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Prepare for the Worst

Financial advisers should educate clients about disability income insurance.

By Nick Fortuna

Throughout his four decades in the financial services industry, Edward Auble has had a scene play out in his mind that he's determined never to face in reality: He meets a recently disabled client in a supermarket, and the client feels that his financial adviser has betrayed him by never educating him about the importance of having disability income insurance.

"If I don't sell them life insurance or don't sell them enough, they're not going to be here to face me, but with disability insurance...I never put myself in that position. I would feel terrible about that," said Auble, a managing partner with the Paoli, Pa.-based Broker Resource Center.

Auble said there are several important factors to discuss with clients who are interested in disability income insurance, including the amount of coverage. Clients typically qualify for coverage ranging from 60 percent to 75 percent of their income, with 65 percent being the most common figure.

Secondly, clients must choose an elimination period – the length of time between the onset of a disability and the point when the client becomes eligible for benefits. The elimination period can range from as short as 30 days to as long as one to two years, and the cost of the policy drops significantly with longer elimination periods. The most common elimination period is 90 days.

Another factor is the length of time benefits are to be paid out. Clients typically choose between policies that pay benefits for five years and those that pay through age 65, when clients become eligible for Social Security benefits.

For a healthy, 30-year-old worker earning $100,000 annually in a low-risk profession, disability income insurance might cost between $500 and $800 annually, said Connie Golleher, the chief operating ion officer for The Holleman Cos. in Chevy Chase, Md. That's not a lot of money to protect one's most valuable asset – one's ability to earn an income.

If that 30-year-old worker were to buy a policy that covers him through age 65, he likely would spend less than $28,000 over the course of 35 years. If he became disabled, the policy would pay him about $65,000 per year tax free, which translates to around $2.28 million over 35 years.

Golleher said that when she shows those numbers to clients, the policy typically sells itself.

"I come at it from an educational standpoint, with the sale being what will naturally happen once you've educated the client and they see that they are more than likely underinsured, if they're insured at all," Golleher said. "People who understand the product and understand the consequences of not insuring their income, they buy because it's a no-brainer."

Golleher and Auble said the clients who are most interested in disability income insurance are those with responsibilities, such as a spouse, children and a mortgage, but single adults also tend to buy since they don't have a spouse to fall back on. Golleher said she typically doesn't target potential clients under the age of 25 because they often haven't been working long enough to understand the consequences of losing that income.

Unlike with life insurance and auto insurance, women typically pay more for disability income insurance, partly because of the risks of breast cancer and complications from childbirth. Additionally, since many women have the traditional role of caretaker for their immediate and extended families, they sometimes fall victim to stress and depression and allow their health to slide.

For Auble, selling a client a DI policy starts with a short and simple-sounding question that gets the client thinking.

"I start off by saying, ‘Have you protected your income?' And that forces the person to ask the question, ‘What do you mean?'" Auble said. "Well, you make an income. What happens if you lose that income? How will you replace it? And that forces them to think some more. Your savings can dry up pretty quickly, and most people are within a few months of bankruptcy. And your spouse's income generally won't be enough to allow you to maintain your standard of living if you're used to having two incomes in the family."

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