Specialty Income Protection in the Golden State
Disability insurance is the greatest resource Californians have in protecting personal income against the very real threat of unforeseen and debilitating illness or injury. A 2013 study by Cornel University found that 8.5% of working age, non-institutionalized Californians are disabled. A relatively small and recently shrinking collection of American insurers offers a wide range of income protection products that provide unique features and benefit schedules, depending on a client’s financial planning needs and the current market outlook.
You are likely to find that most Californians making up today’s workforce are insufficiently, if at all, covered by some form of private income protection insurance. Many employers provide small layers of mandatory or voluntary guaranteed-issue group disability benefits. Since the carriers of such plans offer terms on a guaranteed basis, underwriter guidelines commonly limit benefits to 60% of income with usual caps of $5,000 to $15,000 per month depending on the insured’s occupation, income level as well as employer generosity. For the majority of blue-collar, grey-collar and governmental employees, employer-sponsored group disability insurance provides acceptable income replacement coverage. However, most California residents work for small business owners, are self-employed or are independent contractors. In these instances, group disability insurance is often times not available.
Those without group DI can seek individual disability insurance from a handful of large U.S. carriers. These insurers employ individual underwriting and morbidity analysis to provide prospects with policies similar in comprehension to group disability certificates. Therefore, most Californians can find sufficient disability coverage from a combination of group and standalone individual benefit sources. However, not all occupations provide annual incomes in ranges that can be effectively covered by group or standard individual disability policies. Most Californians in the white-collar market and many in the rapidly-expanding grey-collar market make salaries that are hardly covered by combinations of group insurance and single, traditional disability income policies. This shortfall can be bridged by prescribing a multiple layering of qualified disability coverage with a tiered-benefit approach to income protection.
Take an attorney for example, working long hours for a large Los Angeles law firm, making $750,000 per year. The partnership has agreed to provide group benefits capped at $15,000 per month. His steadfast insurance advisor suggests he apply for an additional tier of individual coverage from a disability carrier who is willing to provide another $15,000 per month. $30,000 of monthly disability income benefits sounds like a lot of coverage to most, but we must consider the risk in its entirety including the attorney’s lifestyle and standard of living. He has a large home mortgage, luxury automobiles for him and his spouse, and he has two kids in private universities. He must have at least 65% of income replacement to financially survive and to maintain even a fraction of his current expenditures in case he became disabled and was unable to continue to practice law. His insurance agent would need to next look to the supplemental/excess disability markets where underwriters would be willing to offer Mr. Attorney a third tier of monthly benefits, participating up to 65%, sometimes 75% of the client’s earnings.
The non-traditional, surplus lines DI market has the ability to provide a third and, in some instances, a fourth tier of income protection above usual disability income limitations. Additionally, excess disability policies are flexible, and can provide dovetailed “own occupation” benefits to age 70.
For moderate to high net worth individuals, the risks of underinsurance can prove to be severe and financially disastrous. Clients need to properly layer disability income benefits on top of existing group and/or individual policies. The tiered-benefit approach to disability insurance will successfully fill the subtle and blatant gaps in the financial protection of personal income.
In some cases, the tiered benefit approach isn’t applicable as there are high net worth individuals who are unable to acquire any traditional group or base disability coverage due to their occupations. These clients are commonly found among those of the entertainment industry.
Hollywood has long provided California with a fantastic and glamorous history, but the famous faces that make up Tinsel Town have never been embraced by the standard disability insurance market. Regardless of their usually highly-touted annual earnings, entertainers commonly find discriminating circumstances when they attempt to acquire insurance against disablement.
The surplus lines DI market is considerably less rigid and has fully accepted and caters to the men and women that make a living in front of a camera or behind a microphone. Benefit platforms have been developed to comprehensively insure the varied earnings patterns commonly found in film, television, music and modeling. Furthermore, the secondary market has recently introduced a disfigurement benefit rider which serves to provide compensation in case of irreparable scarring or physical damage to one’s appearance even without the technical presence of a disabling event.
Beyond the personal income protection needs of Californians, the safeguard of corporate finances is extremely important. If a business owner or marquee employee becomes even temporarily disabled, a business can quickly fall into economic peril, endangering the livelihoods of all employed persons as well as the very existence of the business. Key person disability insurance is a must for corporations and partnerships of any size.
The financial indemnification of key persons to a business can be attained through an individual standalone or group key person disability insurance policy. Benefits are usually payable to the corporate entity in monthly installments or lump sums based upon a multiple of earnings and/or quantitative value of the key employee to the business in question. The financial underwriting of such policies can prove to be quite subjective and at times a daunting task to the most capable of underwriters.
How do you sufficiently and monetarily measure the value of a person to a business? Underwriters consider a number of factors including salary, the value of any ownership in the business, the company’s potential loss of future contracts and earnings as well as replacement costs of the key person.
California is an incredible place to live and is home to some of the world’s most wealthy, influential and creative persons and all of them need disability insurance policies above and beyond what can be attained through traditional sources. The specialty DI market is the best resource for supplemental insurances and coverage for hard-to-place cases.