Barry J. Fisher Paradigm Insurance Marketing

In May 2006 California Broker published an article that I co-authored with a colleague who specializes in disability income protection coverage. The premise of the article was that as clients get older their DI policies lose most of their value and that serious consideration should be given to replacing that income protection coverage with long-term care insurance.  As you might imagine, the article was met in some circles with derision and in others with merely a lack of enthusiasm.  However, this article came to mind the other day when a well respected agent that we work with mentioned to me that when his disability income insurance clients approach their late 50?s and early 60?s he has a discussion with them specifically on this topic.   So, I thought it might be useful to revisit this concept for your consideration.

Let me start by acknowledging the obvious.  That is, that the insuring clause (definition of disability) in an own occupation disability policy is inherently different than that found in a qualified long-term care insurance policy.  The former triggers benefits when the insured cannot perform the duties of his/her occupation and the latter when they can no longer care for themselves due to an inability to perform activities of daily living or they suffer a severe cognitive impairment.  One could say that the definition of disability in a long-term care insurance policy is closer to that of total disability.  Regardless, it is clearly function driven as opposed to occupation based.

One of the points that I made in the article was that as a person?s life changes and they move towards retirement the nature of their professional and business lives may change, and in fact, the disability policy that they purchased because they were a trial attorney or a brain surgeon may have become obsolete.  The risk that was being indemnified for 20 years ago, having a steady hand or being able to attend a court trial, may no longer be pertinent. These professionals may already be consultants or have moved onto other aspects of their livelihoods where proving that they can?t perform a certain specialty or aspect of their business could be difficult.

The larger point that I tried to make in the article, however, was the basic fact that as time passes without a claim, disability insurance policies actually have a diminishing dollar value and an increasing cost per unit of coverage.  For example (and I quote from the article) ?when your 37-year-old client purchases a ($5,000 per month) policy that pays benefits to age 65, they are getting (or starting off with) a protection package worth $1.7 million (not adjusting for COLA in the event of claim).  But it is only worth about $600,000 when they reach age 55 and $300,000 when they reach age 60.?

There are several points that should be considered here:

1. Unlike long-term care insurance the cost of living (COLA) adjustment in a disability income policy does not begin until the insured goes on claim.  Therefore the policy actually loses value unless they suffer the insuring event sooner rather than later.
2. If our 37-year old pays $3,000 per year for his disability insurance his/her initial cost is .00176/thousand ($3,000 divided by $1.7 million).  If they don?t go on claim until age 60 the cost per thousand will be .01/thousand ($3,000 divided by $300,000). Therefore, the annual cost per thousand of benefit at age 60 is nearly 18 times more than at the initial issuance of the policy.  I understand that this example does not consider that the COLA rider engages in year two of the insured going on claim. However, even if this insured were to go on claim at age 60 a 5% COLA would have minimal impact on the actual benefit payout since the insurance company is only on the hook for five years.

Long-term care insurance purchased with a 5% compound inflation protection has an increasing value from year two of policy issuance and thus a decreasing cost per thousand of benefit as time passes. A 55-year old client who purchases a $365,000 pool of money policy ($200 per day times 5 years) for about $3,000 per year today would have a benefit pool at age 83 (likely age of claim) of $1.6 million.  This cost-to-benefit equation is almost 180 degrees opposite that of disability income protection.  What is also starkly different is that as the client reaches their 80?s the likelihood of making a claim and using their policy is nearly 50%; far greater than the probability of being disabled prior to age 65.

One other quick point I?d like to emphasize before I wrap-up this posting:

Benefits from qualified long-term care insurance are always tax-free and the premiums are tax deductible (all or in part) for business owners.

This isn?t the case with disability income insurance.

AGAIN, I?m not suggesting that the disability income protection that you?ve been selling all these years has been the wrong thing or that you should now go out and replace all of the DI policies that you?ve sold with long-term care insurance.

WHAT I AM TRYING TO GET YOU TO DO is think about the value proposition of long-term care insurance in light of other policies that you?ve sold over the years so that you can better explain it to consumers.  Your job of protecting income doesn?t stop when your client retires. The risk changes, the nature of disability changes and therefore, so does the sort of insurance protection ought to be purchasing.

If you?d like a copy of my original article, please email me at barry@paradigmins.com.