Disability Insurance in America
PART 1 – The disability insurance industry in America is at a crossroads. One road leads to oblivion because many insurers have chosen to exit this business. The other road leads to monopoly because only a few life insurers have chosen to remain in the business. Tragedy for consumers and financial services professionals is the terminus of either road. Loss of this crucial subsidiary of the life insurance business may occur unless a substantial cooperative effort is made to salvage it.
In 1990, 350 of the 1,100 chartered life insurance companies in the U.S. underwrote disability insurance. This number has precipitously dropped to fewer than 40, according to industry statistics. These few companies do not have the combined financial strength to take up all the potential disability insurance needs of the American people.
This tenuous condition is due to a variety of factors. One of the factors is that there are apparently only several remaining reinsurers of individual disability insurance. This results in the policies of the few active disability insurers being very similar in plan design and price, and all have similar modest and often inadequate amounts of benefits to offer, due to the monopolistic position of the reinsurers.
Another factor that affects disability insurance is the mindset of the insurance companies’ management. Chief Executive Officers are frequently selected from other industries such as banking, accounting and finance, and it is natural for them to view the companies they manage as financial institutions. Without insurance experience, they have little understanding for consumers’ needs. They believe disability insurance is a disintermediation factor that works against their attempts to accumulate premiums for investment purposes. Disability insurance entails a claims obligation that sends money back to policyholders during periods of disability, and in addition to the actual claims costs, enormous claims reserves must be quickly built. Annuities and life insurance do not present such volatility and are considered safer risks.
Current State of the Disability Industry
Eight companies account for 73% of the non-cancellable disability premium in-force according to studies made by Milliman, and 16 companies account for 94% of such premium in-force. This is nearing monopoly and this trend continues unabated. Free-market disability income insurance could disappear. Government programs, utilizing the disability income insurance machinery it already has in place could provide the system for a nationalized plan.
Although healthcare reform over the last several years has forced most Americans to have some form of medical insurance, according to the U.S. Department of Labor, only 27% of income earners in this country have disability insurance which means 73% are without invaluable protection. This lack of disability insurance is arguably a greater public need than the need for medical insurance. This indefensible position of the life insurance industry is an invitation for government expansion into this arena as we have previously seen with healthcare.
The disability income insurance industry is in need of support. It is important to consumers and producers that the disability insurance business be saved and strengthened. America and Americans will be best served by a strong, innovative and competitive disability insurance industry.
Insurance agents, brokers and financial planners are important advisors to American consumers because for many consumers, they are their only financial educators. Disability income insurance commissions are important to producers because they offset the continuing deterioration in commissions earned from some of the other insurance and financial products they sell.
Agents, brokers, advisors, planners and producers dedicate considerable time, effort and invest direct hard-dollar expense to pursue the quest of planning for the financial security of their clients. Fundamental to financial wellbeing of clients is the creation of an income cash flow, under any contingency, adequate to match the outgo (expense) cash flow.
Of concern are the easily recognized contingencies that affect cash flow; unemployment, business failure, getting too old to earn money, getting sick or hurt and in consideration of dependents, the aspect of death. Being rich, or at least having a passive cash flow sufficient to be used as a substitute for earned income, is the single best solution for all these contingencies.
A financial plan is then conceived and the parts are put together to create, for the client, a plan that will bridge the chasms of diminished or disappearing cash flow. Loss of job and business failure is typically dismissed from awareness with a shrug and a comment like, “I just have to start over with a new business, or a new job and I will have to use my rainy day reserves.”
In financial planning, attention quickly focuses on creating a retirement income cash flow. A plan is set up to channel funds into the plan that will serve as the depository and distribution vehicle that will create and deliver the retirement income cash flow. Death is certain, but it is hard for some people to accept the fact that death could happen before one fully collects his or her retirement income proceeds. With uncertainty and reservation the client agrees to buy some life insurance, which in most cases is to offset loss of future earned income. Many people who do admit they could get sick or hurt, refuse to believe they will ever be disabled. They state, “I come from healthy stock and I’m a careful driver.” Even if I should have an accident I will not be disabled long and I will be sure to make my retirement plan deposits. These clichés are often heard by advisors and planners from uninformed and careless prospects and clients.
Perhaps such clichés murmured by consumers are also thoughts of advisors and planners as they think about their own mortality and morbidity and financial plans. Maybe?
We who are agents, brokers, advisors and planners have at our disposal the ultimate financial planning tool. A brilliant financial plan can be created that is unlike anything outside the insurance business. Our unique and dynamic financial planning tool is our renewal commissions, especially those guaranteed for the life of the policy. In cash flow terms it produces the equivalent of millions of dollars of wealth; it outperforms the best of investments. It is magnificent deferred compensation and the finest of passive income.
The industry average-sized annual premium on an individual disability income policy is $2,300. One average-sized case per week for 50 weeks out of the year can produce $100,000 of premium in-force. In ten years the in-force premium is $1,000,000 per year. Based on a 10% renewal commission, a producer would have renewal income of $100,000 per year.
To save $1,000,000 to create passive income would require saving $1,000 per month from after-tax earnings for a period of more than 83 years. A disability account of $1,000,000 in premiums can easily be accomplished in ten years or less.
To be continued next week…