On a business trip to New York City in 2003, financial advisor Sarah Carlson Rieger was crossing the street when an SUV came barreling at her. In an instant, Rieger was catapulted 30 feet into the air. When she landed, she had shattered her pelvis.
Rieger, president and founder of Fulcrum Financial Group of Spokane, Wash., endured seven surgeries over the next three years as well as rehab to restore the use of her legs. Most of her doctors thought she'd never walk again. In the months and years that followed, Rieger's associate and assistant took over the business by servicing clients, but her firm's dedicated wealth management work was on hold. "The income from servicing went toward the business," she explains. "But the business was no longer profitable. All the profit dried up because I was the rainmaker, and I was out."
Unable to draw a salary, the mother of four turned to her disability insurance policy. At the time, she was an agent affiliated with MassMutual and had group coverage through the company, in addition to individual coverage she purchased on her own. Those payments, plus Social Security disability, provided about half of her take-home pay, enabling her to hire a caregiver.
"Not having disability insurance would have made a difficult situation even more difficult," Rieger says. "Money provides you freedom."
For advisors, disability insurance has a double role to play. It's an important part of a comprehensive financial planning process for clients. But particularly for RIAs working as sole proprietors or with only a partner, disability coverage is also a business necessity for themselves.
Rieger believes that, without her disability policy, her money fears would have postponed her recovery and ultimately derailed her return to work. And she's not alone: Many advisors have little cushion if stricken by a debilitating injury or disease. Income depends directly on the ability to work with clients; there is no fleet of colleagues who can swoop in to generate additional revenue.
Not that disability coverage alone is enough to keep a business afloat. Jeff Peterson, an insurance broker with Seattle-based Pacific Advisors who has a large number of financial advisors as clients, explains that small business owners also need to consider how business expenses would be covered if they were no longer generating revenue.
"That's where overhead expense coverage would come in," Peterson says. It covers the costs associated with running a business - like rent, utilities and payroll - while the advisors collect disability payments for their own personal income.
But disability insurance plays an important role for an advisor wondering how to keep money flowing following an injury or illness. Peterson cautions that advisors may face greater underwriting scrutiny when it comes to getting their own disability insurance. "Some carriers won't insure them, in part because they know what the contracts are and they tend to use them," he says.
Diane Pearson, a wealth manager with Legend Financial Advisors in Pittsburgh, says her own story helps her explain to clients why disability insurance matters.
When she got married 21 years ago, she insisted her new husband, Alex, get disability insurance. "I didn't want a prenup, I just wanted him to get disability. Everyone thought I was crazy," she says. Two years later, she was working at Legend Financial and was four months pregnant with the couple's first child when Alex, a carpenter, had a wall fall on him at a job site. He couldn't work for six months.
With insurance payments coming into the household while Alex recuperated, Pearson was able to focus on working with her colleagues to get Legend Financial off the ground. Even if her husband's disability had lasted longer, she still would have been able to devote time to her career and not worry about where the money for caregiving would come from. "There's always an opportunity to share that story," Pearson says.
Of course, you don't need to have had a devastating injury of your own to understand how to protect yourself or your clients.
Adam Leone, principal and wealth manager at Modera Wealth Management in Westwood, N.J., bought life and disability protection shortly after getting married seven years ago and buying a new home. "It was time to be a grown-up," the 35-year-old CFP says. "If something happens to me and I can't work, I don't want to worry about the mortgage."
Disability is the No. 1 reason for foreclosures and bankruptcies, according to the Council for Disability Awareness. That fact gives planners a particular impetus to obtain insurance protection, Leone says. "Employers are checking credit reports," he says. "I probably wouldn't be able to find a job managing other people's money if I had a bankruptcy on my credit report."
Since getting his coverage, Leone prods clients to do the same. "New clients come in and they want to talk about what investments they should have," he says. "We try to put the brakes on that activity and talk about risk management. We can't control the markets, but there are risks we can control."
There's good reason to protect a paycheck. For most people, a career is their single largest financial asset. Yet only 25% of American workers have any kind of disability insurance, most of it through their employers.
Disability insurance continues to be a hard sell. Relative to other types of insurance, it can be expensive and the underwriting can be exhaustive. A life insurance purchase usually requires a few routine medical tests and a general health history. Disability insurance underwriting, by contrast, entails detailed health exams and screenings; some insurance companies even use a prescription database to find out whether an applicant is taking anxiety medications or antidepressants.
