By Ron Cohen, RHU, RR

Recently, a financial planner contacted me and asked if I could help him find the best disability policy for his client.  The client, a physician, wanted to fully understand the differences between the current selections of disability insurance proposals he had been presented with.  All of these offers not only confused the physician, but the financial planner as well.

As we began to share information, the advisor made a comment that needed clarification.  He said, “They (the proposals) all seemed expensive”.
I then said, “Bob, I am going to show you how cheap it really is”.

The analogy I’ve used for the past 36 years was about to be explained once again.

“Bob, does Dr. Jones have home owners insurance?”  “Of course”, he said.  “Does he have automobile insurance?”  “Sure”, he said.  “What about life insurance?” “Plenty”, he said.  “How does he pay for all of that insurance?” I asked.  He replied, “Personally”.  “Exactly”, I said.  “Bob, Dr. Jones has insured all the golden eggs, but not the goose that laid them”.

I explained that if Dr. Jones house were to burn down and he did not have homeowners insurance, a banker would gladly lend him the money to rebuild it.   The $3000 to $4000 annual premium he was paying to insure that home was just in case it did burn down, he would not incur the cost of replacing it.

Dr. Jones was 35 years of age and earning $300,000 a year from his practice.  I  further explained to Bob, that if the physician’s income remained level for the next 25 years (to age 65), Dr. Jones would have a potential to earn at least $9,000,000.  Sighting, his home was only worth about 5% of that, yet, he was paying 1% of his income to insure it.

I then told Bob the actual odds of Dr. Jones having a Loss:

Probability of Having a Loss

Home  -  1 out of 88
Automobile - 1 out of 70
Being Disabled - 1 out of 8

Now we got back to one of the sample proposals he had received.

90 Day Elimination Period
$10,000 per month after 90 Days
Benefits Payable to Age 67
Annual Premium: $3333 per year
Potential Benefits: $3,810,000

I then explained to Bob that the $3,810,000 benefits were not taxable.  “This figure represents about 60% of his after tax potential income.  The cost to insure this income is less than the cost of his homeowner’s policy.  That policy insures a home worth $500,000.

“Bob, I want to make one last point here, before you even ask the question.”  If you calculate the premiums Dr. Jones will pay to the insurance company from now to Age 65, they would total just under $100,000.  The homeowner’s policy would total almost $120,000.

If Dr. Jones home never burns down, he would have paid almost 25% of the value of that home in premiums to the insurance company.

“With that in mind”. I said, “Do you think it is possible for Dr. Jones to be disabled for 1 year?” “Forget about being disabled forever?”  He said,
“Absolutely”.

“If you calculate the benefits Dr. Jones would receive in 12 months, the total would be $120,000, which is more than he will ever pay in total premiums to the insurance company to Age 65”.  “Wow”, Bob said, “That is really incredible”.  “So which do you insure Bob, the goose or the golden eggs?”