Buying tips for disability insurance

As a financial planner, I spend a great deal of my time helping my clients plan for unforeseen events that could affect their financial well-being.

Recently, I found myself facing a similar situation. After years of limited mobility, I finally decided to have arthroscopic hip surgery. I had to take three weeks off work and only recently got to drive again.

Before having the surgery, I also took a closer look at my company’s long-term disability benefits. Just in case something goes wrong.

I’m glad I did, as I found out that this insurance only covers 60% of my base salary, which is typical of many group plans. Very few of these plans also cover incentive compensation, such as bonuses.

Fortunately, the operation went well and I did not need long term disability benefits this time. But what if things hadn’t gone so well? What if it took me a year or more to fully recover from my surgery? What if I was diagnosed with cancer or another chronic disease and could no longer work? What if I couldn’t get around on my own anymore?

Receiving 60% of my monthly income from my employer’s plan would not cover my family’s living expenses. And I’d probably have more bills to pay for medical bills, grocery deliveries, and rideshare services like Lyft or Uber. The prospect of facing these additional expenses while receiving only a fraction of my income in benefits was frightening.

And these are not irrational fears. One in four workers aged 20 or over will become totally or partially disabled at some point in their career, depending on the Advice on disability awareness. This is why I decided to turn to supplementary long-term disability (AI) insurance.

Extra income when you need it most

DI is more useful and cost effective when, in combination with your employer’s long-term disability insurance, it can replace most of your regular monthly income. And if your business doesn’t offer any type of disability insurance or if you are self-employed, that might be the only thing standing between you and extreme financial hardship.

But, as I discovered in my research, ID can get expensive, anywhere from $ 1,000 to $ 3,000 per year or more, depending on your age, physical condition, and coverage requirements. That’s why I really needed to think about how this fits into my overall financial situation.

What about Social Security disability benefits?

You might think that Social Security will provide a safety net if you become permanently disabled. It is true that if you qualify, you may be able to collect Social Security Disability Insurance (SSDI) benefits until you reach your full retirement age, at which time the benefits will pass. social security retirement benefits. But you must have paid Social Security taxes in the past to be eligible. And the social security administration has very strict rules eligibility criteria for SSDI services.

Your benefit payments are unlikely to be enough to cover all of your expenses, and if you earn more than a certain amount of money per month, your payments may be suspended or terminated.

My DI journey of discovery: the stages I have taken

Being a financial planner, I have a lot of experience in performing cost / benefit analyzes of different asset protection options for my clients. Now it was time to do it for myself.

Compare monthly income needs to disability insurance payments

I started by estimating the monthly income that I would need at different stages in my life if a physical disability forced me to stop working for an extended period. I have included medical costs and other support services in my calculations.

With that amount in hand, it was time to see where disability insurance could fill in the gaps.

As I mentioned, my company’s long-term disability insurance plan covers 60% of my base salary. But because these benefits are taxable, their real value is less. So my own separate disability insurance policy should make up the difference. Fortunately, when you purchase this insurance yourself, the benefits you receive are generally not taxable.

This made it relatively easy to calculate the monthly AI payments that I would need to make ends meet. I simply subtracted the income that I would receive each month in my business plan from the total monthly income that I would need. This dollar difference was the monthly amount I would like DI to cover.

Finalize the duration of coverage

Then it was time to decide how many years of benefits I would need if I became permanently disabled. Many disability insurance policies start with payment periods ranging from two to five years, but you can extend the period for as long as you want.

Of course, the longer the payment period, the higher the premiums will be. But I really like my job. If I couldn’t do it anymore, I would like to be compensated for all the time I miss, so I decided to go to the maximum.

I am in my 40s and would like the payment period to last until I retire at 67. In the worst case, I would have about 20 years of payments. If I never made a claim, I would be paying premiums for two decades. It may sound excessive, but is it really? My term life insurance policy covers the same period. At least with DI I would get the financial benefits in my lifetime.

Consider additional features

Now that I had decided on the amount of coverage and the length of the benefit period, it was time to consider some of the features that can affect its cost.

Waiting time

Typically, long-term disability benefits take effect within a certain period of time after the expiration of short-term disability benefits, typically 90 days. Insurers generally charge less for longer waiting periods. I decided on a six-month waiting period, figuring that in the worst-case scenario I could use the money in my emergency fund during that time. For me, it was worth taking that risk in return for significant premium savings over the life of the policy.

Payment restrictions

AI carriers may offer several types of policies and endorsements that affect the flexibility of payments.

  • Own occupation is the type of coverage that most people choose. These policies pay benefits when you are no longer able to work in your current (or most recent) role. You are covered even if you are able to work in a less demanding role. In some cases, you can work and receive these benefits at the same time.
  • All-occupation insurance requires that you be totally disabled and unable to work before the insurer pays benefits. If you can still work to a certain extent, even in a lower paying and professionally unsatisfactory job, the insurer may deny benefits.
  • Residual disability This is an additional rider that you can choose from and that will pay you benefits even if you are only partially disabled and can still work. This can be a good thing to add as relatively few people end up becoming completely disabled.

Self-occupying policies are more expensive. But for me there was no alternative. If a disability forced me to stop being a financial advisor, I would like to receive compensation for the time I missed.

Get a quote on the package

Now that I have a basic idea of ​​the amount of coverage, duration, and payment options, I am in the process of getting quotes from highly rated DI operators. These are rough estimates because when I finally apply I will need to give them my medical history and pass an insurance medical exam.

Now it’s your turn: find a guide for your own ID journey

I feel fortunate that my experience as a CFP® professional has allowed me to do a lot of upfront planning on my own. But, given the complexity of the product, I would recommend that most people speak to a qualified financial planner to project their cash flow during various periods of disability and estimate their DI coverage needs before starting to plan. contact the insurers.

Financial Advisor, Partner, Canby Financial Advisors

Joelle Spear, CFP® is a financial advisor and partner at Canby Financial Advisors in Framingham, Mass. She holds an MBA with a concentration in Finance from Bentley University.Securities and advisory services offered by the Commonwealth Financial Network®, a member of FINRA / SIPC, a registered investment adviser. The financial planning services offered by Canby Financial Advisors are separate and unrelated to Commonwealth.

About Antoine L. Cassell

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