Income Protection Strategies For Top Earning Clients

Tuesday, April 29, 2014

High-profile individuals such as athletes and entertainers often make news with their very lucrative contracts, while top corporate executives, lawyers, hedge fund managers and other professionals can attain similar levels of lucrative compensation. What all these people have in common, however, is that they run the risk of losing their future income if they lose the ability to perform their jobs because of a disability.

Their contracts and agreements may not be fully guaranteed and often have a significant performance based component. While the risk of disability may be overlooked or discounted, more top earners are contemplating the very real impact of disability on contractual obligations and their ability to maintain income.

Excess or surplus lines supplemental disability policies are becoming more attractive as individuals better understand the risks and impact of a disability and more comprehensive coverage becomes available.

The risk of a 45-year old being disabled after 90 days for at least five years is 43 percent. Comparing the risk of disability versus death at age 40, studies show it is 2.9 times more likely for men and 5.9 times more likely for women to be impaired by a disability. Life insurance risks are compelling and irrefutable, but the significant impact of a disability warrants more attention.

Many corporations and professional organizations have basic disability insurance plans, but they rarely meet the needs of top earners. Traditional insurance carriers can protect all sources of income, but caps or contractual restrictions severely limit coverage.  The combined maximum benefit, using group and individual disability coverage, can be as high as $50,000, but usually it is much less.  Assuming the goal is to replace 60 percent of income, and the plan is designed to protect all forms of compensation (base salary, bonus, variable pay, employer contributions to deferred compensation, etc.), the maximum income covered, even at $50,000 per month, would be $1 million per year of covered compensation.  If an individual becomes disabled, a disability lasting just three to five years could mean tens of millions in lost income.

Fortunately, there are ways to cover this risk using excess or surplus lines supplemental disability policies. The most common insurer in this market is Lloyd’s of London.  The policies available are highly flexible and customizable.  Benefits are payable on a monthly basis, as a lump sum benefit or a combination of both. Benefit limits can exceed $100,000 monthly, or more than $25 million as a lump sum, and can be issued on an individual or multi-life basis.

Surplus lines carriers can also provide coverage for other unique risks facing affluent individuals: specialty life and kidnap and ransom policies for international travelers, key person and buy-sell disability, accident/event coverage for extreme hobbies such as mountain climbing and racecar driving or coverage for high-profile events such as sales conferences, executive meetings and weddings.

An individual’s ability to earn income requires thoughtful and adequate protection and when income is dependent upon performing at the highest level, the protection should match the potential loss. Advisors and insurance companies have solutions available to meet the needs of the affluent client whether for disability or other high-limit risks.

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