Q&A with Kelli Hueler: - Napfa

insurance
By Mark desiderio and John ryan, cfp®
Top 10 Mistakes advisors Make When
Evaluating disability insurance
Understanding disability insurance
is a never-ending challenge.
Since Ryan Insurance Strategy
Consultants started in the disability
insurance industry in 1978, we’ve
analyzed an endless array of policy
options and innovations. We’ve worked
with Fee-Only advisors since 1983 (when
NAPFA was started), seeking costeffective,
secure solutions for protecting
individuals and families.
Below are 10 key mistakes that we
have seen advisors make when evaluating
disability insurance. We hope you learn
from these mistakes, as well as from our
tips for avoiding these errors.
Not seeing the shortcomings in
employer-provided group long-term
disability policies. We would all agree
that employer-provided long-term
disability (LTD) is a great value. Often,
however, the benefit is not adequate.
The most common LTD plans
provide 60-percent of monthly earnings
up to a specified maximum benefit,
usually with a cap of $10,000 per month.
This means a person making more than
$200,000 per year is likely restricted by
the maximum benefit and would receive
less than 60 percent income replacement.
If the benefit is paid by the employer, it’s
likely to be taxable and, therefore, the
percentage of income replacement is even
lower. If the definition of earnings does
not include bonus or commission income,
a client may discover at the time he
needs support that he is entitled to only a
fraction of his true income replacement.
Plus, clients forget that the policy is lost
if they leave their company.
In sum, to determine the real value
of a group LTD policy, an advisor must
look beyond the definitions of disability,
monthly benefit percentage, and the
maximum benefit, in order to review the
taxability options, define “earnings,” etc.
Not discussing multi-life premium
discounts, especially with female clients.
Most disability insurance companies offer
discounts if three or more people from the
same company purchase a policy at the
same time. The discount applies even if
the policies are for completely different
benefit amounts.
When calculating the final cost of
each policy, the companies usually rate
each plan based on unisex ratings, rather
than making distinctions based on gender.
They then provide a 10 percent to 20
percent discount off the unisex rating. The
end result is a 10-percent to 20-percent
discount to men. For woman, on the other
hand, the discount can be upwards of 40
percent off the “street rate.” This means
that a female business owner client can
purchase a policy for herself and two other
employees for substantially less than the
cost of a policy for just herself!
Asset Value of Asset Cost to Insure
Failing to put price in perspective.
Most people do not think twice about
insuring their large assets, such as a house,
cars, boat, etc. What people usually do not
realize is that their largest asset—the one
that allows them to obtain all of their other
assets—is the ability to earn a paycheck.
Below is a table to help put the price of
disability insurance into perspective.
Using Social Security and/
or worker’s compensation benefits
in disability retirement cash flow
projections. Per data compiled by the
Council for Disability Awareness, it
might not be a good idea to assume that
governmental aid will be available for
financial support in the case of a disability:
• 65 percent of initial SSDI claim
applications were denied in 2009.
• The average monthly benefit through
SSDA in June 2010 was $1,065 per
month ($1,190 for males and $928
for females).
• Eight percent of SSDI recipients
received less than $500/month, 52
percent received less than $1,000/
month, and 97 percent received less
than $2,000/month.
continued on page 28
Percent chance of
using coverage, for
person of age 35
House $300,000 $1,500/year 1:77
Car(s) $50,000 $2,000/year 1:88
Earnings $2,250,000(varies) $2,400/year 1:4
Source: Council for Disability Awareness
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Napfa advisor ocToBEr 2012