become an art form, is basically a form of protection from the burning sun, the freezing rain and wind, as well as defense against exposure and disease.

In these modern times, a fourth necessity has entered life’s picture, and that necessity is money for health care. Today’s world is crowded by fast-moving things that substantially increase the odds of accidental bodily injury. In addition, living close to others increases the transmittal of disease. Physicians, hospitals, medicines and technicians have become a built-in part of our living standards. Like the constantly moving second hand on the clock, life is being consumed, but from an economic point of view, each tick of the hand on the clock represents an expenditure of money—there is no break, no way to stop the spending.

A person can jump in bed, cover up his head, grit his teeth and vow not to spend any more money. But that won’t work; without nourishment, he will die. The choice is to spend money or to die.

The first lesson in Personal Economics 101 is that the only antidote to having to spend money to live is to have a sufficient amount of money to cover those costs. For most people this means earning the money, because very few have been gifted a sufficient amount of money to pay for a lifetime of needs.

In the course of life, one can encounter a number of income interruptions: job loss, business failure, mental or physical disability and death. The most potentially disastrous of all is becoming disabled to the extent that one cannot work and produce income.

The economic problem of becoming disabled (which is created by the very living of life itself) has been recognized for centuries, with the result being the creation of certain forms of insurance that provide income to a disabled person. Developing and underwriting such coverage involves many complex factors including medicine, law, psychology, finance and integrity.

Unfortunately, the complexity of underwriting a disability risk has discouraged both insurance carriers and field underwriting insurance agents or brokers from concentrating on this form of critical and badly needed insurance. Among the many U.S. domiciled insurance companies, there has been little interest in disability insurance. This can be attributed to the fact that some companies do not want to promote such coverage for fear of getting too much business in-force and, thus, risking great claims losses.

The objective of this article is to provide practical information about the need for DI products, and an understanding of the uses and limitations of these products.

According to the U.S. Social Security Administration’s Fact Sheet (February 7, 2013), 69 percent of workers in the private sector have no private long term disability insurance. It is estimated by professional surveys that fewer than 27 percent of American income earners are protected by any form of disability income insurance. It is further estimated that fewer than 50 percent of all business owners have ever had the subject of disability insurance discussed with them. Life insurance agents tend to concentrate on life insurance. Health insurance agents tend to concentrate on health insurance. Casualty agents tend to concentrate on property and casualty insurance.

Who will do the important job of delivering disability insurance to serve the American people? The answer is that it will be a conglomeration of insurance agents and brokers from all of these fields of specialization. But they need education about how to provide a solution for the client’s needs.

Personal economics is a plan designed to balance the costs of a selected lifestyle with the funds that will be available for that purpose.

Criticism has been slanted toward the American consumer because of failure to save a significant portion of earned income. Some estimates indicate that average American income earners save less than four percent of what they earn. This is deemed to be dangerously low and inadequate to handle emergency matters that may happen during the working career of individuals, and certainly inadequate to build an adequate and dependable retirement income account.

These surveys, however, tend to measure only those amounts that are easily traceable into some form of an investment program, whether that be a financial institution such as a bank or a savings plan into a specifically designed insurance program with cash value build-up or retirement income benefits being the paramount objective of the plan.

In fairness to the American consumers, who is constantly touted and badgered by advertisements to buy things that add to the dynamics of life and to the pleasures of living, it should be pointed out that the expenditure of money on a mortgage loan to buy a home is a process of converting cash flow income into an equity build-up. This is a form of savings.

Paying the premium on a cash-value life insurance policy may be measured as expenditure, but in reality, in part, the premium paid is a transfer of cash into an equity build-up called cash value. This is a form of savings.

A time purchase plan used to buy a new automobile means that a little of that payment is transferred into ownership of the vehicle, and that upon payoff of the obligation, there exists something of value. Not all the payments have been spent, lost and gone forever.

It is important that American consumers have an awareness of how they spend their money. They must plan for economic problems and conditions during the course of their lives that will challenge their ability to cope and to survive.

Savings without the element of time provides no solution to most financial problems. Saving is anticipated to be a long term process which, if uninterrupted, will achieve a substantial end result. Of greatest concern is the interruption of the process, a shortening of the time and, thereby, not achieving the intended objective.

Prudent personal economics dictates that a person be concerned about the interruption of the all-essential income cash flow required to balance outgo. He must also consider the consequences of dying too soon, living too long, or—the most probable and worse situation—becoming disabled. Appropriate new forms of disability insurance are now available to make solid disability financial planning possible and to secure the intended end results of the person’s insurance plans. 