Policyholders can expect to pay 2% to 4% of their income annually for a policy to cover about 60% of earnings post-tax, which translates to around 85% on a taxable basis. Women are charged about a third more, taking into account their greater likelihood of having a disability.
There are other complications, many of which make apples-to-apples comparisons challenging. Some conditions, like back pain or mental health issues, may be excluded from coverage, although more carriers are willing to create policies for these conditions. Different companies can have different approaches to the same disease or conditions; one might refuse to write a policy, for instance, while another might agree to do so but with a higher premium or a limit on how long benefits will last.
One reason disability policies are complex and expensive: There's a much higher chance that an insurance company will be on the hook for a disability claim than a life insurance claim. At age 25, a man has a 32% greater chance of suffering a disability that lasts more than 90 days than of dying. Women of the same age have a 147% greater chance, according to Guardian Disability Insurance Brokerage.
That can also make insurers more squirrelly about paying up. It can be hard to prove that a disability has occurred; obviously, that's not true with death. Pearson says that after her husband's accident, an insurance representative would actually accompany her husband to doctor's appointments to confirm that he was in fact still disabled.
Yet it's incumbent on the advisor to make clients understand the risks of forgoing disability insurance, says Jim Heitman, president of Compass Financial. "Clients are sold on life insurance because they buy the whole 'What if I get hit by a bus?'" Heitman says. "But what happens if you get hit by the bus and you don't die?"
Heitman also speaks from experience. At 30, he was spending his weekends and off hours as a search-and-rescue volunteer on California's Mount Baldy. One day, he went up the mountain to secure some equipment - and when the snow beneath him gave way, he plunged 30 feet, breaking several vertebrae. At the time, he worked for a broker-dealer and had group coverage through his employer. He was out of work for three months, then returned on a part-time basis for the next three, all while undergoing physical therapy.
"Most people at that age don't have a lot of resources to fall back on. In the end, the disability didn't derail my financial plans, and it didn't derail my family's financial plans," he says.
GROUP VS. INDIVIDUAL
As much as the insurance helped Heitman through a rough time, his coverage was also limited because it was a group policy. Now a sole planner in his fee-only firm, he has since bought an individual policy. (To protect clients, Heitman has also gone one step further: He has an agreement with another planner 50 miles from his Alta Loma, Calif., office that should one of them suffer a disability, the other would step in to serve clients.)
Group disability is, by far, the way that most people have coverage. It's often free or available at very low cost, and there's no medical underwriting involved. But it only goes so far, advisors caution.
The benefit can be taxable if an employer pays the premium or if the employees pay it pretax. That could come as a shock to someone who believes they'll be getting 60% of their salary only to find out that a big chunk of it is taxed.
Also, group coverage is based on salary rather than total compensation. Someone whose earnings are based largely on a bonus may find the benefit woefully lacking, says Cheryl Sherrard, director of financial planning with Clearview Wealth Management in Charlotte, N.C.
And group disability often places severe restrictions on which type of disability will be covered. The plans usually pay for 18 to 24 months if a person is not able to perform his or her occupation; after that, they typically only continue to pay if that person can't perform any occupation.
"These three basics are essential to an employee's understanding of what they would really get in the event of a disability and can be a real eye-opener if they see the dollars and cents of those details," Sherrard says.
To deal with these limitations, advisors recommend layering on individual policies. For example, a group policy that covers an insured's own occupation for only two years can be paired with an individual policy that has an elimination period of two years but then provides coverage until age 65. Or an individual policy can be used to add more coverage in the case of someone who gets most of his or her salary through a bonus.
"If you need your income, then you need disability," says Rieger, the CFP at Fulcrum Financial in Spokane. "It's not a luxury."
Ilana Polyak, a Financial Planning contributing writer in Northampton, Mass., has also written for The New York Times, Money and Kiplinger's.
Beyond the Basics
Getting disability insurance is no straightforward affair. Financials, age, health and gender all come into play, and policies can come with a number of bells and whistles.
Of course, whether they're appropriate for you or your client depends on need. Here are a few features you should know:
Residual benefits: This is the ability to receive a partial benefit based on a percentage of salary. Most people spend a period working part-time after an injury or as their health declines. So if a person's income falls 25% because of a disability, the policy will pay 25% of the benefit.
Cost of living: An inflation-adjusted benefit.
Own occupation: Verify whether the policy will pay a benefit if you're unable to perform your own occupation as opposed to any occupation.
Future purchase option: This is important for people in professions with steep upward salary trajectories, like surgeons. It allows the insured to purchase additional benefits in the future and keep up with salary increases without medical underwriting. -Ilana Polyak