When Disability Strikes,
The Best-Laid (Income) Plans Can Go Astray

By Jim Connolly

When disability strikes, the best laid plans of financial advisors can often go astray. Experts agree that the best defensive strike is disability insurance. But, in lieu of that, planners focus on how to put a client back on a path that will increase the likelihood of regular income.

This proves a point that many planners often make—that income planning is not only for retirees. One has to have a income plan for the life continuum.

The foundation should be a disability or a long term care insurance policy, depending on the age of the particular client, say financial planners interviewed by Income Planning.

“If you don’t have insurance or significant funds, the game is kind of over. It is like being unemployed but only worse,” explains Curt Heinz, a certified financial planner, CLU and ChFC with Heinz & Inglefield, LLC in Charlotte, N.C. “You can only go so long before you run out of money.”

Consider: Disability strikes 3 in 10 men and 1 in 4 women before retirement, according to the Consortium for Citizens with Disabilities, Washington. The CCD cites a Harris survey stating that only 35% of people with disabilities reported working full or part-time, compared to 78% of those who do not have disabilities.

But sales of disability income (DI) insurance are not reflecting widespread concern about that. For instance, though the LIMRA International, Windsor, Conn., reports that average premium per policy for new DI sales rose 4% in 2004 compared to 2003 and annualized DI premiums increased by 3% in 2004, the number of policies sold dropped by 1% compared with 2003. For 22 companies, the number of policies issued declined at an average annual rate of one half of 1% per year from 2001 to 2004, LIMRA adds.

 “It is a struggle to get people to see the value of disability insurance,” says Heinz. Reasons he cites include cost, the detailed underwriting that clients must submit to prove insurability, and the fact that coverage can be hard to get.

An individual DI contract is preferable, although a DI contract through either an employer or an association can be an option to ensure that a client’s income plan remains intact, says Heinz. Residual DI can be an important feature for a client to ensure a continuous stream of income, he adds.

If DI is not a part of a client’s income plan, then Heinz says that the strategy depends on the circumstances. If a client is generally healthy, he continues, as a planner, he would not change the structure of a portfolio to create an income stream in the potential event of a disability. If the situation arises, he explains, then the gradual liquidation of a stock mutual fund portion of a portfolio could be considered. In this way, a client is availing himself of the advantage of any potential appreciation in the market.

If, however, a client suffers a permanent disability, then Heinz would approach the situation as if the client had become a retiree, and “a somewhat fragile one at that.” An income plan would be adjusted accordingly, Heinz says.

And, a client and a spouse, he says, may have to face the possibility of loss of current and future income if a spouse’s work capacity was limited because of the need to care for the disabled client.

Todd Terhorst, a CFP, CLU, ChFC, and president and managing partner with Diversified Wealth Management, LLC, Minneapolis, Minn., says there are 2 major disability scenarios with different income planning solutions: disability near or after retirement; and disability earlier in one’s career.

If a client is near or at retirement, and if the plan was done correctly, then there should be enough money to create an adequate income stream, Terhorst explains. Unless there is a very serious health issue associated with the disability, he continues, the income stream that is required shouldn’t be much different from the regular income streams originally anticipated for retirement.

In event of a very serious health impairment, the financial advisor needs to see if the client already has long term care insurance, especially for those clients who are approaching retirement, he says. In addition, the advisor will potentially need to restructure a income plan if more income is needed, and offer the client a realistic assessment of the income situation, he says. So, if applicable, an advisor needs to tell the client if there is a possibility that money could run out at a future point.

LTC insurance is important for older clients, Terhorst says, because it can afford them and their income plans essential financial protection in the event of a serious disability. Therefore planners should make a point to discuss the benefits of LTC insurance with clients in their late 50s, he adds.

If a client is 35, it is a different story, he continues. This is when long term disability (LTD) insurance is “an absolutely important component” of any income plan, he says, explaining that if the disability is serious, then millions of dollars of income could be needed over the remainder of a client’s life. But if clients don’t have LTD, he says, that “income would be gone if you were hit by the proverbial bus.”

Disability insurance is the most difficult insurance topic to identify clearly for a client, he adds. To handle this when preparing a financial plan, Terhorst’s firm asks the client to determine bare minimum needs as measured by income. Client understanding of DI’s importance is essential, he notes, adding that if the client knows someone who has become disabled, this helps build that awareness.

Terhorst himself saw the importance of DI when a client in his late 30s was stricken with multiple sclerosis and had to leave his job. The client had short term disability insurance and he had “respectable” IRAs and 401(k) savings, Terhorst says. But in about 4 years, the client’s savings were largely depleted and the client ended up moving back with his parents.

That move back to the parent’s home might not have been necessary, Terhorst suggests, if the client had also has LTD insurance.

For a client in a business venture, both a DI buyout policy and an individual policy may be appropriate to ensure that the client receives a stream of income both from the business and from the individual policy.

Ellen Fairbanks, a certified financial planner with MD&A Financial Management Co., Pittsburgh, reiterates the hope that clients have DI insurance which she says is “well worth the investment” because it is “the most straightforward approach.”

“Once you become disabled, you can go through a great deal of money in a very short time,” she notes.

A plan should be reviewed following a disability, she says. But, Fairbanks continues, solutions can vary because “it is a very individual thing.”

In one client’s case, she was able to create an income stream from inherited money and short term disability insurance, according to Fairbanks.

If a disability occurs and there is a need to reevaluate a plan, then Fairbanks says that an income stream could be created from a portfolio of CDs. However, she would not recommend annuitizing an annuity unless there is a “very big pot” of money. The reason, she says, is that “typically, it is not pegged to inflation. You are losing buying power.”

Another consideration for when income needs to be created, she continues, is to avail oneself of local, county or state services like transportation, which can often be accessed for little or no cost. “These are worth money.”

She cites the case of a client with 2 disabled daughters. The client moved the family to a new residence, only to find out that public services they had previously received were not available in the new location.

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