A recent article in a local business journal carried an important and valuable message for business owners. The message was about how the sudden, yet unnecessary, collapse of a business has a deep, sometimes fatal, financial effect on many people—the owners, employees and customers. Such a collapse can only be prevented by good and complete business planning.

Perhaps due to size constraints imposed by the publisher or to the writer’s unfamiliarity with the subject, all of the facts about the loss of the business were not discussed in the article—the actual reason the business failed was that the owner became disabled and unable to continue to work.

We frequently talk and write about the subject of the missing page in a buy-sell agreement. The missing page refers to the oversight and failure to include disability of an owner in a buy-sell agreement. Yet statistics point out that disability is the most likely loss to occur during the effective period of a buy-sell agreement, and it can result in a larger financial loss than the death of an owner.

Insurance brokers, advisors and planners must fully understand the aspects of a business owner’s disablement so that the matter can be thoroughly discussed. In addition, the importance of proper and adequate funding for a buy-sell agreement must be understood and accepted.

A real case example of two unincorporated partners who own a $1 million business that started with a $50,000 investment from each partner serves as an example of what could happen in the event of one of the partners becoming disabled.

The disabled partner, lying in his bed in pain, is heavily medicated and has little strength to consider his non-disabled partner, who now has to perform the work of two people. Any strength the disabled partner has must go to consoling his wife, who is worried about her husband as well as money to sustain the family’s needs. He tells her to simply call the non-disabled partner and ask for a paycheck.

When she makes the request for her husband’s paycheck, the non-disabled partner agonizes over what he must tell his partner’s wife. He explains that he is working hard to cover for his partner, but the lack of his partner’s expertise, valued contacts and help is taking its toll on the business. The non-disabled partner then explains that there simply is no money for a regular paycheck!

Unlike the “dead death” of a partner, where the effects are obvious and immediate, the effects of living death are worse. Creation of a buy-sell agreement is the solution.

The History of Business Disability Plans

In 1958, there existed a fine basic education and sales/marketing course known as The Disability Insurance Training Council, the educational arm of the National Asso­cia­tion of Accident and Health Underwriters. This effort was endorsed by the entry of the Life Underwriting Training Council into the field of disability insurance.

The Purdue University Life Insurance Marketing Institute was a highly respected source of education for those wishing to augment their knowledge of life insurance marketing. When Purdue expanded its horizons to include disability insurance, a natural adjunct for this marketing institute was to use its roster of talents to include disability insurance in its think tank and invent additional sales opportunities for the product.

Up to that point in history, disability insurance was called accident and health insurance and was used in a single way—to insure earned income, the only peril that had been recognized at that time.

From the Purdue Life Insurance Market­ing Institute came the idea to use disability insurance in the same way life insurance was used—to fund loss. Subsequently, the first product to come out of the think tank was funding buy-sell agreements with disability insurance. Next was key person disability insurance (known as key man in those days) followed by disability business overhead expense.

Since that time many other plans have been created and made available: retirement completion plans, contract guarantee, severance agreements, loan/lease indemnification, salary continuation, venture capital indemnity, supplemental high-limit disability.

After nearly 60 years, this segment of the disability insurance business is still in its infancy, as attested to by an analysis of 33,102 proposals done in 2008. Buy-sell proposals constituted 10 percent of this total (3,055) followed by key person, overhead expense and loan indemnification.

We will examine each of these plans and their logical uses in subsequent articles. 

An article with the headline, “Executive On Leave Since Injury,” recently appeared in the Los Angeles Times. The article was of local and national importance because it involved a well-known and respected CEO of a large national company that provides many jobs in Los Angeles and several other major cities.

The company is a stable, older firm that was being pressured by Wall Street to increase its profit margin. Investors were not happy because the stock price had been stagnant for several years.

In response to the investors’ call for action, the former CEO was fired and a new, highly regarded CEO was brought in to run the company. The new CEO’s actions calmed the Wall Street worries. Financial scenarios at the company became very promising, and the great stress that pervaded the firm was easing. Management was beginning to relax as the stock price stabilized and was heading toward the positive.

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

An article such as this only proves that producers have a dual obligation to co-mingle business disability insurance plans with personal disability insurance plans to keep their clients financially whole during periods of disability and to also provide stability for the company.

Wall Street doesn’t care about the executive—it’s all about the stock price! We have experienced similar stories from other intense, hard-hitting companies, and the pattern of what lies ahead for the CEO and the company is very predictable.

Companies have little patience in waiting for disabled top executives to recuperate. Business must be tended to daily and with vigor. The disabled executive hopes to begin tenderly and work up to, once again, being a hard-driving executive.

We hope to be wrong, but our feeling is that this man will almost immediately be permanently replaced. This is an unfortunate occurrence in the career of a professional manager.

