Since May is Disability Insurance Awareness Month, this Blog is dedicated to some thoughts on disability income insurance linked with life insurance.

When I was active as a producer, I pretty much shied away from disability income insurance due to the terrible underwriting issues that always seemed to plague my applications.  My friends in the business tell me that this has eased considerably in recent years, and many of them consider disability income coverage to be a significant part of their practice.

The coverage issues that affect all your clients are fourfold:

• Disability;
• Early death;
• Retirement;
• Long-term care.

All four can be addressed with a cash-rich life insurance policy with accelerated death benefits combined with a disability income policy.  This combination can be used effectively for individuals and executive benefits.

Case Study of an Executive Benefit

Tom Hamilton is Chief Marketing Officer, a key rainmaker, and a non-owner executive of Acme Ford, LLC.  The owners plan to sell the company in five years.  The goal is to provide a benefit package for Tom that causes him to remain with the firm for at least the next seven years (including two years after the expected sale of the company in order to remain a resource for the new owners).

They plan to provide Tom with a Controlled Executive Bonus plan in which the max-funded life insurance policy coupled with a disability income policy helps solve all four issues: disability, early death, retirement, and long-term care, as follows:

• An employer-paid gross-up bonus is used to fund the premiums on the policy owned by Tom.
• To help with needed family income should disability occur during pre-retirement years, Tom makes loans on the policy which he uses to pay for a personal, long-range, disability income policy with a benefit of $12,750 a month and annual premiums of $7,200.  (In this example, the policy loans don’t start until year 2, so an additional gross-up bonus is paid by the firm during the first year so Tom can net the needed $7,200.)
• The policy death benefit serves the family well in the event of Tom’s early death.
• The extensive after tax cash flow from policy loans adds an important source of retirement income.
• In the event that institutional or home care is needed during retirement, an advance of a portion of the policy death benefit provides needed dollars.

Here is a flow chart of the case:

Controlled Executive Bonus Plan

Click here for a copy of this Flow Chart for your personal use.

The question that Acme Ford has to answer is this: Will this plan glue Tom to the firm for 7 years?  For the answer, check out the snapshot below of the first 8 years outlining Tom’s repayment obligations.  There is a swing in Tom’s favor of $725,000 between his loss in year 7 and his gain in year 8.  This, coupled with the potential losses in prior years and the immense gains in subsequent years, should produce some serious superglue.

Note:  In the plan documentation, Tom’s obligation to repay the bonuses during the first seven years would typically be waived should he die or be terminated without cause.

Another interesting aspect of the Controlled Executive Bonus plan is that, in view of the repayment liability, Tom may refuse to participate.  With the array of benefits provided by the plan, what would his refusal tell Acme Ford?  My guess is that Tom would likely be considering another employment offer.  What an unexpected management tool this could turn out to be!

Click here to review Tom’s Controlled Executive Bonus illustration using the Executive Security Plan module from the InsMark Illustration System.

The benefits to Tom are considerable:

• No personal out-of-pocket cost;
• A disability income policy with annualized tax free income of $150,000+;
• A seven-figure pre-retirement life insurance death benefit;
• A substantial post-retirement death benefit;
• Annual, tax free, retirement cash flow of $125,000;
• Residual cash value in the final year illustrated at $1.1 million.

Benefits to Acme Ford are the retention of a valuable key executive plus all plan funding is tax deductible.

Note:  In the absence of a business to fund the plan, the logic of this presentation will work for an individual as well.  In Part 2 next week, you'll see how Tom can acquire this plan even if Acme Ford is unwilling to provide it.

Click here for a link to the disability income proposal used for the case study example above.  Most of you know how strongly I feel about comparison selling.  Pay particular attention to Page 3 to see the effective comparative strategy in the quote.

Note:  The disability income proposal and the carrier’s basic illustration should accompany the Controlled Executive Bonus illustration.

Conclusion

Good as the overall benefits are, without the disability income policy, Tom’s plan is a chair with only three legs: death benefit, retirement cash flow, and long-term care.

 

InsMark’s Digital Workbook Files

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Digital Workbook Files For This Blog

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Important Note #1:  The hypothetical life insurance illustration associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.