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The ability to fill this gap is becoming of increasing concern to certain professionals, which in turn has stimulated a new and alternative disability marketplace: supplemental high-limit disability insurance. Designed to be taken in conjunction with the maximum amount of traditional coverages available, this product ensures that a successful professional and his or her family will not suffer a dramatic change in lifestyle, nor have to erode their accumulated assets in the event of a disability.
The most unique component of this product is the amount of benefit that is available to an individual. Monthly benefits begin at $10,000 and are capable of reaching and exceeding $250,000 a month. Furthermore, unlike traditional disability coverage, which usually pays the benefit until the insured is age 65, the monthly benefit in high-limit disability is payable for up to 60 months. In order to offset the fact that the benefits are payable for five years, the applicant can also purchase a large lump sum benefit, which is payable after the expiration of the monthly benefits. The lump sum can range from $250,000 to $25 million, and, if used to purchase an annuity, in many cases can allow for benefits to be payable even beyond age 65.
This product is further differentiated by the fact that it functions in a similar manner to term life insurance. The applications for high-limit disability insurance are identical to those of guaranteed renewable disability and standard life insurance. The insured is protected against a disability occurring within a certain time period, usually between three and five years. After the policy term, the individual reapplies in order to renew the insurance. This underwriting process for renewals ranges from extremely limited requirements to the same underwriting that was required for the original policy, depending on age, health status, occupation, and benefit amount. Furthermore, the insured will have to justify the sum insured amount that originally was issued.
All professions, no matter how high-risk, can qualify for high-limit disability coverage. While the greatest number of candidates for the coverage come from the ranks of small-business owners, there is also a large need among those in the highly-trained fields of law and medicine. In addition, even those occupations with volatile incomes, such as traders, investment bankers, insurance agents, real estate agents, and the like qualify for coverage by basing benefits on a three-year average of gross income.
As it relates to "dangerous" professions, high-limit disability is the primary level of insurance because coverage is not available through conventional means. The product is used by athletes and entertainers, and has even been purchased by individuals who have occupations like mine sweeper or astronaut. While the available terms and pricing may vary dramatically across these careers, virtually all professionals are capable of obtaining large amounts of disability coverage through non-traditional means.
High-limit disability insurance is primarily used for personal income protection and is designed to protect a wage-earner's most important asset, the ability to generate an income. The policy guarantees the insured an income as close to his or her pre-disability salary as possible in the event the insured is no longer capable of performing the duties of his or her profession because of an injury or illness. Usually, for this goal to be attained, an insured will require a monthly disability benefit equal to 60% of his or her gross income, if the transaction is completed in such a manner as to allow the insured to receive the payments on a tax-free basis. Persons who make in excess of $300,000 a year often are incapable of obtaining enough disability coverage through traditional means and should complement their existing insurance with high-limit disability protection to fill the gap.
The second and often ignored use of high-limit disability insurance is to protect businesses that are structured on a partnership basis with a buy-sell agreement in place. In the vast majority of cases, these agreements are protected against the death of a partner. However, they are seldom insured against one of the partners suffering a career-ending disability -- which can be devastating to the remaining owners. The unavailability of required benefit amounts inhibited partnerships from insuring buy-sell agreements against disability. That is no longer the case with the increased availability of large lump sums up to $25 million per person. With high-limit disability, nearly every buy-sell agreement is fully insurable. Such coverage eliminates the unpleasant possibility of having to compensate a partner who no longer can contribute to the company.
There are many other uses for the high-limit disability product as it stands today. This is primarily because of the product's flexibility. When dealing with individuals or transactions of the wealth, size, and scope for which this product is appropriate, there are unique solutions for each case. Therefore, the high-limit disability insurance industry has become accustomed to tailoring each risk on a case-by-case basis.
Other examples of situations where the product substantially reduces the financial risk of a person or entity include key-person coverage, contractual obligation protection, and loan indemnification insurance. Small-business owners are critical to their companies' survival. Key-person coverage provides insurance based on the companies' gross receipts rather than merely focusing on the indivdual's income. All such individuals should maintain a corporately-owned key-person policy that will allow the company to pay its overhead and keep its doors open in the event the principal is unable to work because of a disability. Large companies suffer a setback when a senior executive is lost. Small companies, however, can be forced into bankruptcy when a similar event occurs. This concept also has applications when a small corporation is being acquired. The purchaser has the exposure of losing its entire investment in the event that the key contributor to the company is unable to continue to work.
Statistics show that 48% of home mortgage foreclosures are because of a disability, but nearly three-quarters of American wage earners do not have any disability protection. High-limit disability can be structured to provide benefits that enable an insured to continue to make his or her mortgage payments in the event of an injury or illness. While mortgages are the most common example of loan indemnification coverage, the product can be structured to insure almost any form of debt an insured is obligated to repay.
As with any insurance product, there are certain clauses and provisions that should be included in your client's policy to ensure they have the best product on the market. There are several high-limit disability products available and they are all different. There are at least three Lloyd's of London policies, all uniquely worded and priced. The key components to look for can be summarized as follows:
o Specific Own-Occupation Definition
o Waiver of Premium Clause
o Residual Benefit Provision
o Recurrent Benefit Provision
o Presumptive Disability Benefits
o No Other Income Offsets.
The candidates for high-limit disability insurance normally fall into one of two categories. The first are those with incomes greater than $300,000 a year. Professionals in the highest tax brackets suffer the most significant change in lifestyle in the event they suffer a disability and are underinsured. Most persons with an income above $300,000 have either insufficient disability insurance or none at all. Traditional companies are unable to offer coverage to people who have a significant net worth, which is usually defined as more than four or five million dollars. High-limit disability coverage is the only option available to these wealthy men and women.
The second category of high-limit disability insurance is for professionals whose occupations are deemed high-risk or highly volatile. Because of the flexibility of the high-limit disability products, these persons can have a customized product designed solely for them. In addition, many professions have unique compensation practices. Their incomes are not as simple as a straight W-2, and may include large bonuses or capital gains rather than wages. High-limit disability underwriters take into account all forms of revenue, from wages and bonuses, to deferred compensation agreements and retirement account contributions.
It is important to note that high-limit disability insurance is not a substitute for traditional individual and group disability coverage. It is designed to serve in a supplemental capacity to fill the gap between the benefit amounts under those policies and what the insured will require to maintain the same lifestyle for his or her family without liquidating previously amassed wealth.
Daniel I. Burns began working at Pro Financial Services, Inc. in 1997, shortly after graduating from Georgetown University. He began his employment in the policy administration department. In mid-1998, Dan was promoted to manager of his department. Over the next year, he focused on improving the firm's computer systems and procedures, helping increase the efficiency and accuracy of all administrative personnel. In 2001, Dan was promoted to president. Since then, he has developed relationships with insurance companies in the United States, Canada, Bermuda, England, Germany, France, and Italy. Strategic partnerships like these led to the renovation of the disability products used in Major League Baseball and the National Football League.