Where Does He Go From Here?

If he recovers and becomes a viable candidate for a new management position, he will have a new start, but disappointment will continue to depress him. A new position, at his age, will likely be with a smaller, lesser known company. His compensation will suffer and his ego will smart for some time.

The executive may be permanently paralyzed to the degree he will not be eligible for a new job. If he recovers or if he remains disabled, his personal financial concerns are great. The story and our assumptions based on experience with executive disability insurance helps all of us to be alert to the income cash flow needs of executives and the stability of the firm for which he works.

The unfortunate CEO we have discussed should have had supplemental high limit disability insurance to sustain his lifestyle, and his employer should have had key person disability protection to offset the effects on the company. He may never work again or he may slowly recover. His health, his stamina, his ability to produce on a 24/7 basis will forever be questioned. An adequate disability program for temporary or permanent need is the salvation for his life and lifestyle.

Every executive needs advice, because the reliance on company plans to adequately replace income will result in serious disappointment. This situation illustrates the strategic differences between dead death and living death and the consequences of trusting employment plans to do an adequate job.

Personal Economics 101 is not found in college catalogs, and parents untrained in personal economics are not a knowledge source for information and guidance. Thus, the highly important task of providing personal economic and financial advice is the domain of financial service professionals. 

With this opportunity to provide advice comes the duty to diligently and fully provide modern and unbiased financial advice. Credentialed studies and a commitment to continuing education provide evidence that an advisor desires to be highly professional and provide competently sculpted financial plans. Changes in 21st century perceptions and functions have resulted in a class of professional generalist versus the professional specialists we knew last century. In the 20th century, financial professionals specialized in areas such as securities, life and health insurance, property and casualty insurance, real estate, accounting, law and banking. In the 21st century, financial professionals are combining their knowledge from these various venues and becoming specialists in providing expertise for overall financial planning.

In general, the change is working well except in the challenging field of disability financial planning. The industry statistics tell us that advisors are inadequately preparing consumers financially for the contingent event of becoming disabled.

Consumers face both personal and business perils as a result of disability. According to the U.S. Department of Labor, only 27 percent of income earners in the United States have disability insurance and, of that number, the majority have inadequate amounts to meet their obligations. Those who find themselves unable to work due to a disability may want to consider utilizing the services of Crest SSD for representation and assistance with a claim.

Dimensions of an Adequate Disability Financial Plan

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

Our federal and state governments have long recognized the vital necessity to have a continuing flow of income when unable to earn it and have put the following assistance programs in place:

Law                                                Year Enacted

Workers’ Compensation                     1908

Unemployment Compensation          1917

Social Security Retirement              1935

State Disability Plans (5 states)         1942

Social Security Disability                 1956

Tax Advantaged Retirement Plans   1957

The need for continuing income cash flow has long been recognized by economists and scholars of finance. Life insurance, once looked upon as a burial fund, was expanded to the concept of income replacement insurance for survivors of a deceased wage earner with the 1913 book, “Life Insurance,” by Solomon S. Huebner, PhD, CLU.

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

Oil and Water

Dr. Huebner is also the creator of the human life value concept. He cited the need for income replacement insurance whether the loss of income stems from “dead death or living death.”

While balancing income cash flow replacement in the case of “dead death” has been relatively easy, never in the 127-year history of disability insurance in America (with few exceptions) has an adequate amount of income replacement benefits been available from a single source. Thus, financial advisors have encountered difficulty because of the many limits imposed on underwriting disability income insurance.

Life insurance companies frequently select their leaders from other industries such as banking, accounting and finance. Thus, it is natural for them to view the companies they manage not as insurers, but simply as financial institutions. Commonly, such executives perceive disability insurance to be a disintermediation factor that works against attempts to accumulate premiums for investment purposes. Disability insurance entails a claims obligation that involves sending premium money back to policyholders during periods of disability and, in addition to the actual claims costs, substantial claims reserves must be quickly set aside.

As a result of this uneasiness about disability insurance, the number of companies underwriting disability insurance has precipitously dropped from 350 to 26 in just the past decade. However, even with the lack of competition and with only two or three reinsurers active in the disability field, the conditions for limited and controlled benefit offerings do exist.

Some financial planners have shunned disability insurance because of the lack of capacity and others because of harsh underwriting; both factors have contributed to the disappointing coverage results. Few insurance companies promote disability sales, few offer sales incentives to foster sales, and most have long ago forgone educational endeavors in this field.

To homogenize the needs of the consumer with the now available coverages, creativity is needed to forge an adequate disability plan. All sources must be considered and utilized to deliver the required amounts. Highly compensated people cannot be adequately insured with either individual disability income or group disability alone.

