DI Basics: The Tiered-Benefit Structure

Disability insurance is an often overlooked, undervalued and misrepresented financial safeguard. Yet, it the greatest resource an income-earner has in protecting one’s economic freedom against the very real threat of not being physically able to make a living due to a short or long-term debilitating illness or injury. Disability insurance is essential to every working American.

Although the number of financial institutions in this country that sell DI products has dwindled considerably over the past several decades, the domestic insurers that remain loyal to the market are generally healthy, robust carriers offering a wide range of income protection products, including unique features and benefit schedules dependent upon on financial planning needs and market outlook (which is currently very positive).

Unfortunately, you will find that a majority of working Americans 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 commonly limit benefits to 50% of salary with usual caps of $5,000 to $20,000 per month depending on the insured’s corporate position as well as employer generosity and carrier comfort level. For most blue-collar and governmental employees, employer-sponsored group disability insurance provides acceptable income replacement coverage. However, many people working for small business owners, those who are self-employed or those who are independent contractors often find group disability insurance isn’t offered or at all 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. But as we all know, our American capitalistic way of life organically promotes a societal structure wherein 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 simple 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 New York law firm, making $1,000,000 per year. The partnership has agreed to provide mandatory group benefits capped at $20,000 per month. His steadfast insurance agent suggests he apply separately for an additional layer of individual coverage from a DI carrier who is willing to provide another $20,000 per month. $40,000 of monthly disability income benefits at first glance seems quite agreeable and sufficient, but we must further consider the attorney’s lifestyle and numerous liabilities and expenses. He lives in a pricey townhouse, has a vacation property in south Florida and two kids enrolled in private schools. 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. Currently, he is dangerously underinsured.

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 domestic DI participation limits. Furthermore, excess disability policies are flexible and can provide comprehensive, 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.