Layering Benefits to Effectively Safeguard Income

Common sense and assumption based on experience in the life and health insurance industry have led me to the realization, which I’m certain most of you have witnessed and will wholeheartedly agree upon, that most clients and hopeful prospects—most, not all—are in no way proactive when it comes to their insurance needs.  No matter how financially savvy a consumer believes they are, many tend to aim for a path of least resistance and lowest cost when it comes to the contemplation of purchasing insurance even though they may recognize that a claimable “event” could spell utter disaster from an economic standpoint.  And in no industry sector is that more clear and relevant than with income protection—disability insurance.

Without financially protecting one’s paycheck, men and women stand to lose their single most vital source of economic freedom.  Regularly-earned income provides for the necessities of one’s lifestyle and of one’s family—it allows for food, shelter, utilities, transportation, education, healthcare as well as the other numerous bills and costs the average American encounters on a daily basis.  Income also provides for the luxuries and niceties that we often take for granted like vacations, entertainment and recreation costs.  Unfortunately, most Americans making up today’s workforce are insufficiently covered by some, if any, form of income protection insurance.

It’s inherently natural to disbelieve in one’s own morbidity and physical demise, yet statistics show that a healthy person is at least three times more susceptible to disablement from accident or sickness than to death during their career. Disability insurance is quite often overlooked or simply an afterthought, and that needs to change in this country.

The U.S. Department of Labor and DI experts throughout the country have maintained for decades that a working American should have at least 65% of his/her income insured in the hopes of providing for one’s family during a period of total disablement.  Some high-limit DI carriers, in certain cases, are now participating with coverage up to 75% of one’s income if any in-force benefits happen to be taxable to better allow for more substantial income protection.

Disability insurance is a necessity, and having less than 65% of income insured isn’t prudent nor viable financially if and when a disablement occurs.  Insurance is all about preparation for the unknown and planning for the worst case scenario.  A vast majority of Americans, even the wealthy, fail to maintain significant savings and liquid assets in cases of emergencies like unforeseen disablement.  Retirement programs are certainly gaining a stronger foothold among the masses—more people in this country are planning for their futures after retirement, but they are severely lacking in protection for the here and now during their working careers.

Underinsurance provides a false sense of security for which you don’t want to be responsible.  As an advisor you owe it to your clientele to get them appropriately insured to high-limit DI levels so they can economically care for themselves and their families if they were to suffer a short or long-term impairment.  You are not selling them just another redundant piece of paper.  You are providing them with financial freedom from potential disaster.

The disability insurance needs obviously vary from client to client depending upon occupation, age, income and lifestyle.  In my experience, many prospective clients require a layering approach to DI protection with the employment of multiple insurance policies over varying platforms.  Income protection isn’t black and white.  There typically isn’t one simple solution, no one formula for success.  By nature and historical limitations of the market, one DI policy or one product just isn’t going to cut it.  There are actually multiple levels of disability insurance, and all can be extremely important to your clients.

The first level or layer is group insurance, better known as LTD (long-term disability).  Many U.S. employers provide small layers of mandatory or voluntary guaranteed-issue group LTD benefits.  Since the carriers of such plans offer terms on a guaranteed basis, underwriter guidelines commonly limit benefits to 50% to 60% of income with usual caps of $5,000 to $15,000 per month.  For the majority of blue-collar workers and governmental employees, employer-sponsored group insurance combined with state disability benefits provides acceptable income replacement coverage.  But most of the workforce in this country are employed by small business owners, are self-employed or are independent contractors.  In these instances, group disability insurance is oftentimes not available or isn’t sufficient on its own.

The second layer of income protection is IDI (individual disability insurance).  Those without group DI or without a sufficient level of group DI can seek individual disability insurance from a handful of large, reputable U.S. carriers.  These insurers employ individual underwriting and morbidity analysis to provide prospects with policies similar in comprehension to group LTD certificates.  Most Americans can find acceptable levels of disability coverage from a combination of group and standalone individual benefit sources.

However, there are many income-earners in this country that have salaries in ranges that cannot be effectively covered by group and/or standard individual disability policies.  That brings us to a third layer of DI.  Most in the white-collar market as well as physicians and dentists, and many in the rapidly-expanding grey-collar market have annual earnings that can hardly be insured by such a combination of group insurance and a single, traditional disability income policy. 

Consider an executive making $300,000 per year.  Is a group LTD plan providing 60% of income up to $10,000 per month going to allow enough protection to maintain that person’s lifestyle or the lifestyles and financial needs of their spouse and children?  Families with a high-net worth require more insurance than most, as their average expense ratio is significantly higher than an average household.

The third tier is comprised of high-limit DI and is only accessible through the Surplus Lines market and specialty carriers like Lloyd’s of London which specializes in providing income protection above the usual disability benefit limitations of most U.S. carriers.  High-limit or “excess” disability insurance is readily available on a fully-underwritten, individual basis as well as for groups large and small on a multi-life guaranteed-issue basis. 

For moderate to high-net-worth individuals, the risks of underinsurance can prove to be severe and financially disastrous.  Your clients need to understand the importance of the varying layers of income protection, and with your guidance, properly tier and layer supplemental benefits on top of existing group and/or individual policies.  Safeguarding 50% of one’s income is not enough.  Safeguarding 60% of one’s income is not enough.  The multi-layer benefit approach to disability insurance will successfully fill the subtle and blatant gaps in your clients’ risk exposure.

–Published with permission from Broker World Magazine.