By Dr. James M. Dahle, WCI Founder
I had an interesting opportunity a while back to attend a conference that few insurance agents and even fewer docs ever attend. It was the annual meeting for the International Disability Insurance Society. It was inexpensive and it was in Salt Lake City, so when I was given an invite to attend, I decided, “Sure, why not?” This industry group is small, but it has a mission to promote disability insurance.
As the society writes on its website,
“The International DI Society (IDIS) is an organization whose members dedicate themselves to providing disability insurance to individuals, families, business owners, and employers to afford financial security in the event that an unforeseen disability occurs. We are devoted to growing consumer awareness and enhancing the disability insurance industry by expanding our members' resources, remaining current on industry trends, and providing a community for producers, distributors, underwriters, and carriers to establish relationships and drive innovation.”
The people at the conference (and who are members of the society) are primarily representatives from the carriers (i.e. the insurance companies) and the insurance Brokerage General Agencies (BGAs, sometimes called wholesalers.) You probably don't know about BGAs, but they provide a lot of the back office functions for an insurance agent and provide value to both the independent agents/brokers and the insurance companies, getting paid with a small slice of the commissions for their efforts.
People Aren't Buying Disability Insurance
There was a lot of hand-wringing at the conference. Apparently, there is dramatically less disability insurance being sold now than there was 30 years ago. The main buyers of this insurance, especially when we're talking about individual policies, are physicians and dentists. Many employers of all kinds offer group policies to their employees, but it's apparently fewer than it used to be (it should be noted that these group policies often have weak definitions of disability and don't properly insure anywhere near enough of the employee's income).
More information here:
The Problems with the Way Disability Insurance Is Sold
As a big fan of disability insurance (at least until financial independence occurs), I was surprised and a little worried to see that less of it is being sold/purchased. The conference dove deeply into all kinds of reasons why this is occurring. A lot of the blame falls on the insurance industry, but some also falls on employers and consumers themselves. Some of it is probably just historical accident, too, and some is inherent to the nature of the product. Let's discuss each of these.
Insurance Industry Problems
The insurance industry carries a lot of the blame here. While people are far more likely to be disabled than to die young, the vast majority of marketing budgets are going toward life insurance sales, not disability insurance sales. Disability is the major risk we face. Companies have also been way too slow to streamline their processes and to adopt technology. One of the biggest complaints I get from white coat investors is that it takes weeks to months to buy a disability insurance policy. We're used to buying on Amazon with a single click, but buying disability insurance generally requires meeting with an agent; getting blood drawn; filling out a huge application; having that agent fight their way through a byzantine bureaucracy of underwriters; and, assuming you're still interested two months later, getting you to sign a policy and WRITE A CHECK.
What else do you write a check for these days? Katie and I go most months without writing a single check, yet it's the only way to buy disability insurance. No credit card, PayPal, Venmo, or ACH transactions. The industry needs to fix these issues. Its failure to do so is literally hurting American families, because it is keeping them from buying a necessary insurance product.
Employer Issues with Disability Insurance
Employers sometimes provide disability insurance to their employees. But the truth is that they do a poor job of it. It's often left to a lowly HR professional who may not understand its importance or, worse, the company decides to skimp on it and ends up providing a lousy policy. Employers actually can provide a relatively strong, own occupation policy. They just don't. And when they do, they do a lousy job of educating employees on the value of this important benefit. I mean, which is more important? A $1,000 annual match on a 401(k) or something that would allow the employee to have a dignified standard of living for decades in the event of permanent disability? Some employees don't qualify to buy individual policies. If their employer doesn't provide a group policy, they don't get anything at all. If the employer provides a crummy policy, all they get is a crummy policy.
As a general rule, consumers don't value their benefits package as much as that package costs their employers. Here at The White Coat Investor, we have the world's best 401(k). And we make sure our employees know it and value it. Because we're spending A LOT of money on it (as employer contributions, not necessarily fees) instead of paying them more in salary. Employees need to actually understand the value of their benefits packages.
