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Even Rich Boomers Need Adequate DI

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Brokers who have seen firsthand what serious disabilities can do to clients wish colleagues would work harder at persuading affluent baby boomers to buy disability insurance.

Now that the excitement of the 1980s disability insurance boom is a distant memory, “theres no buzz about it,” says Irwin Cohen, president of Affiliated Financial Specialists Inc., South Elgin, Ill.

Agents might mention the importance of DI in passing, then hurry on to try to sell other, easier-to-explain products that generate more commission revenue, Cohen says.

But “high net worth” boomers counting on income from their prime earning years to pump up retirement nest eggs, pay off big mortgages and put children through college may need DI almost as much as middle-income boomers do.

No government agency or charity looks after the interests of rich boomers with inadequate disability insurance.

The percentage of affluent boomers who are wealthy enough to bump into disability coverage limits, let alone other barriers to buying coverage, is probably small.

UnumProvident Corp., Chattanooga, Tenn., one of the dominant carriers in the market, can write policies that will pay as much as $30,000 in monthly benefits, as long as the benefit payments will replace less than about 60% of the insureds current monthly income, says Guy Bertsch, the companys vice president of product development for disability and LTC products.

UnumProvident and its competitors usually limit the amount of income that disability benefits can replace to avoid the risk that rich benefits will give claimants who could go back to work an incentive to stay home.

Matthew Herz, chief operating officer of Herz Financial L.L.C., Farmington, Conn., and president of JustDI, a Farmington-based disability insurance brokerage, says he has helped quite a few clients set up special disability insurance arrangements because the clients have had problems buying conventional coverage.

Many carriers have monthly benefit limits of $10,000 to $20,000, and some carriers look hard at net worth when assessing applications for coverage, Herz says.

Finding carriers that will write coverage for applicants with more than $4 million in assets is especially difficult, and the more liquid the assets are, the harder placing the business is, Herz reports.

If applicants collect significant income from relatively “passive” activities, such as investing in real estate, “that counts against you,” he says.

UnumProvident does not normally take net worth into account when underwriting applicants, because “we dont insure their wealth,” Bertsch says. “We insure their income. If theyre still working, theres something there to protect.”

But experts say underwriters at some insurers worry that, as much as standards of living might vary from person to person, anyone with millions of dollars in assets starts out with enough investment income to create a built-in incentive to stay home.

Some might ask why an affluent client needs disability coverage at all, but experts note that standards for affluence differ from individual to individual and region to region. Besides, “as salaries increase, lifestyles and expense structures increase,” Bertsch says.

A single, 40-year-old lawyer with no dependents and simple tastes who lives alone in Mission Hills, Kan., might live what most people would think of as a very comfortable life for just $5,000 per month.

But a married, 52-year-old neurologist in Manhattan with an ex-wife who collects alimony, a new wife with an irregular income, two older children attending private colleges, one young child who loves horseback riding and attends private school, two cars, and a summer house on Long Island might need as much as $40,000 per month, or $480,000 per year, after taxes, just to keep up what he thinks of as a comfortable, middle-class existence.

If the neurologist suffered a severe disability, he might need $10,000 more per month to cover the costs associated with coping with the disability. That would push his annual income-replacement needs to $600,000.

On top of that, he would have to continue to worry about saving enough to cover retirement expenses.

Although some moderately wealthy boomers are foggy about the concept of disability insurance, most are sophisticated people who “definitely are interested and do purchase this coverage,” Herz says.

So, what can a producer do to help the rare but much desired client who really needs disability coverage that will pay more than $30,000 a month?

One obvious thing that producers can do is to call the disability carriers they usually work with for advice. Producers also can call brokers such as JustDI that frequently find traditional coverage and make special arrangements for hard-to-place disability applicants.

Petersen International Underwriters, Valencia, Calif., for example, is well known for drawing on the international insurance markets to come up with custom disability solutions. The firm, which is a direct correspondent of Lloyds of London, develops its own high-limit coverage packages for doctors, athletes and other wealthy clients.

But Herz notes that, in some cases, clients who buy “special risk” policies end up with fewer coverage choices and weaker policy definitions than they would get if they could buy off-the-rack policies.

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.