21st Century Disability Financial Planning

Disability insurance is not about elimination periods, benefits periods or definitions of disability-those are simply technical aspects of a given product. Disability insurance is about income and is truly a vital financial product. No longer does the 20th century approach of insuring a person with a policy that may only yield benefits sufficient for bread and water and a tent in the park suffice. In the 21st century, attitudes of underwriting and planning have begun to change.

Loss of a job is not a new century concern. In this century people will face six to eight job changes during their working careers. The measure of a career period will be replaced by a cash flow concern. The 20th century advice of “get a job with a big company, stay out of corporate politics and hang on until retirement” holds no believability.

Insurers’ issue and participation limits as well as caps are based on old century concepts. A new planning approach to measure disability income needs will overcome these limitations. The 21st century issue limits must consider the probable asset value of a person’s career earnings, not just past earnings.

Disability financial planning for the high income earner who is not yet super rich. A highly successful entertainer, athlete or professional person must set aside a portion of his earned income to create wealth, to build a passive income and a retirement income sufficient to sustain his lifestyle of choice. Financial discipline and time is required to achieve this level of independence. If earned income diminishes or ceases altogether during the wealth creation period, the plan will fail.

Bankers commonly recommend that their clients buy life insurance to cover their indebtedness to the bank. In the event of disability, earned income would cease and repayment of debts would be in doubt. Modern underwriting provides for bank loans to be insured against disability outside the insured’s personal disability financial plan. Bankers enthusiastically endorse the aspects of carrying bank loan indemnification insurance until the client is debt free.

Disability financial planning for the already rich. Let’s look at a 40-year-old CPA with inherited wealth. He earns $250,000 per year from his accounting practice. Among his inherited wealth is an apartment building, appraised at $13 million, that  yields net rental income of $250,000 per year. Thus his combined earned and unearned income totals $500,000 per year.

The CPA considered not insuring the apartment building, since it cost him nothing. In the event of the building being destroyed by fire or earthquake, he still retains the land value. The loss of the building would include the value of the bricks and mortar but, more importantly, the loss of an endless income stream of $250,000 per year of passive income. Without hesitation the CPA and his financial advisor made the decision to buy insurance on the $13 million building.

Next came the question of whether the CPA should insure the $250,000 of income he earns from his practice. This income flow, when measured as an asset, achieves a comparable value of the $13 million building when the current rate of income is calculated over a period of time (to age 65) and includes a 6 percent rate of growth/inflation.

All insurance is important in protecting assets. This year the changes are:

Asset       Odds

Home       1 in 1,200 of being destroyed by fire

Auto(s)     1 in 250 of filing a claim

Death       1 in 150 of happening this year

Disability  1 in 30 of suffering a long term disability

Few people have net asset values that exceed the capitalized value of future earned income. Like the recognized hard assets owned by a person, the value of future earnings should be as insurable as buildings, autos, art, jewelry and collectibles.

If it makes sense to insure a $13 million building, it makes sense to insure the $13 million asset of future earned income.

The answer to the question “Do rich people need disability income insurance?” is, as the bankers agreed, “Yes.” The only difference between the needs of the rich and the not-so-rich is the dimensions of the coverage.

In his book, Life Insurance, Solomon Huebner, founder of The American College, shattered the myth that disability insurance was a casualty insurance coverage by stating: “Disability insurance clearly falls in the life group of coverage and is just as urgent as life insurance in its ordinarily used forms.”

However, the art and science of underwriting disability insurance differs from life insurance, and these differences account for much of the disdain some have for disability insurance. On one hand, purveyors have difficulty ignoring the disability needs of their prospects and clients; yet, on the other hand, the negative experiences they have encountered with prior submissions make them often choose not to market DI.

Underwriting does not have to be a barrier to profitable DI sales. You might say underwriting DI is more akin to applying for a bank loan because underwriters need to have a good feeling and a detailed description of the risks they are considering. An underwriter of DI views a 40-year-old executive with a monthly income of $30,000 as a potential $6 million liability. This would be the amount of benefit this executive would stand to collect if 66 percent of his income needed to be replaced until age 65.

Therefore, in order to simplify the task for an underwriter and to build his confidence in the applicant, descriptive word pictures will play a crucial role. Salespeople by nature are storytellers. Thus, if an agent takes the time to tell the client’s story (as opposed to allowing a dry and factual application to tell the story), the success rate for approval increases (which, of course, increases the producer’s placement ratios). Unfortunately, well-constructed cover letters have become a bit of a lost art.

