Back in March, I co-hosted a disability insurance webinar with Bill McKernan, Managing Director of the McKernan Financial Group. We shared insights on how high-income professionals should think about disability insurance and incorporate it as a key aspect of their overall financial planning. Our discussion focused on long-term disability insurance since high-income professionals can self-insure for a short-term disability.
Here are my key takeaways from the session:
- Group disability policies are often inadequate for high-income professionals.
Although a typical group disability insurance policy covers 60% of base salary, these policies are subject to a monthly maximum benefit, which creates a cap well below the 60% coverage for any high earning professional. Plus, if you have significant variable compensation (e.g., bonus, commissions, performance-based stock options, etc.), none of this variable comp is covered. Lastly, if your employer is paying the premium (which they often do), then your benefit is fully taxable. It is also worth noting that group disability policies typically have a less favorable definition of disability and they are generally not portable, meaning if you leave your job you lose the policy.
- Disability insurance is expensive, but there are lots of ways to lower your premium payments.
There are numerous factors that go into the overall price of a disability insurance policy. Some of these, like your age and profession, are out of your control. However, the rest are options you get to decide upon. The benefit amount and the length of the benefit period you select play a major role in the cost of your policy. Ask yourself if you really need coverage until age 65 (hint: the average duration of a long-term disability claim is about three years). Lesser, but still very important, factors include whether you get “own-occupation” insurance, whether benefits are adjusted for inflation, and whether premiums are level or increasing. If you think through the options and how they will impact your financial plan, you will find that there are lots of ways to structure a disability insurance policy to make the premiums affordable and still provide you with a good policy.
- Working with a reputable insurance carrier can help you get your benefit faster and easier.
Ask anyone who has had to file a claim for disability insurance, and they will likely have a story for you about the mountain of paperwork they had to fill out and all the documentation they had to provide before receiving any benefit payment. When you are comparing policies across carriers, don’t let the price tag be the sole determining factor. Be sure the carrier you select has a solid reputation for paying claims in a timely manner and find out if there are certain types of claims they handle better than others. The last thing you need in an already difficult situation is the added stress of paperwork and hours on hold with the claims department.
The risk of becoming disabled is significantly greater than the chance of dying prior to age 65 and, for most of us, our ability to earn an income is by far our most valuable asset. If this is true, then why is it that so few people have an adequate amount of disability insurance? I think there are two reasons. The first, which Bill pointed out, is that most people have a hard time envisioning themselves as disabled. Frankly, it’s much easier to envision dying than becoming disabled. If you can’t envision this future possibility, then you’re unlikely to plan for it. The second reason is disability insurance is a far more complex product than buying something simple, like term life insurance. This complexity is a hurdle that few people seem to want to take the time to jump over. If you are serious about protecting your most valuable asset, you should take the time to learn about the various aspects of disability insurance or hire a reputable agent to help you.
A big thanks to Bill McKernan for co-hosting the webinar with me! Please get in touch with me if you have any questions or would like to learn more.