The Insurance Doctor

Category: Disability Insurance

  • Disability Insurance, Rolling the Dice

    Disability Insurance, Rolling the Dice

    I just returned from an extended Las Vegas Super Bowl Weekend and was thinking about what to write this week while on the plane back to JFK airport.  In many ways, insurance is gambling! 

    There is a high probability of a disability occurrence happening, such as someone becoming disabled either mentally or physically.  As an Independent Insurance Advisor, also known as a “Field Underwriter,” my job is to ask questions then listen.  This is why we have 2 ears and 1 mouth as we are supposed to listen twice as much as we speak.  Nearly 50% of ALL individuals ages 34 or younger will be disabled for 90 days or longer prior to age 65. 

    As per the Commissioners Individual Disability Tables, CSO/Society of Actuaries, see the chart below:

    Age     Odds of Long-Term Disability     Average disability length

    30                   51%                                                    4.7 years

    35                   48%                                                    5.1 years

    45                   40%                                                    5.8 years

    50                   34%                                                    6.2 year        

    There are generally 2 types of disability income insurance:

    1. Group Disability Income Insurance: Group disability insurance is usually offered by an employer at no cost or for a nominal fee taken out monthly directly from your paycheck.
    2. Individual Disability Income Insurance: Individual disability income insurance (DI) is usually purchased from an agent or broker, similar to life insurance.  There are significant advantages to doing business with an independent insurance broker!

    Advantages of Group Disability Insurance:

    1. Premiums are Affordable
    2. Some policies are portable meaning you can keep it if/when you leave the company
    3. The Business Owner can protect key personnel in the event of disability

    Disadvantages of Group Disability Insurance:

    1. Most policies have a monthly disability income “BENEFIT CAP” which is far less than the employee would need to provide for one’s family
    2. Few policies have an “Own Occupation” definition of disability, meaning it is much harder to trigger a claim versus individual policies.

    Our first task is to assess the risk probability based on the clients’ age, medical history, income level, occupation, amount of coverage, and details of the policy.  We come up with a monthly income need (usually between 40%-65% of income) then shop the policy to different insurance companies.  We then present between 1-3 company options to the client for review.  An Agent can ONLY present 1 company option!  My job is to find a comfortable premium to transfer the majority of the disability risk to the insurance company.

    Regardless of a person’s age, the ability to earn an income is usually their most valuable resource.  Disability income insurance is the one type of insurance that workers cannot do without!  If this is the case, why do less than 50% of adult Americans own a personal disability income insurance policy?  The answer is based on cost, as a typical individual disability income policy will cost between 2%-4% of a person’s salary, depending mostly on age.  This is why it makes sense to apply for an individual disability income policy as young as possible.

    Accidents are what most people think are the main cause of disability. This is incorrect!  Depression and back pain are the most likely to trigger a disability claim.  This has been exacerbated by Covid-19.  Disabilities can be triggered mentally or physically.  As an example, my friend is on disability from post-traumatic stress disorder (PTSD) from Hurricane Sandy. 

    It is critical to consider how your bills would be paid in the event of a disability lasting more than 3 months.  Workers should consider how long they would be able to cover their expenses.  Couples should also consider whether they can survive on one partner’s paycheck if the other were to become ill or injured.  In most cases, an individual private disability income policy is the best way to handle this risk!

    My top 3 tips to consider when buying an individual disability income insurance policy to protect you and your family:

    1. Get Disability Insurance Quotes from an Independent Broker:  An independent insurance broker has a macro view of the marketplace and multiple insurance companies to shop rates and benefits for you.  For example, we have one insurance company that will cover a disability due to a botched elective plastic surgery procedure. 
    2. Buy the “Own Occupation” definition of disability: Not all companies have this definition and some charge extra for it as a rider.  For example, a right-handed surgeon gets his or her right hand mangled when closing the car door.  With an “Own Occupation” policy, said surgeon goes on claim and can collect benefits and still work supervising others.  A policy without “Own Occupation” would have an “any occupation in their field” definition and would NOT be on claim in the previous example.
    3. Do NOT Take a Tax Deduction for insurance premiums paid: This is where your CPA can make a big mistake getting “greedy” for deductions.  If you pay your premiums with “after tax” dollars, 100% of your monthly benefits are TAX FREE!  If you take the small annual premium tax deduction, 100% of your monthly benefits are taxable!

