Why high limit disability insurance?

• Author: Terry, Gary F.

Highly compensated lawyers, investment professionals, and corporate executives all have the same financial problem, one that becomes more serious as each year passes. The problem also receives far too little attention, which may be why so few professionals are aware of their predicament.

The problem is the gaping hole in their disability protection--and that's no exaggeration.

A Case in Point

Here's just one example. A portfolio manager in a large investment firm who earns $1 million per year is diagnosed with a severe case of multiple sclerosis and goes out on disability indefinitely. His disability plan will pay 60 percent of his earnings up to a maximum of $25,000 per month (a combination of group disability of $20,000 and a traditional supplemental plan of $5,000), or $300,000 annually. This means that his original pre-disability, after-tax take-home pay of $650,000 ($1,000,000 - $350,000) (assume a 35 percent tax rate) is now $300,000. His disability income benefit is 54 percent less than he took home after-tax before becoming disabled.

As strange and ironic as it may seem, the disability insurance market for the highly compensated has been frozen for the past two decades. Although salaries, annual bonuses, and long-term incentive payments have increased dramatically during this period, the available amount of disability income protection hasn't changed at all. The irony is that the more income these individuals earn, the less coverage they may obtain as a percentage of their total compensation. Thus, the gap between needed disability coverage and what U.S. insurance companies are willing to provide continues to widen.

It wasn't always this way. Back in the '70s and '80s, the disability insurance market was young, aggressive, and growing by leaps and bounds. A number of insurance companies were determined to gain market share, no matter what it took to reach their goal.

To accomplish their objective, they went so far as to broaden their definitions of disability and they hung out a welcome sign for members of certain professions in particular. Sales went up, of course, but so did the number of claims. The major losses some insurance carriers experienced led to a major industry consolidation.

Today's Market

Today, the disability income insurance market is concentrated in a handful of companies that write most of the business. Their actuaries develop guidelines and set rules on how much coverage (the amount of the monthly benefit) they...