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A Wiser Retirement®
214. What is disability insurance and do I need it?
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On this episode of A Wiser Retirement™, Casey Smith is joined by Randy Hargett and Kyle Conroy. Randy is a Long Term Care Specialist at Capstone LTC Advisors and Kyle is a Managing Partner at Disability Insurance Services. They discuss what disability insurance is and how to determine if you need it.
Podcast Episodes Referenced:
- Ep 212: Medical Costs During Retirement and Preparing for the Unexpected
- Ep 179: Long-Term Care Insurance: To Buy or Not to Buy?
- Ep 126: How can insurance protect your wealth?
YouTube Videos Referenced:
- The Medicare Sign-Up Process Explained
Other Links:
- Randy Hargett - Capstone LTC Advisors, randy@ltcstep.com
- Kyle Conroy - DI Services, kconroy@diservices.com
Learn More:
- About Wiser Wealth Management
- Schedule a Complimentary Consultation: Discover how we can help you achieve financial freedom.
- Access Our Free Guides: Gain valuable insights on building a financial legacy, the importance of a financial advisor for business owners, post-divorce financial planning, and more!
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This podcast was produced by Wiser Wealth Management. Thanks for listening!
Welcome to a wiser retirement podcast, where we believe the best financial advice should always be conflict free. I'm your host, casey Smith, guiding you to financial freedom today, or my co-host, randy Hargett and Kyle Conroy. Today we're going to talk about disability insurance and how to determine if you need it. You are four or five time repeat a wiser retirement guest, so thanks for coming back and doing this. Glad to be back and, kyle, this is your first go around on the podcast, so thanks for joining us. I think everyone remembers Randy, or if you're a wiser client and you've needed any insurance services, you've worked with Randy. But, randy, tell us a little bit about yourself and your business real quick, just for our new listeners.
Speaker 2Yes, I'm a 22 year long term care insurance specialist, with a little bit of life insurance mixed in there over the years, but mainly been focused in long term care, and so when we have conversations about things like we're going to discuss today, we bring in other specialists on that, and that's why we brought Kyle in today to discuss disability.
Speaker 1So, kyle, just to be clear, you are not an agent yourself, but you're the wholesaler that supports agents. Is that correct way to describe that?
Speaker 3Yeah, I am a licensed agent. I actually started my career as a financial planner and then I transitioned over to this company Disability Insurance Services. So we're a wholesaler in the market where I'll help agents like Randy basically brokerage out for when they're looking for any disability insurance needs, more on the individual side. But that's correct. You know I generally don't go on the application for simpler terms.
Speaker 1So got it All right. Well, that makes it makes the conversation a little less unbiased when we have the wholesaler here, not just a bunch of agents selling disability insurance. Right, Right, All right. Well, you know, I chose this topic because we kind of have hot points every year that we focus on as a firm and I don't know if I've ever really talked about this publicly, but but we, few years ago, as a state planning Okay, let's make sure all our clients are really buttoned up with a state planning.
Speaker 1This year we're really focusing on disability because there's a few cases that popped up that I determined that man, these people didn't be in a role for a long term disability inside their inside their open enrollment at their company, and that's kind of I always thought that was just kind of a no brainer, but the reality is that a lot of people don't understand disability, exactly how it's applied. But I believe Randy you can correct me if I'm wrong you have a better chance of being disabled than using your life insurance policy by dying. Is that? Is that a correct? I don't. I don't know the exact percentages.
Speaker 2That is true, casey, especially if you compare it to term life insurance. There is a much greater chance of being disabled and having that financial burden than it is dying during the term the life of a term policy.
Speaker 1So let's just kind of dive right into disability insurance and keep it high level, but let's talk about short term disability versus long term disability. What defines those two?
Speaker 3So generally, with the short term, what we're looking at is it's going to be about a benefit period of a year. Anything beyond that. You know some some people can argue that is a two years. One year. Anything beyond that is generally what we would consider long term. So a traditional long term disability policy is going to be to age 65 or to age 67. Those are the two most common ones that we see. Depending on the carrier and occupation classes and things like that, sometimes they'll drop it down to either maybe a five year or a 10 year, but generally speaking that's going to be the two kind of difference makers. There is a one year or two year versus two age 65 or 67.
Speaker 3Your waiting period or your elimination period also plays into that.
Speaker 3So obviously if someone's going to have a, say, a one year benefit period, your waiting period or elimination maybe you know it could be two weeks, it could be a month, something like that.
