This is one of the most difficult insurance products to sell…period…and it drives me crazy. Your chances of dying in your 30-40s is probably 1-2%…your chances of becoming disabled due to sickness or accident is 1 in 7.
Often, I’ll hear, “I have it at work, so I don’t need it” …or “That will never happen to me!”. I’ve learned there are two prices for disability income policies…
- The price if you buy it
- The price if you don’t
Keep in mind, the biggest differential between Disability Income Plans and all other types of insurance policies is the varying definitions of a disability. Life insurance is simple…there’s a death certificate and you can’t fog a mirror. Auto insurance is simple. Police report shows who is at fault…policy repairs auto back to original state.
When buying personal Disability Income Plans, you’re basically buying a book of definitions. There are two key occupational categories to consider:
- Your OWN Occupation
- ANY Occupation
These are crucial to know. Here’s a good example of how they work.
Two people, Bert & Ernie, work for the same company. Let’s say they are both commercial bankers, age 40, because I see this all the time in this occupation. Both make a base salary of $75,000 ($6250/month) plus annual bonuses of $150,000 ($12,500/month). Total monthly income = $18.750/month. Got it so far?
They walk to lunch together and in crossing a busy downtown street are both hit & critically insured by a truck that ran a red light. Bert has only the group disability plan provided by the bank, which is 60% of his base salary. Ernie works with an insurance advisor, and upon realizing that the group benefits provided at work only covered base salary only, he bought a supplemental Individual Disability policy.
Here’s how it plays out:
BERT – After 6 months, Bert qualifies for disability benefits of 60% of his BASE SALARY ONLY. $75,000 x 60% =$45,000 / 12 months = $3750/mo. In addition, since the bank deducted the disability plan costs as an employee benefit expense, the benefit to Bert is taxable as ordinary income. (Let’s net it out at $3000.00/month for simplicity)
RESULT: Bert goes from making $18,500/month to roughly $3000.00/month…and it will get worse in a minute.
ERNIE – Same benefits as Bert above. However, in recognizing that the bank’s plan didn’t cover any of his bonus, Bert purchased an additional disability plan that paid him roughly $10,000/ month in the event of a total disability. Since Ernie does not deduct the personal insurance premium, his benefits are 100% tax free.
RESULT: Same as Ernie…$75,000 x 60% = $3750.00 PLUS…$10,000/month tax free to age 65 = $13,750/month.
Remember when I said it will get worse for Bert? There are two occupational categories for disability: YOUR OCCUPATION and ANY OCCUPATION. After 24 months, in the employer provided group plan, if Bert and Ernie can perform ANY OCCUPATION, (meaning pushing a broom, or bagging groceries) they are no longer disabled.
After 24 months, Bert and Ernie’s monthly disability income ends per the definition in the group policy. However, Ernie’s supplemental policy has a definition of YOUR OCCUPATION, meaning he cannot perform the duties of being a commercial banker. What this means to Ernie and his family, is that the TAX-FREE benefit of $10000/month continues if he meets that definition of disability. Who do you want to be?
A few observations here:
- First, if you are working for a company that provides group disability benefits, have someone review the definitions. ANY OCCUPATION is standard language in these contracts, usually after the 24-month period.
- Second, see what sources of income they cover. I’ve seen the scenario above multiple times where bonus & commissions were not covered.
- Third, many insurance advisors try to sell the maximum benefit for the maximum period. My disability income specialist, who I rely on a lot agree on this point. I regularly see a 90-day waiting period and 60% of total income to age 67. You can lengthen the waiting period, shorten the benefit period, and reduce the monthly dollar amount. Look at your basic expenses & customize the plan to fit your budget…a little bit of something is better than a whole lot of nothing!
- Fourth, I can provide an additional benefit for a Millennial that will protect student debt. It’s generally waived at death, but not in the event of sickness or accident. Consider purchasing a plan to cover your student debt payments…especially if you have graduate or post-graduate debt with higher interest rates.