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 [email protected].  Stay Safe and Keep the Faith!