Speaker 3With the long term disability plans doesn't matter if it's a 10 year or two, age 65 or 67, we'll generally see like a 90 day elimination period. So that's kind of the questions that we'll get a lot of times from clients is like, well, what happens in that kind of intermediate period where you know what if they'll distinct something smaller in a sense of you know, rolling their ankle or hurting their knee or something like that, and they're just going to be out for a couple months. That's obviously where a short term policy is going to come into play, just because with the long terms it's something where they would you'd have to be out of work and unable to work in your occupation for generally it's like three months, so 90 days, before that benefit period gets triggered. So that's kind of the main differences. You know the nuances between the two, because from a writer standpoint, a lot of times we'll see most of the same writers offered. So it really just comes down to that benefit period.
Speaker 1So in the say, how about short term? You said that's one year. So if really, from a financial planning standpoint, if you have a year's worth of expenses saved up, then you could typically avoid having to purchase a short term policy if your company didn't offer it already by having that. The problem is that most people don't have enough savings saved up to get them from where they are today to age 65 or 67. Right, and I'm glad you said 67, by the way, because most policies I see stop at 65, but yet full social security is now 67. Correct. So is it just that the industry is just now catching up in their policies to the Social Security's change and the Secure Act?
Speaker 3Yeah, now for a few years they've had to age 67, but I definitely think that's part of it. As you know, within the last I mean probably a decade plus now we've seen people even if, whether their retirement age was still 65 or not, we're seeing them work longer into their, you know, upper 60s. We even have some clients that work into their 70s. We'll see some clients that are actually applying for disability insurance, you know, at age 70. And it's unique occupations in that sense, but we do see that a lot of times. So it is nice that now you can kind of dovetail that into the typical retirement age of 67, and that way you know that you're going to be covered through that age.
Speaker 1So in our planning, that's something we have to think about. We have enough cash to cover the short term. If we don't, then a short term policy could be added for sure, All right. So I think this is an obvious question but why? Why do we need to buy this? Why do we, why should we have this coverage?
Speaker 3Yeah, so the main thing, you know, looking at disability insurance from a few different angles, uh, one just being protecting your financial security, right, your financial future. Uh, one thing that you know I always love to ask clients is you know what's your greatest asset? You just kind of sit back and let them talk for a second and the obvious answer is they're always like you know, my house, my car, uh, the nice shiny boat that they just bought, and that's why you know it's kind of, I would say, disability insurance is more of a educational product, because a lot of people either don't know about it or don't think that they need it. Um, so the educational part comes in because we're like no, your greatest asset is actually your ability to earn an income. You know, because once you learn, once you lose that ability to earn an income meaning you're disabled and unable to work um, you know, out goes the expenses, for, you know, sometimes it could be tough to pay a mortgage. You know the, the boat, the house, the car, all those things come into play. Uh, looking beyond that, you know, for agents like yourself where you're doing retirement planning and things like that, uh, it's really tough to make investments if you don't have money coming in the door, right, it's stuff to to keep pushing money out for different kinds of things. So that's kind of the starting point, um, you know it's.
Speaker 3The other thing is, a lot of times someone will say, well, maybe there's one breadwinner in the family and it's like you know whether there's equal incomes coming in, or one makes significantly more than the other. If, as soon as some of that money coming in is not available anymore, you know, now you have to start making lifestyle changes. Now, maybe you have to downsize the house. Now, maybe you're moving your family and your kids have to go to the school district, so all those things like that. Because, regardless of what a family's income is, they are, they're used to a certain uh lifestyle. Right that you become accustomed to that. Um, so that that's kind of how we look at it is whether you have, you know, some savings in the bank or whatever it is, uh, it's really, if you're reliant on your paycheck you know you're, you're relying on that money coming in on a monthly basis, then disability insurance is going to be suitable for yourself.
Speaker 1What, um I mean? What about social security? Disability? Why couldn't you just go on that instead of buying a disability policy?
Speaker 3Yeah, so a lot, a lot of limitations to social security. Uh, the starter, I'll say, you know, the stats that I've seen are as much as 70% of applicants get denied for social security. So you have to be totally disabled to to receive those social security disability benefits as opposed to, you know, so it couldn't be a partial disability. I guess where I'm getting at. And with these uh end of, with these individual long-term disability policies, they're much more comprehensive in coverage because obviously if you're, if you're totally permanent disabled, then you're going to receive your benefits. But there's also a writer on there called a residual writer, that if you were partial dis, partially disabled, so it's, you know, cause that's, that's very commonplace. Where it's not, you can't work at all full time, but maybe you can only work two or three days a week because you have to go to rehab therapy. Uh, you just need rest, you know, to recover. Whatever it is, they'll still pay an equal percentage of your benefit. So, uh, that's another reason. And then the maximum benefit amount I think recently I read there's maybe 3,800 or 3,822 or something like that was the max um social security benefit being paid. So there's that, uh, the elimination. You know there's a five month waiting period for it.
