4 things I’d like people to know about disability insurance as a CFP

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In 2007, my 61-year-old mother was diagnosed with stage 3 breast cancer. I still remember the numbness I felt hearing my mother struggling to keep calm as she told me about it. news. Although I was not a financial advisor at the time, I clearly remember the words I said afterwards.

“Don’t worry about something until there is something to fear. We cannot control the fact that we are in this situation now, but we are 100% in control of what we do and the attitude we take from this point on let’s be positive and beat this thing. “

My mother had unused vacation and sick leave, unused vacation and sick leave from previous years (“compensatory time”), benefits under the Family Leave Act and a combination of insurance. -short and long term disability. By effectively combining and coordinating these benefits, my mom was able to take a little over a year off to focus on her treatment and recovery.

I am happy to say that my mom won her two year battle with cancer and has been cancer free for almost 11 years. Whenever I look back on that time, with the challenges that accompanied it, I sincerely believe that if it were not for the disability coverage she had and the ability to coordinate her benefits to enable her to lead the battle regardless of the bills, she may not be here today for our daily talks.

Fast forward to 2020. As a CPA and financial advisor, I am a strong advocate of ensuring that my clients not only have disability insurance, but that they have the right amount to face the risks they may face. to be confronted. That said, I would like my clients to know a few things about disability insurance, including how to read the fine print, how benefits are taxed, when to purchase a private policy, and how much of your income is covered. I’ll cover it all here.

Disability insurance: the basics

Anyone who knows me and knows my writing knows that I am an insurance fanatic. I often say that insurance is like an American Express card – don’t leave the house without it. This goes for all types of insurance – life, disability, home, auto, umbrella, etc. I often preach that insurance forms the basis of a solid financial plan and that without it jeopardizes the effectiveness of the entire financial plan.

If life insurance is the Batman of policies, disability insurance is clearly Robin, or the indispensable sidekick. I stress “essential” because a person of working age (25 to 65) is six times more likely to suffer from a disability that puts them out of work for more than 90 days than this person dying. Simply put, disability insurance is a must-have for workers who are financially responsible and have loved ones who depend on their income to meet their financial needs and goals.

Disability insurance is insurance that pays you a percentage of your income in the event that you are injured, become ill due to an illness, ailment or ailment, or suffer from a health problem. requiring treatment, such as a mental illness or a substance. trouble with use. Disability insurance generally comes in two forms: Short Term Disability (STD) and Long Term Disability (LTD).

I often call disability “the protection of your wages” – like many of your valuable possessions that are protected by insurance, disability insurance protects your ability to earn a living.

Understanding the fine print

A disability insurance policy, like any other insurance policy, is a contract. In these contracts, there are many provisions and conditions that the ordinary employee does not pay attention to. However, when it comes to such coverage, it is essential to understand these provisions to ensure that an insured person is truly insured. Important terms and provisions include:

Income before disability

This is the insured’s income before applying for disability benefits. Note that this coverage is generally limited to salary income. I’ll explain this in more detail when we discuss the limitations of disability insurance below.

Personal occupation vs any occupation

This provision dictates how a professional is determined to be “disabled” under the policy. According to the “own occupation” criterion, the policy will pay benefits if a disability prevents the insured from performing the functions specific to his profession. Conversely, under the “any profession” criteria, the policy only pays if you cannot do any work, not just the work for which you are specifically trained. The more specialized your profession, the more you want a policy with a “own occupation” clause.

Beneficiary period

For LTD policies, policies can range from one year to the insured’s 65th birthday. There are also variations where a policy can provide “own occupation” benefits for two years and then change its disability criteria to “any occupation” (or an annual disability recertification by a physician appointed by the employer).

Coordination with Social Security

Many policy benefits are offset by any Social Security Disability (SSDI) for which the insured becomes eligible while receiving LTD benefits. In general, SSDI becomes payable when a qualified candidate has been disabled for at least five months and is expected to be disabled for at least 12 months in the future. When projecting LTD benefits, it is important to understand how benefits may change with the introduction of SSDI benefits.

Taxation of benefits

In general, when it comes to group disability benefits, taxation is straightforward: if your employers pay for your disability coverage or if you pay pre-tax premiums, your benefits will be taxed as you go. that you will perceive them. Conversely, if you pay the premium with after-tax dollars, you will receive tax-free benefits.

Understanding the tax system is important so that there are no surprises when making a claim and projecting benefits considering the nature of the disability and its duration.

The limits of your services

Disability insurance generally only covers salary. Since many employees and middle managers earn less than a normal salary, these professionals need to be very careful to ensure that they are properly protected.

For example, a vice president earns $ 175,000, including $ 100,000 in base salary, $ 35,000 in stock compensation, and $ 40,000 in bonuses. Although the employee’s total compensation is $ 175,000, according to many LTD policies, only the salary – or $ 100,000 – is covered in the event of a claim. For example, a family that consistently earns $ 175,000 can lose almost 40% of its income in the event of an LTD claim. Even more if the benefits are taxable.

Meet your family’s needs with sufficient coverage

It may be helpful to purchase a separate private LTD insurance policy in addition to the group insurance provided by your business. Here are some of the reasons why this strategy may make sense:

  • When you take out private coverage, most policies are issued with “own occupancy” clauses.
  • You can choose the duration of the benefits according to your needs. So, if your group contract is only for two years, you can take out a private wrap-around contract that covers you for five years, up to 65, or even up to 70 years.
  • With private coverage, you pay with after-tax dollars, making benefits tax-free when you receive them
  • You can purchase an LTD to supplement your existing group LTD to cover the portion of your compensation that is not salary

Sharif Muhammad, MBA, CPA, MST, CFP, is the founder and CEO of Unlimited Financial Services LLC, a New Jersey chartered accountancy firm.

About Antoine L. Cassell

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