A typical affluent family owns a variety of assets, including real estate, cars, retirement accounts, investments, cash and life insurance. But some assets may be vulnerable to possible loss, through economic downturns, mismanagement or natural disaster.
Fortunately, some of those losses can be offset by transferring the risk of loss to an insurance company. Still, there are other risks, such as job loss or experiencing a business failure, which cannot be so readily transferred.
Protecting your client’s greatest asset
Many wealthy individuals attempt to protect their assets from creditors through the smart use of trusts designed for that purpose. However, that strategy can’t protect their most valuable asset, their lifetime of earning power, or what we call human life value. Your clients can’t readily safeguard their earning power using a trust, but they can protect their human life value using of life insurance.
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Life insurance is the easiest way to transfer the financial risk of loss due to premature death from an individual or family to an insurance carrier. When the need to transfer such a risk is life long, and when resources are sufficient, participating whole life insurance is an ideal uncorrelated asset with which to transfer the financial risk of premature death. The policy’s cash value — its “living asset” — also becomes part of the fixed portion of a well-diversified portfolio.
We’ve focused for years on how life insurance replaces income that can no longer be produced in the event of premature death. But certainly disability insurance is the second important element of protecting human life value. HLV is the total of all the income an individual will earn in his or her lifetime and disability insurance is income protection, helping to replace income lost during a period when an individual is too sick or injured to work.
Together, life and disability insurance can provide a sufficient level of human life value protection to a family or a business, a protection generally overlooked in the advanced planning arena of asset protection.
The need for protection: A case in point
I have an attorney client. At the age of just 33 she’s on the fast-track, earning $150,000 a year with plans of working to age 75. (She indicated 75 is the new 65!) With 5 percent annual increases over that period, estimates show she will have generated more than $20 million in her working lifetime.
Even just three percent increases will add up to almost $13 million. Either way, it’s a large asset. But premature death or disability will deny her and her family the maximum benefit of that earning power.
The math and the responsibility hadn’t occurred to her before this line of thinking was presented. She was both pleased to consider her financial potential, and worried what the potential loss would mean to her family.
There’s a great consumer resource at DisabilityCanHappen.org. Starting with the most natural question, “How likely is it that I will become disabled?” my client discovered her “PDQ” (personal disability quotient) is a low 16 percent. (Disability” statistics identified on this site are defined as the chance of being injured or becoming ill and unable to work for at least three months.)
Nearly two-thirds of wage earners believe they have a two percent or less chance of being disabled for three months or more during their working career, but the actual odds are 1 in 4. (Photo: thinkstock)
Perception vs. reality
Approximately 64 percent of wage earners believe they have a two percent or less chance of being disabled for three months or more during their working career, according to the Council for Disability Awareness. However, theU.S. Social Security Administration puts the actual odds of a three-plus month disability for a worker entering the workforce today at about 25 percent. There is thus a big difference between perception and reality.
Further, most working Americans estimate their chances of experiencing a long-term disability are substantially lower than the average worker’s. They think bad things will not happen to them — even though the stats say otherwise and we know some of them will experience a disability.
But if my attorney client does become disabled, there’s about a one-in-three chance she will be disabled for five years or longer (average length of disability for her age/health/activity is 78 months). A slightly older and less fit38-year old business owner has a 38 percent likelihood of experiencing a disability lasting three months or longer; and he has an almost 40 percent chance of the disability lasting seven years.
Why insure the risk?
So for our healthy, skilled 33-year-old attorney, let’s put it all together:
All of these statistics are in favor of using insurance to mitigate significant financial loss because the low early probabilities make it affordable.
And here’s one more interesting statistic: The chance that an individual’s house will burn down in his or her lifetime is an estimated 0.033 percent, according to the FEMA U.S. Fire Administration.
But there is a disconnect about the risks and liabilities surrounding house fires versus those related to premature death or disability: We tend to fully insure our homes, but most people have woefully insufficient coverage for loss of income due to death or disability.
Why is this a problem?
Consider these startling facts from the Council for Disability Awareness:
• A 2012 consumer survey revealed that 68 percent of Americans would find it very or somewhat difficult to meet their current financial obligations if their next paycheck were delayed for one week.
• A 2015 Federal Reserve report indicates that 46 percent of those polled said they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.
We cover the loss of the full human life value potential with life insurance – and Life Insurance as an Asset Class makes a compelling argument that the cash value of participating whole life is a respected and valuable fixed income component of an individual’s fully diversified portfolio.
While disability insurance doesn’t need cash value to make it affordable during the working years, when it is combined with appropriate amounts and kinds of life insurance, a “double-duty” synergy is achieved, resulting in complete protection for the portion of human life value for which insurance exists and can be obtained at a reasonable cost relative to the potential for loss.
Adding a “waiver of premium” rider to a life insurance policy can help ensure your clients’ life insurance premiums will be paid in full during qualifying periods of disability. (Photo: Thinkstock)
Life and DI as an asset class
With appropriate amounts of monthly income to cover the normal expenses of living, the economic life of a family can continue while the breadwinner is unable to bring home a paycheck:
The mortgage gets paid;
Credit card and student loan payments continue;
Savings and investments for retirement, weddings, and other future needs can be accomplished;
Vacations can be planned.
In fact, unless there is a substantial amount of wealth prior to the loss of earned income, disability insurance is the only asset that can assure the family’s economic normalcy in the face of disability.
Super-charge your client’s protection
Looking for a triple-play rather than just double duty? Adding a “waiver of premium” rider to a life insurance policy can help ensure your clients’ life insurance premiums will be paid in full during qualifying periods of disability.
With an active waiver provision, cash value growth and dividends continue to accrue unimpaired. (Disability insurance includes a comparable waiver of premium). Even better, add an index participation feature to select whole life policies and your client can direct policy dividends into an indexed account.
It’s a fact of life that people are, in general, reluctant to spend much time contemplating mortality or the loss of their ability to earn a living. Unfortunately, that can also mean they fail to plan for those contingencies that can devastate a family or business.
While it is impossible to know what the future has in store, you can guide your clients to protect themselves and their loved ones in the event that the unforeseen should happen.
Richard M. Weber, MBA, CLU, AEP (distinguished) is managing member of Ethical Edge Insurance Solutions, LLC. Read his full bio here.