Tiered-Benefit Income Protection

Disability insurance is the greatest resource Americans have in protecting personal income against the very real threat of unforeseen and debilitating illnesses and injuries. A relatively small collection of American insurers offers a range of income protection products, providing unique features and benefit schedules dependent upon on a client’s financial planning needs and the current market outlook.

You will find that a majority of Americans making up the workforce are insufficiently, if at all, covered by some form of income protection insurance. Employers may provide small layers of mandatory or voluntary guaranteed-issue group disability benefits. Since the carriers of such plans offer terms on a guaranteed basis, underwriter guidelines will commonly limit benefits to 50% of income with usual caps of $5,000 to $15,000 per month depending on the insured’s income as well as employer generosity and carrier comfort level. For most blue-collar, grey-collar and governmental employees, employer-sponsored group disability insurance provides acceptable income replacement coverage. However, many Americans work for small business owners, are self-employed or are independent contractors. In these instances, group disability insurance is often times not available.

Those without group DI can seek individual disability insurance from a handful of large U.S. companies. These insurers employ individual underwriting methodologies and morbidity analysis, providing prospects with policies similar in comprehension to group disability certificates. Therefore, Americans can often find sufficient disability coverage from a combination of group and standalone individual benefit sources. However, the U.S. harbors a capitalistic society where occupations and incomes vary to extremes. Many of those making up the white-collar market and the rapidly-expanding grey-collar market earn salaries that cannot be properly insured by the combination of group insurance and/or a single, traditional disability income policy. This shortcoming can be remedied by the prescription of a multiple layering of qualified disability coverage or a tiered-benefit approach to protecting one’s income.

Take an attorney for example, a partner in a large Chicago law firm, making $750,000 per year. The partnership has agreed to provide group benefits capped at $15,000 per month. His steadfast insurance agent suggests he apply for an additional tier of individual coverage from a disability carrier who is willing to provide another $15,000 per month. $30,000 of monthly disability income benefits sounds plausible and sufficient, but we must consider the attorney’s lifestyle. He lives in a large suburban home, has a vacation property in south Florida and two kids enrolled in private universities. He must have at least 65% of income replacement to financially survive and to maintain even a fraction of his current expenditures in case he became disabled and was unable to continue to practice law. His insurance agent would need to next look to the supplemental/excess disability markets where underwriters would be willing to offer Mr. Attorney a third tier of monthly benefits, participating up to 65% to 75% of the client’s earnings.

Petersen International Underwriters has the ability to provide additional tiers of income protection above usual DI participation limitations. Furthermore, excess disability policies are flexible and can provide dovetailed “own occupation” benefits to age 65 or 70.

For moderate to high net worth individuals, the risks of underinsurance can prove to be severe and financially disastrous. Clients need to properly layer disability income benefits on top of existing group and/or individual policies. The tiered-benefit approach to disability insurance will successfully fill the subtle and blatant gaps in the financial protection of personal income.