An underwriter must understand an applicant’s occupation. The underwriter’s guides will place the applicant in a category agreed to by the chief underwriter and the reinsurer, but there may be variations in each category.

For instance, if an applicant is a veterinarian, the underwriter must classify the person with regard to his practice: Does the proposed insured’s practice include large and dangerous animals? If the applicant captains a tuna boat, the underwriter must know if the proposed insured is owner of the boat or an employee of a firm that owns the boat. Further, the underwriter must determine if this is a seasoned firm or a new venture by a person who has heard that tuna fishing can be very profitable. These are just a few examples of risks that may defy the simple categories for veterinarians or tuna boat captains.

Character of an applicant is also very important to an underwriter. Let’s examine a case in which the applicant is a surgeon. Besides knowing what kind of surgery is practiced, other pertinent information may prove helpful to establishing good character. Has the doctor ever had his license suspended? If so, why? Has he ever been involved in a drug or alcohol rehab program? If so, how long ago, and what were the results since then?

A producer will be in a much stronger position by anticipating questions such as these and putting the answers in a cover letter rather than waiting for the underwriter to request more information.

Health history questions are also a consideration in the underwriting process: duration of an illness or injury, age at onset, age at complete recovery, and occurrence of any similar symptoms since the recovery. Other information requested may include doctors’ statements, health care facilities used and dates. The more thorough a producer is at documenting this type of information, the more likely fast and efficient turnaround in underwriting can be expected.

Troublesome pre-existing illnesses such as cancer, heart trouble and nervous conditions are easily taken in stride. Cancer is excluded for only the first five years following recovery. Heart disease may take a rating instead of an elimination waiver. Mental or nervous conditions and drug or alcohol history can often be handled by rating or coverage modification. Such conditions were previously excluded; however, today pre-existing conditions are often considered for issue.

Financial underwriting is also understandably important in underwriting DI. Like placing money in a wall safe for the insured to use if they become injured or ill, justification for the amount of money to be reserved is prudent and should be understood by any professional insurance agent.

Often the attitude of a proposed insured discourages a producer from properly collecting the information needed to justify the needed insurance. People are accustomed to calling their auto insurance agent and binding coverage over the phone, yet when they go to the bank for a home mortgage, they have no problem providing financial information that is being asked of them.

Financial justification may on occasion require an accountant to put the matter into simple terms. This is particularly true of business cases that can become complex, involving tax laws and co-mingling of passive and earned income and legitimate deductions.

A component of the financial underwriting also involves knowledge of other forms of disability benefits available to the proposed insured. The applicant may have passive income or may be eligible for some at a future date. Having this information allows an underwriter to program around income from military reserve pay, previously earned pensions or group insurance (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.

Producers must think of the underwriting process as one of professional communication. In preparing a cover letter, a tone of friendliness and cooperation should be used. All underwriters are in the business of selling insurance and are aligned with producers’ interests—on the same team. Together a producer and an underwriter can complete a case and deliver an incredible product­—guaranteed cash flow, should the client become disabled.

Underwriting complex cases is not mysterious, should not be difficult and can even be fun. Today companies are cooperating profitably and brokers need no longer shun writing this urgent coverage. Dr. Huebner’s observations of nearly a century ago are still viable: Living death and dead death insurance belong in the same stable and should be promoted with equal enthusiasm, which is indeed possible.

The International DI Society’s western division study group met via telephone conference to discuss risks beyond personal insurance. Study group leader Greg Nelson, Strategic Benefit Coach, Sandy, UT, was unable to fully participate in the meeting, so he was aptly represented by former International DI Society President Rick Cardero, Principal Financial. It was a fast-moving and practical meeting for all participants, and the chosen subject for the group’s discussion was “Why Overhead Expense?”

A business overhead expense (BOE) policy is, by its design, a low cost item and is considered to be temporary coverage. Unfortunately, the low premium (due to the product’s short term benefit) does not highly stimulate commissioned purveyors. Yet the group’s discussion quickly painted a “word picture” of how very important and vital this coverage is in a financial disability plan.

With BOE insurance, a business owner is reimbursed for expenses during a disability, which enables him to return to a sound business without robbing his family of the benefits provided by his personal DI policy. Nor is the owner forced to sell his business or turn down customer requests.

There is a decided tax advantage provided by BOE insurance. The premiums are tax deductible and even though the benefits must be reported as income, the actual business expenses are deductible (Revenue Ruling 55-264, 1955-1 C.B. 11).

Who Needs BOE DI? Business owners and self-employed individuals, because they face the dual problem of protecting their homes and familie, as well as their businesses.

Are there alternatives to not having insurance? Yes:

 • Accounts payable can be used to pay expenses.

