End of the Line

One of the most dramatic illustrations of how one person’s life can change in a heartbeat is the 1995 riding accident transforming Christopher Reeve from Superman to a wheelchair-bound paraplegic. Aside from the enormous impact of the disability, another aspect, faced by many families daily, was how to deal with everyday financial obligations and rapidly escalating expenses in the face of sudden, total loss of income. Even a movie star’s pay would be hard-pressed to support the needs of Reeve and his family after the accident. But with Reeve unable to work, how long would the money last?

Fortune intervened in Reeve’s case, both in the form of comic Robin Williams, Reeve’s Juilliard classmate, and in Reeve’s own eventual return to work. But most families do not have the luxury of a rescuer waiting in the wings with a financial bailout, and many professions cannot be pursued in the face of disability. Planners must consider the question of what will happen to a client’s entire family if accident or illness robs them of a reliable income stream. That’s where disability insurance comes in.

Even though disability insurance is a complex product, advisors should be familiar with what it can and can’t do. In fact, Kevin Meehan, a planner in Itasca, Illinois, argues that “all financial plans will become unraveled without appropriate risk management before the event. To call yourself a planner and not address protecting someone’s income borders on malpractice.”

In the 1990s, he says, many advisors ignored the more “difficult” areas of the financial plan, such as insurance planning. Since these advisors could make “significant dollars” from clients by managing money, rather than by constructing a complete plan, many clients are now unprotected against losing their income stream–”the most important asset you have,” according to Rob Moody, a planner in Atlanta. The younger a client is, and the greater that client’s income potential, says Moody, the more it must be protected. While he concedes that “it’s no fun to sit there and read through an entire disability policy,” he also emphasizes, “that’s what comprehensive financial planning is all about.”

Disability insurance is meant to protect against loss of income due to accident or illness. You can start your search for coverage by consulting one of the insurers listed in the sidebar on page 76 (a more comprehensive directory is available for download at www.investmentadvisor.com). But there are many factors to consider when selecting a policy. For example, is the coverage for the insured’s own occupation, or any occupation? Must your client return to work in any capacity available? “As long as you could sell movie tickets, [an insurer] might consider it gainful,” Moody says. How is disability defined? Under what conditions will a policy pay? Is there a cost of living provision? How long will benefits be paid? And what are the exclusions and limitations?

Caveat Advisor

Once you’ve waded through the terms of the policy itself, you’ll find your job is not over yet. Individual disability insurance is not easy to buy. Companies are merging or exiting the field. Underwriting has become more stringent, with certain types of coverage more difficult to get. But even amid the turmoil since 9/11, ratings on the “very small number of companies” selling disability insurance have not changed, says Kevin Maher, associate director of Standard & Poor’s Financial Services. In fact, says Maher, companies are working to expand their market in group sales, which involves packaging disability coverage with other benefits. In addition, Maher points out that companies are targeting lower age groups “that don’t believe they’ll ever be disabled.” Ken Smith, a first vice president at Mutual of Omaha, for instance, is looking at expansion into blue-collar markets with a policy that offers a limited benefit period of five years or less.

The group-sales effort may frustrate individual advisors. Often, clients will say of disability insurance: “I have it at work.” Moreover, they may have no clue just what they have acquired. According to Peg Downey, a planner in Silver Spring, Maryland, “Ninety-nine percent of the time, what they have at work is inadequate. Many times they don’t get any more from employers than two sentences that say they’re covered for up to 60% of their base salary.” Employees tend not to inquire how base salary is defined or what conditions trigger coverage. Employees also often fail to realize that 60% may not be adequate for their needs, or that they can purchase supplemental policies to bridge the gap.

Consumers and advisors need to ask questions for another reason. Insurers, says Maher, are “more careful as to what they’re including and not including in coverage.” Companies also, he says, seem to be investigating more claims as they are presented. Often such areas as mental health are “segregated into a package” so the insurer can provide it as an add-on or to a whole company, rather than offering it to all potential policyholders.

George Paquin, a fee-only planner and licensed insurance advisor from Chelmsford, Massachusetts, has also seen insurers “getting smarter about asking questions. It turns out that most people have smoked something funny in the past or have been seeing a counselor, and the companies run like hell.” Indeed, Paquin cites one client, a recovering alcoholic who hadn’t had a drink in 15 years, who was nonetheless denied a policy. Moody, meanwhile, tells the tale of one client, a widower, who went to see a mental health professional and then found it hard to increase his disability coverage through his group plan. The insurance company, asserts Moody, “was afraid he might be habitually depressed.”

Moody, himself in the process of increasing his disability coverage, worries about a back injury he suffered in 1994. “I went to see a back doctor once, who referred me to a physical therapist whom I visited one time,” says Moody, “and I haven’t had any problems since.” But he expects that his insurer will add a waiver to his policy to exempt his back “and not cover it because of this injury that happened more than eight years ago.” His advice? While still young and healthy, purchase a good, non-cancelable disability policy on which coverage can be increased as income rises. “Once you start [having health problems] it’s going to be very difficult to get coverage for that problem,” he warns.

Not only would-be policyholders are upset with insurance companies’ tougher standards. Some policyholders have filed a class action suit against UnumProvident Corp., the nation’s largest disability insurer, charging it denied claims based on decisions made by non-medical personnel to cut costs. The suit, following an individual suit filed by a former UnumProvident doctor who alleged the same things, seeks, in addition to unspecified monetary relief, a reevaluation of all claims denied by UnumProvident in the last few years. While UnumProvident’s Rick Magro, VP of individual product design and marketing, declines to comment on the suit, he adds, “our core purpose is to pay claims in an ethical manner.” He notes UnumProvident paid more than $3.6 billion in disability-related benefits in 2001.

Picking a Winner

So how do you pick the right policy for your client? You could start with a list of items Rob Moody has compiled to make the selection process more efficient. He suggests you look at these:

o How strong is the insurer? “You’re buying a promise to pay,” he says. The strongest companies, he warns, also usually have the highest premiums. “Northwestern Mutual Life is probably the strongest financially,” he points out, “but will also charge very high premiums.” Compare the financial strength rating of the company with its premiums; he uses ratings from five different firms, and pays attention to what percentage of companies rated by each firm had a higher rating. “It’s possible,” he says, “for a rating firm to rate an insurance company A+, but it might be that that firm rated maybe 60% of all the companies they rated higher than A+.” Also weigh the financial rating against the premium; finding the strongest company won’t help if your client can’t handle the premiums.

o Is the benefit tax-free? When an employer pays the premium on a disability policy, the benefit is taxable. Moody suggests that if a client has the option to pay premiums with after-tax dollars, she should, because the benefit itself becomes tax-free.