What Happens When a Person has to Stop Spending Money
by W. Harold Petersen, RHU, DFP

How do you stop spending money? What if you have exhausted all savings assets, and all the money you can borrow? The banks will no longer talk to you and friends and relatives wish they had never met you. The answer is that people cannot stop spending money for living or they will surely die. The cost of living starts with the first breath and continues until the last breath.

We can understand the costs involved in the very living of life when looking at a person’s lifeline starting at birth and observing the mortality statistics of age 80 for men and 84 for women. The first 20 or so years of life entail food, shelter, clothing, and educational costs.  These costs are largely borne by the parents. In the early 20s, most people start earning money to cover their living expenses. A person develops a lifestyle. Among the costs are items, such as marriage, a home purchase, automobile costs, and costs associated with a child’s birth, support, and education.  In addition, a person must add the costs of transportation, healthcare, and an adequate retirement account to this planning equation.

It’s a big job to earn enough money to cover retirement by working from the early 20s to a typical retirement age of 65.  Even if you resist luxuries, such as fishing and hunting trips, foreign travel, and life’s many other temptations, you still have to design a retirement fund that can pay for a lifestyle from ages 65 to 80. Fifteen years at $200,000 per year is $3 million.  Three million dollars yielding 5% is $150,000. Living off interest doesn’t work in most cases. Assuming you have no serious health problems and no nursing home costs (average $130 per day) the adequacy cash flow in retirement will fall somewhere between lucky and a tight squeeze.

Consumption does not stop!  You must be prepared to meet expenses as they occur or you will fall impossibly behind in your financial plan. The most likely peril is getting disabled by accident or sickness during your productive years, which will alter or seriously affect the current cash flow as well as cash flow in retirement.

But wait!  There is Hope!

A well-planned and adequate disability financial plan is the only answer.  To meet the expenses of your chosen lifestyle, it is extremely difficult to save enough to do the normal things in life even if you live to full mortality, you save inordinately, you spend miserly, and you have good luck.

Producers can be heroes by providing clients with a solid, adequate disability financial plan that encompasses personal and business needs. Most advisors, agents, brokers, and planners have only been exposed to one theory of disability insurance needs – partial income replacement.  In this traditional theory, the insurer promises to pay a monthly benefit equal to a certain percentage of the insured’s current earned income, not to exceed a set maximum amount, which is usually the amount the insurer has been able to reinsure.

This may solve the needs of the low or modest income earner, but will not suffice for those with good earnings. There may also be a benefit cap in addition to the insurers’ limits being a percentage of earnings. Also, some insurers reduce the amount issued based on the person’s passive income or the insured’s net worth. This forces the client to liquidate accumulated assets or use unintended reserves to meet cash flow requirements during periods of disability.

With the income asset theory, the capitalized value of future earned income is deemed an asset the same as other hard assets, such as real estate, securities, art, precious jewels, or autos. Issue limits for disability income are based on insuring the asset value of earned income, instead of partial income cash flow.

A consumer insures the loss of a $10 million building for 80% to 100% of assessed value.  This amount ensures that the consumer would not have to liquidate other assets to commingle with inadequate insurance proceeds to fund the cost to rebuild the building.

In like manner, disability financial planning should insure the capitalized value of future earned income in the same way that it would a hard asset. Other contingencies outside a person’s personal disability estate should also be insured, such as business disability insurance needs.

A well-planned and adequate disability plan is impossible to provide without the supplemental power of high limit disability insurance. Disability insurance renewal commissions, which are very persistent, can provide a fine retirement plan for the planner who prescribes a proper disability plan.
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W. Harold Petersen, RHU, DFP, has been in the disability insurance industry for 60 years and is founder and president of Petersen International Underwriters. Petersen produced a seven-part course on disability insurance and has written books on personal economics and disability financial planning.  Among his publications are “Life is Just a Cash Flow,”The Tax Advantage Digest,” and “Future Income as an Asset.”  He has been awarded the Harold R. Gordon Memorial Award—Person of the Year in 1985, the health insurance industry’s most coveted award.  In 2003, he received the Will G. Farrell Award from the Los Angeles Association of Insurance and Financial Advisors, and in 2005 he was awarded the International DI Society Lifetime Achievement Award. He was awarded the Distinguished Service Award by NAIFA-California in 2008.
Petersen has served on boards of the NAHU and NAIFA, as well as on the board of trustees for the California Association of Life Underwriters.  He has served two terms as the chairman of the Disability Insurance Training Council, and is Founding President of the International DI Society. He can be reached at Petersen International Underwriters, 23929 Valencia Blvd., Suite 215, Valencia, CA  91355, by phone at 800-345-8816, e-mail  whp@piu.org, or website www.piu.org.