 • Partners may be asked for money to cover expenses.

 • Employees can run the business.

 • Personal disability insurance can be used, as can personal savings.

 • A professional replacement can be hired.

 • Money can be borrowed.

 • The business can be temporarily closed.

 • The business can be sold.

If such options are not viable, then business owners absolutely need BOE!

What overhead expenses may be covered: lease or mortgage payments; utilities; employee salaries and benefits; furniture and equipment leasing or  purchasing; accounting, billing and collection fees; janitorial, security and maintenance; premiums for malpractice, property and disability insurance; professional dues and subscriptions.

What may not be covered: owners salary and benefits; any person sharing business expenses with the insured; any member of the insured’s profession; any person hired to perform the insured’s duties; any person responsible for generation of income for the business; any member of the insured’s immediate family who was not a full-time employee prior to the disability; the cost of goods, merchandise, products or services; depreciation; moving expenses;  parking fees.

These many points of concern indicate more coverage is needed to fully cover a business owner’s exposure to loss due to disability, and a discussion about key person insurance will create another interesting topic of conversation.

We are pleased that the International DI Society is supporting and encouraging such telephone discussions. It is realistic to believe video conferencing will soon follow.

Broker World readers’ support of Disability Insurance Awareness Month and the annual October IDIS conferences will help us continue to lift to prominence the hazard of disability so that the need for coverage is acted upon before our client’s turn comes. 

Early human society was made up of hunters and gatherers. Mankind had no knowledge of or concern for cash and cash flow. We had not progressed beyond satisfying pending hunger and, outside of protection from the cold, clothing was only a mild concern. Planning had not yet been mastered; events and environment pushed us into hasty conclusions for immediate gratification…for survival.

Planning ahead and thinking about change became a revolutionary event. In the never-ending quest to make life and its trials better and more pleasurable, humans gradually recognized the value of trading their abilities or resources with each other for ownership of goods and services—bartering.

One person might be talented at building shelters, while another more successful as a hunter or fisherman. Meat or fish, in exchange for building a shelter, was a frequent commodity.

For preservation and safety, tribal instincts flourished and communal living developed. Then trade between villages began; however, sometimes simple barter was not possible. Some trade had to depend on future delivery because of current unavailability. A method of keeping track of these exchanges on a non-barter basis led to the development of currency, which provided a way for trade or exchange on a non-seasonal basis. Thus, goods and services could be exchanged for money.

The exchange of services and goods for money led to advances in creativity and, ultimately, the Industrial Revolution. This grand movement enticed people to leave the lifestyle of working the land for a living and exchange their time and their talent for a paycheck, which held the promise of a better way of life.

People were enticed to live closer to the places they work. Thus, life became more focused and an income with which to purchase a different lifestyle became an irresistible seduction.

As a result of the Industrial Revolution, hunting and gathering was forgotten and bartering quickly evolved the human race into an income society. It was no contest because money allowed us to buy:

 • Desirable food, rather than just something to sustain life.

 • Fashionable clothing that fit well and was comfortable.

 • Warm, comfortable and attractive homes.

 • Education and health care for our children.

 • Transportation, which also provided a new and exciting dimension to life called recreation.

We have now become a society of individuals relying on every dollar earned and, as such, we must protect our way of life and our income. In the event of a disability, we could lose everything; our lifestyle could dissolve before our eyes.

This economic problem of being disabled has been recognized for more than a century, and this recognition gave way to the invention of certain forms of insurance that provide an income cash flow to a disabled person.

Modern disability insurance provides solutions to the problems created by living life. The industry now insures virtually all occupational classes and provides adequate benefit amounts to replace cash for special needs like key person exposure, business overhead and mortgage and loan payments. There is even disability insurance to continue deposits to a retirement plan in dimensions unheard of a few years ago.

Today disability insurance benefits are reaching new heights, with monthly benefits of $100,000 or more and business agreements of $100 million or more.

Do people buy $100,000 per month DI policies? Yes, they do. Financial needs are proportional, based on earning capacity. Who buys $100 million of business insurance? The people who have that dimension of need!

Last month’s column entitled “Personal Economics 101” suggested that the vast majority of American wage earners are not in a financial position to maintain their current lifestyles in the event that their source of income is interrupted. This wonderful industry that we are all part of has solutions to help eliminate two of the primary reasons for income interruption: life insurance, in the event that a wage earner dies prematurely, and disability insurance for the most likely of all income interrupters—becoming disabled and unable to work.

The statistics for a person becoming disabled can be interactively discovered using the “Personal Disability Quotient” calculator on the website of the Council for Disability Insurance Awareness (www.disabilitycanhappen.org). Suffice to say the chances are anywhere from two to seven times greater (depending on age) than a person dying prematurely. Yet our great life and health insurance industry continues to sell more life insurance than disability insurance by large volumes.

