Castles & Moats

Insurance and Investment Planning...Simply Explained

Disability Income Plans2018-07-05T21:12:33+00:00

Chapter 7

Disability Income Plans

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…

  1. The price if you buy it
  2. 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:

  1. Your OWN Occupation
  2. 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:

  1. 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.
  2. Second, see what sources of income they cover. I’ve seen the scenario above multiple times where bonus & commissions were not covered.
  3. 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!
  4. 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.

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If you’re in need of auto, home, landlord, or life insurance, I look forward to getting to know you and becoming your partner in protection.

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