Redefining Overinsurance

All disability insurance carriers have genuine concerns regarding overinsurance, as it has the potential of creating a moral hazard of enticement to file unsubstantiated and unnecessary claims. Traditional disability insurance carriers address this phobia in the form of issue and participation limits. These carriers believe that as the monthly benefit amount increases, the moral hazard and risk also increases. The traditional carriers tend to fixate on monthly benefit amount instead of covered percentage of income. Financial analysis has proven that as incomes increase standards of living and therefore expenses increase proportionately. High income earners are often very driven, very competitive, and most are not interested in remaining on a disability claim longer than absolutely necessary.

Petersen International Underwriters has long been a provider of supplemental high limit disability insurance which traditional carriers consider outside their risk retention “comfort zone”. Disability protection at 65% of income is recognized by the insurance industry as the appropriate and minimum level of insurance that one should acquire. Petersen International Underwriters believes that 65% of income should be provided regardless of the insured’s occupation or income level. Disability insurance industry statisticians have advised that the average duration of a long term disability claim is approximately three years. If the average claim is only three years, why are we prescribing benefits that are payable to age 65? We might argue that a “to age 65” benefit period be considered overinsurance, as the majority of disability claims are resolved by year five.

Supplemental disability insurance is designed to provide the insured person additional layers of coverage up to that appropriate level of 65% of their income regardless of the monthly benefit amount. A large benefit amount for high income earners is extremely important in terms of proper financial planning.