Most people know if they have disability insurance benefits available to them, but they may not necessarily know if those benefits are adequate for their needs. There are more than 137,240,000 American income earners—and most of these people are inadequately prepared financially for a disability.

This lack of preparedness is truly an opportunity for every professional insurance agent and is a simple and an affordable service for those professionals to provide. The least that can be achieved is a favorable interview and the chances are it will result in a sale of at least some supplemental disability insurance.

So, how should this vast market be approached? Following is a suggestion for starting the conversation.

“Mr. or Mrs. Client (or prospect), third party researchers have disclosed the fact that most American income earners are inadequately insured against the contingency of being involved in an accident or becoming sick and being unable to work and produce income.

“Income is essential to most people’s peace of mind and happiness, yet it is the most likely need to be overlooked or neglected. It is my duty, as an insurance professional, to help bring an awareness of this critical matter.

“Economists who have substantially studied the income needs of consumers feel strongly that 60 to 75 percent of personal income is needed; otherwise negative results will quickly develop. Insurance products and services make protecting your income possible and affordable. You will be able to tell very quickly if my information and service will be of interest to you. Will you see me next Tuesday or Wednesday morning?”

More help with continuing the con­versation:

“Like most people, you probably wonder why you must buy so much insurance. Here is a quick review:

“Which of your insurance policies now in effect pay you directly in cash? Following is a list of insurance, based on the most common purchase priorities of consumers. How do you measure up to this priority list?

“Homeowners insurance pays the mortgage company, or the cost to rebuild your home, but it does not pay you. Most people own this insurance because the mortgage companies demand it.

“Automobile insurance pays the repair people or the car dealer to replace your car. You do not get to handle the funds.

“Medical insurance pays physicians, hospitals and pharmacies, but not you! It is nice that we care so much about making sure the doctors and health care workers get paid, but what about you?

“Life insurance pays your beneficiary. Most of us do care about what our loved ones will do to make ends meet in the event of a premature death, but you will never see the money.

“Long term care insurance pays a nursing home to care for you. If the insured is the income provider for a family, who pays for food, clothes and a home for the family members?

“Dental and vision insurance pays the providers directly, but only for their services, leaving nothing for you. There is no offset for the time it takes away from your job to be treated and there is no cash to you.

“Disability insurance pays you! Only you will have the control over the money and how it will be spent!

“Some people say that insurance is an unappealing product because…it has no moving parts; it has no chrome strips; you can’t eat it, ride 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 until it is time for the next premium to be paid.

“Disability income insurance is the exception because, in a sense, it is edible, rideable and you can sit on it. As a matter of fact, its cash benefits will buy anything!

“Disability insurance is like a wall safe, filled with money. It is peace of mind from the knowledge that should you become disabled, you and your family will never be hungry, will not have to give up your home, will be comfortably clothed, educational endeavors will not be curtailed, and retirement plans will not go unfunded.

“Cash is king and disability insurance pays the policyowner in cash.”

There you have it—Personal Economics 101.1—now it’s time to sell some disability income insurance. 

The first lesson in this personal economics course is: the only solution to the problem of having to spend money to live is to have a sufficient amount of money to cover the costs. For most people, this means earning the money, perhaps by learning which helium miner is the best to mine helium with, or by holding a full-time job with a decent working salary, since so few have been gifted a sufficient amount of money to buy a lifetime of needs.

In the course of life, one encounters a number of income interrupters: job loss, business failure, mental or physical disability and death. We have all had the opportunity to observe the experience of many, and what is the most disastrous of all the income interrupters is disablement of the human body to the extent that it cannot work to produce income.

The economic problem of becoming disabled, which is created by the very living of life itself, has been recognized for well over a century and resulted in the invention of insurance that provides an income cash flow to a disabled person. Underwriting and insuring such coverage requires grappling with many complex factors having to do with physiology, anatomy, law, psychology, finance and integrity.

If you examine professional surveys about insurance, you will find statistics that indicate fewer than 27 percent of American income earners are protected by disability income insurance and that fewer than 50 percent of all business owners have ever had the subject of disability insurance discussed with them. Those in the insurance industry know that life insurance agents tend to concentrate on life insurance, health insurance agents tend to concentrate on health insurance, and casualty agents tend to concentrate on property and casualty insurance.

Personal economics is a plan designed to balance the costs of a selected lifestyle with the funds that will be available for that purpose.