    Are you confused?  These are critical individual and family planning decisions that should not be taken lightly.  For a better understanding of these policies and rates, feel free to reach out to me at Rob@InsuranceDoctor.us.

  • Disability Income Insurance. Can you afford NOT to have it?

    Disability Income Insurance. Can you afford NOT to have it?

    Imagine that you own a “SPECIAL MACHINE” that you keep in your basement.  This machine is programmed and able to PRINT MONEY!  How would you treat it?  More than likely, you would baby it and keep it well-oiled, perhaps put a cover on it to prevent it from getting dusty.  You would do everything in your power to PROTECT AND INSURE IT! 

    You would call the insurance company (or your agent/broker) to get a quote for “CASH MACHINE INSURANCE” and they said it would cost between 2%-4% of the amount of money it prints out per year.  This would not be so bad, right?   Think of YOURSELF as the CASH MACHINE, and the cost to replace a portion of your annual income is that 2%-4% insurance premium. 

    The purpose of disability income insurance is to replace the income when one is left unable to work.  Most working Americans need their income to survive!  Because wage earners almost always depend on an income stream, protecting this income is CRITICAL towards financial security!  Yet, well over 100 million working Americans have no private disability income insurance. 

    Many people have a misconception that accidents are the #1 cause of disabilities.  This is incorrect, as the number 1 CAUSE for disability is DEPRESSION/MENTAL NERVOUS.   These cases are now way up due to Covid-19.  Back pain is the number 2 cause.

                There are 2 types of disability income insurance:

    1. Group Disability Income Insurance: Group disability income insurance is usually offered by an employer at no cost or for a nominal fee/premium taken out of your paycheck.
    2. Individual Disability Insurance: Individual disability income insurance (DI) is usually purchased from an agent or broker, somewhat akin to life insurance. 

    Disability income (DI) is a unique type of insurance.  It is CRUCIAL insurance that protects against the loss of income when the policyholder is unable to work for months or years following an injury or illness.

    This is one area of insurance where “broker error” and “CPA error” can really hurt you.  These are THE BIGGEST MISTAKES your broker and/or CPA can make:

    1. Selling Based on Price: This is a common mistake agents and brokers make to “just make a sale.”  There are 5 or 6 companies in New York State that offer strong plans; however, there are differences between policies that must be pointed out.
    2. Using the Disability Insurance Annual Premium to Take a Tax Deduction:  Many accountants and agents make mistakes by getting greedy and suggesting taking the small tax deduction which can have enormous lifetime repercussions.  If DI policies are paid with “after-tax” dollars, then ALL the monthly benefits are received INCOME TAX-FREE!  If disability policies are paid with “pre-tax premiums,” then ALL the benefits received are 100% taxable!  For example, a 40-year- old that gets permanently disabled would receive 25 years of monthly income benefit to age 65 that would ALL be taxable because of “bad advice” from their insurance broker and/or CPA. 
    3. Incorrectly Completing the Disability Insurance Application:  Completing these disability insurance applications can be an arduous process.  Many insurance agents cut corners and rush this critical part of the process. 
    4. NOT Selling a Disability Policy with “OWN OCCUPATION” as the Definition of Disability:  It irks me to review the policies that others have sold without this critical definition.  See the example below.

    To best explain errors 3 and 4, an example should make it clear.  If a right-handed surgeon gets his or her right hand mangled in a car accident and they have “OWN OCCUPATION” as their definition of disability, they can go on a claim and (while getting paid on a claim) supervise others.  The “OTHER DEFINITION” would be something akin to “they cannot work in ANY AREA of their chosen field.”  In this scenario, the surgeon would NOT be on claim and forced to take a MAJOR PAY CUT!  The problem with group disability is that very few of those group policies have the “OWN OCCUPATION DEFINITION OF DISABILITY,” which can make the difference between going on claim or being ineligible.  If you own individual disability income insurance, I suggest going to your policy’s declaration page 1 and reading your definition of disability! 