There's more to it than that, though. People don't understand the value of their various assets and the importance of protecting the most valuable ones. Consider the assets of a typical 35-year-old doctor:
- Older Car: $15,000
- New Tesla: $80,000
- Retirement Account: $120,000
- Brokerage Account: $150,000
- House: $750,000
- Future Earnings: $9 million
- Total: $10.1 million
Future earnings represent 90% of the assets of this doc. It's not even close. But I bet they have full coverage on those cars. And the house is probably insured very well. They'd even consider insurance on the portfolio if it really worked and was available for a fair price. Yet they balk at buying disability insurance.
“It's so expensive!”
Well yeah, because look at the value of what's being insured. Plus, it actually gets used. Statistics suggest that between 1 in 4 and 1 in 7 people will get disabled at some point during their career. (The risk is about twice as high for physicians and dentists as the average person.) The average disability claim lasts 3.8 years, but many people are permanently disabled.
Obviously, being permanently disabled is a financial catastrophe. But even being disabled for 3.8 years would have a devastating effect on most of our nest eggs. Imagine you have an $800,000 nest egg at 40 and end up not working for four years before reentering the workforce. For those four years, you can't make additional contributions to your retirement savings. In fact, perhaps you withdraw $120,000 a year from it to cover your spending. You've dramatically reduced the size of your future nest egg. The combination of not contributing and withdrawing from it reduces your nest egg at 65 by 47%.
Now, there are other risks to that future earnings stream. You could die, so you should buy some term life insurance to protect against that risk. You could also become burnt out. Though you can't buy burnout insurance, we offer what we think is the closest thing to it. If you're feeling crispy, you ought to check out Burnout Proof MD.
But disability is a huge risk that should be insured against. This should not be a product that has to be sold. It should be a product that is purchased willingly, that people are banging on the door to buy.
It used to be that there were many insurance companies, and they all had lots of captive agents out there selling their products, including disability insurance. Consolidation in the industry has made it so there are dramatically fewer insurance companies out there and, correspondingly, fewer captive agents. The disability insurance industry is a pretty tiny thing. The conference included pretty much all of the carriers and BGAs, and I don't think there were even 100 people in the room.
Most of the policies are sold by a tiny percentage of the agents out there. Just about all of the major players in the medical space (which is the biggest space) are on our recommended independent agent list. They all know each other, and they are on a first-name basis. The fact that there are so few of them, however, means that there are a lot of people out there who don't even know disability insurance exists or how big of a risk they are running by not having it. These folks should not be spending any of their time marketing at all. They should literally be spending all day just writing up applications as fast as they possibly can to get everyone insured that should be insured.
The Nature of the Product
Of course, part of the issue is simply the product. Life insurance is easy to understand. You're either alive or dead. If you're alive, it doesn't pay. If you're dead, it does. And there is actually a certificate produced when somebody does die attesting to that fact. It's black and white.
Disability, unfortunately, is 50 shades of gray. So naturally, the policies protecting against that risk are dramatically more complicated and harder to understand. Also, proving you've been disabled and that you are still disabled requires time, doctor visits, and sometimes the assistance of attorneys. This makes it a harder product to sell and buy. It just requires more time, attention, and effort by the agent selling it and the consumer buying it. It could be streamlined a bit by better standardization in the industry, but I wouldn't hold your breath as every business wants to differentiate itself. This obstacle is not going away anytime soon.
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Education, Education, Education
Over and over again, this theme came up at the conference. People just need to know more about disabilities and disability insurance. It is a product that ought to sell itself. It should be bought, not sold. Insurance agents need to know more about it. Financial advisors need to know more about it. And consumers need to know more about it.
I guess that's where we come in as white coat investors. As you talk to your peers, colleagues, and trainees about finances, make sure you're also talking about disability insurance. And when it comes time for someone to buy it (which is as soon as they're earning money), be sure to send them to the good guys in the industry to make sure they are buying the right policies at the best possible price.
What do you think? Why are so many people uninsured when it comes to disability? What can be done about it? Comment below!