Americans are frequently criticized because of their failure to save a significant portion of their earnings. Some estimates indicate that average Americans save less than four percent of their income. An amount deemed dangerously inadequate to handle emergency needs that may occur during their working careers or to build a dependable retirement income account.

In fairness to American consumers, who are constantly badgered by advertisements to buy those things that add to the dynamics of life, it should be pointed out that expenditures on a mortgage loan to buy a home is a process of converting cash flow income that results in an equity build-up, which is a form of savings. Paying the premium on a cash-value life insurance policy, while measured as expenditure, in reality is in part a transfer of cash into an equity build-up called cash value, which is a form of savings. Even a time purchase plan to buy a new automobile means that a little of that payment is transferred into ownership of the vehicle, and there, upon payoff, exists something of value. Not all payments have been spent, lost and gone forever.

Yet it is important that American consumers have an awareness of how they spend their money. They must plan for possible economic problems and conditions during the course of their lives-problems that will challenge their ability to cope and to survive.

Without the element of time, saving money provides no solution to most financial problems. Saving is a long term process which-if uninterrupted-will achieve a substantial end result. What must be of greatest concern is the interruption of the process.

Who will do the important job of delivering disability insurance to serve the American people? The answer is that it will be a conglomeration of insurance agents and brokers from all fields of specialization. However, they must be reminded of their clients’ true needs and educated on how to provide solutions for their clients’ needs! Only then will agents and brokers be able to respond to the challenge and solve their clients’ problems by showing them how to protect their income cash flow sufficient to match the outgo, should disability strike.

Personal economics 101 dictates that a person be prudent in not only providing income required to balance outgo, but also must consider the consequences of dying too soon, living too long, or- the worst situation-becoming disabled.

The good news for producers and consumers is that fresh thinking has resulted in new disability products being made available so that an arrangement of plans can create a true and adequate disability financial plan.

The rapidly developing interest in disability financial planning has revealed a huge concern in the senior marketplace. Insurance trade journals, economic magazines and newspapers all carry numerous articles discussing people who, unfortunately, fear they may outlive their money. The primary causes for this obsessive concern are due in large part to the recent recession coupled with the fact that people are living longer.

When earned income comes to an end voluntarily, there is usually a controlled retirement plan in place. However, when income is halted due to illness or injury, there is a potential for giant health care costs along with increased living expenses. All of this adds to the fear of what could happen—and it does.

These fears can largely be offset by an insured planning to work later into life and the knowledge that even if disabled, the income replacement capabilities of senior market disability insurance are available.

Some senior disability insurance plans pay beyond age 65, which of course has been the primary benefit period age for the past several decades. Moreover, there is a new and increased desire to have disability insurance that would stay in force to at least age 70—if not longer—with benefit periods and amounts that would adequately allow for the completion of a formal retirement plan.

There are other needs for senior disability products that stretch beyond the age barrier of 65. Business needs are still critical in one’s financial planning. An example would be a participant in a buy/sell agreement with no specific end age required; the need for funding is likely to continue to grow as opposed to decrease. Unfortunately, traditional buy/sell plans actually decrease in value as a person approaches age 65. Solutions to this problem can be found with carriers that have recognized the importance of the senior market. With your professional assistance, clients can be comforted in knowing their business obligation to buy out a senior aged partner can be backed by insurance.

Many people not only have the strength, but they also have the desire to keep working beyond normal retirement age. Self-employed individuals such as physicians, attorneys, writers, architects, store owners and partners in various enterprises feel they are wasting time and money by not being productive. It is not uncommon for our office to field calls from producers with clients in their late sixties and even in their seventies who are signing new office lease agreements or borrowing money from a bank to make some new capital improvements to their business. Not only does the business person recognize the importance of insuring these new obligations, but many landlords and lenders are insisting on insurance protection.

A business person or a professional person may wish to continue to keep his business open beyond normal retirement age. The overhead costs must be covered lest the remaining employees leave for fear they will not be paid. The owner loses the business, the employees lose their jobs and all are in financial jeopardy.

Business overhead expense, loan indemnification and key person disability plans play a vital role in the senior market by allowing productive people to remain productive and to actually be able to increase their productivity, knowing the financial concerns of a disability can be insured.

Senior market disability income insurance is a key to a large and responsive market: People are living longer and their good health encourages them to keep working for financial reasons. Pride becomes a motivating factor. Then we must also remember that senior citizens are constantly tempted to buy new cars, remodel their homes, do some long-postponed traveling, etc. These temptations could have a debilitating effect on the financial wellbeing of your clients, should their income suddenly become interrupted due to a disability.

There are real reasons for a person to respond to the concept of buying senior market disability insurance if given the chance. A review of existing clients is a good place to start.