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ex3-5 kelly

The client is Kelly, a 30-year-old attorney who is employed by a successful law firm at a base annual salary of $80,000. Kelly likes the idea of buying an individual disability policy that provides a monthly benefit of $4,000 per month for which she will pay $1,500 annually. The cost of the guaranteed insurability rider is 10% of the annual premium—an additional annual cost of $150. As most agents know, although Kelly has no resistance to the annual $1,500 premium for the policy, she may resist adding another $150 to that amount. But before she declines the rider, she should consider what might happen if she purchases the policy without it. Kelly is earning a nice income that will continue to increase as she advances her career. At age 40, Kelly's annual income has increased to $150,000, which equals $12,500 per month. But Kelly still only owns the single disability insurance policy she purchased ten years ago. The monthly benefit it provides ($4,000) is $8,500 less than she is earning. Because a person's standard of living tends to rise in tandem with earnings, Kelly probably spends considerably more than $4,000 for ongoing expenses. Kelly now wants to purchase additional coverage and believes she could live on as little as one-half her current income if she were disabled (about $6,200 per month). Because her existing policy provides a monthly benefit of $4,000 monthly, another $2,200 of coverage per month is needed. If Kelly is in good health, the additional coverage will cost $1,000 annually at her attained age of 40. Assuming she can purchase coverage at standard rates, her total annual premium for both the existing and a new policy would be $2,500. The key question is whether Kelly is still insurable. If she is not, she won't be able to purchase additional disability insurance at any cost. If Kelly is insurable but has developed a medical condition that makes her a less attractive risk, she might be able to purchase additional coverage but the insurer would charge an additional premium because of the condition. Even a 20% premium rating would bring the annual cost of her new policy up from $1,000 to $1,200. Obviously, a higher rating would increase the policy premium even more. By paying the additional annual premium of $150 at the time the policy is issued to purchase the guaranteed insurability rider, Kelly would have been guaranteed: (a) the option to purchase additional disability coverage in the future—without providing evidence of insurability, and (b) the premium for the additional coverage would be at standard rates rather than higher rates based on a future medical condition, Over the 10-year period, Kelly would have paid a total of $1,500 for the rider—which would have guaranteed her the ability to purchase additional coverage (on multiple occurrences) at standard rates instead of paying the additional $200 per year for a rated policy. Kelly would have recouped her $1,500 investment in the rider in fewer than three years. Furthermore, if Kelly had purchased the rider originally, it's likely she would have exercised the option to pur­chase more coverage over the years as her income increased. At age 40, her monthly benefit would bear a much closer relationship to the earnings she'll lose while disabled.