    Back in 2009 my friend, John, called me and asked for help.  (John and his Mother were existing life insurance clients).  John had applied and been rated double the standard premium rate for disability insurance and asked for my help after apologizing that he did not know I handle this type of insurance.  He is a physical therapist who was employed at the Rikers Island outpatient facility and he had a side gig supervising exercise programs for seniors at their homes after their hospital discharge.  His previous broker did NOT ask him the proper questions and incorrectly completed the DI application listing 100% of his time spent at Rikers.  John earns about $100,000 annually, was 38 at the time, and in excellent health as a non-smoker.   

    After further discussions, I discovered John was splitting his hours equally between the 2 jobs.   Thus, I crafted his application showing the split to a different insurance company.  In conclusion, I was able to reduce his premium in half to $250/month for a $5500/month income benefit to age 65.  John called me 3 years ago as he was unfortunately beaten up at Rikers Island in an unprovoked vicious attack and is now on permanent disability collecting TAX-FREE monthly checks for another 16 years until he turns 65!

    For individuals and families, this is must-have insurance!  A good profile candidate is age 25-50 and earning a minimum of $75,000/year.  White-collar jobs are usually less expensive than blue-collar due to injury risk. 

    For a FREE policy review or to discuss disability income insurance quotes for you or your business email “contact me re disability” to Rob@InsuranceDoctor.us.  Stay Safe and Keep the Faith!

  • Disability Income Insurance 101

    Disability Income Insurance 101

    Imagine that you own a special machine that you keep in your basement.  The device is able to print money.  How would you treat it?  You would keep it well-oiled, perhaps cover it so it doesn’t get dusty.  You would protect it and certainly would INSURE it!

    You call the insurance company to get a quote for your “cash machine” insurance and they say it costs between 2-4% of the amount of money it prints out per year.  That wouldn’t be so bad right?

    Think of yourself as the cash machine and the cost to replace a portion of your annual income is that 2-4% insurance premium.

    The 47 million Americans with no private health insurance was a major catalyst for the approval of the ACA (Obama Care affordable care act).  What about the roughly 100 million working Americans that have no private disability income insurance?

    Just about every working American needs his or her income to survive.  Because wage earners almost always depend on a continuing income stream, protecting their income is a vital step towards financial security.

    Limra (life insurance marketing & research association) says that 71% of Americans say they would find it difficult to meet their current financial obligations if their paycheck were delayed for one week.  Yet very few people have individual disability insurance.

    The purpose of disability income insurance is to replace the income if one is unable to work.  There are two main types of disability policies, group and individual.  Group is usually offered by an employer at a nominal fee.  Individual is usually purchased from an agent somewhat similar to life insurance.  Suffice it to say the chances are anywhere from two to seven times greater (depending on age) of being disabled than dying prematurely.

    What are the odds it can happen to you?  The odds change based on a few factors (age, type of work, smoker etc).  To find out your own odds go to www.whatsmypdq.org to ascertain your own personal disability quotient.

    The two biggest mistakes most brokers make is to sell based on price and to suggest that clients use the annual premiums paid to take a small tax deduction.  The saying “you get what you pay for” is most appropriate when evaluating disability policies.  The “definition” of disability is the most important factor in a policy.  You want what is termed “own occupation” as the definition.  Group policies rarely include that.

    The easiest way to explain this is with an example.  If a surgeon gets his or her right hand mangled in an accident and they have “own occupation” as their disability definition,  they can go on claim and return to work supervising others.  The other definition would be something akin to “they can’t work in any area of their chosen field”.  In that scenario that surgeon would not be on claim and has to take a big pay cut.

    The second mistake is to get greedy and take a small tax deduction on the premiums paid.  If disability policies are paid with pre-tax money than the benefits are 100% taxable.  If premiums are paid with after-tax money then all benefits are tax free.

    One final point is that many disability policies start to reduce their income benefits at age 55 or 60.  This is an age where it’s important to meet with your broker to see if it makes sense to reduce or cancel your disability insurance and re-position those premiums for long term care insurance.

    I’m always interested in reader opinions or suggestions for future topics and can be reached at robcintel@aol.com.

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