Speaker 3So there's just a lot of things that come into play. That social security is a great benefit that's being provided currently by the government to have. Uh, I just wouldn't necessarily want, you know, myself or my clients or a family member to be reliant on that just because the individual policies are much more cumbersome than coverage. Uh, you can get higher benefit amounts and things like that. And then the other, the other aspect to that is a lot of the carriers, uh, depending on the market and things like that, they will they'll have a social security benefit writer.
Speaker 3So what that means is you still have your base benefit from these policies and then there'll be a secondary benefit that will that's called like their social security um, a benefit writer, essentially. But if you get declined by social security, that secondary benefit will be paid. But if you were to get approved when you apply for social security, then that second benefit won't be paid, and so you also get your base benefit and then the social security. So, um, it's nice, you know, kind of peace of mind, I guess to have that social security in the background, but it's not something that you know. I think that, uh, anybody should just 100% be relying on.
Speaker 1So when you think about, uh, disability, is it pretty common place that it covers 50% of your? Is it your last year's income? Is that what it goes off of? How? How are the benefits determined?
Speaker 3Yeah, it's generally the kind of the golden rule, if you will, is about 60% of your gross. So, uh, for easy numbers, just to kind of work backwards, what we always say 60% would, for every 100,000 of gross income on an annual basis, that's going to be about 5,000 a month. Just right, 5,000 times 12 is 60,000. So there's your 60%. Uh, each carrier has their own algorithms that they use, so it could be plus or minus. You know, when we run competitive analysis, that base benefit for every client won't be completely equal across the board. They'll generally be within a couple of hundred dollars of each other. Uh, but 60% is what we say, you know, and kind of the questions that a lot of clients will ask like, well, this is still less than what I was making.
Speaker 3Uh, the reason being that there has to be some sort of incentive to get back to work. Right, cause, you know, most, most people are like most people in this world. If you're receiving 100% of your income while not working, it's tough to motivate them to get back to work. So, um, the idea is to, you know, be there as a support system, you know, financially, for something where to happen and they're unable to work. Uh, with the hope that once they get healthy again and and you know are able to get back to their occupation, then they'll do so, and the reason being so that they can get, you know, get their full income back. Uh, so. So those are kind of how we look at it from a percentage standpoint, but again, every, every care is slightly different.
Speaker 1So obviously, the more income you have, the more you should be expecting to pay in premiums for a private disability policy. Is that a fair statement?
Speaker 3Definitely yeah. The two main driving factors are going to be your age and what your income is, because, if all things being equal, if a person is making the same amount of money from one year to the next, that second year, when they're a year older, they'll be slightly more expensive, just naturally, the inherent risk that comes with that.
Speaker 1So is there a cost of living increase built into most of these policies, or is it just a flat dollar amount?
Disability Insurance Riders and Annuitites
Speaker 3No good question. So there's a few different riders that these carriers will include. One is called your COLA, or cost of living adjustment, and so that's for every year that they were on claim that next policy anniversary it'll increase. It's generally going to be 3% to 4% depending on inflation and things like that, so that each year your benefit while on claim will increase. The other nice feature that a lot of these carriers include on their built into their policies, that's the automatic increase rider. So it'll be for the first five or six years of the policy without being on claim On the policy anniversary your benefit is actually eligible to go up against generally 3% to 4%.
Speaker 3Obviously your premium will be reflected with that as well. But it's kind of an inflation guard for the first five to six years of the policy being enforced and then it falls off after that. But that's just something to get started with. And then you've got again that COLA rider for, let's say, five, 10, 15 years. Down the road, if, god forbid, somebody goes on claim, then at least they can get that inflation guard built into it moving forward, just because, as we all know, especially what we've seen these last few years from an inflation standpoint, let's just say you have a $5,000 or a $10,000 benefit right now. That dollar for dollar value is not going to be the same in 10, 15, 20 years down the road. So a very important rider to include Casey.
Speaker 4I've got a question.
Speaker 2Kyle, is it not true that there are some policies out there that reflect specifically on the job that you became disabled from that you can't work that job, but you could work another job and there's still some benefit available? Is that correct? Great question.
Speaker 3Yes, sir. So kind of the definition basically of these disability insurance policies are if you're unable to do your duties and responsibilities of your occupation, you have an attending physician statement that signs off on it, then you will receive that benefit. There's two critical riders that we look at. They're commonly known as true and occupation. So there's two levels to it. So there's a modified and then there's true and occupation. Under both definitions the carrier will never force you back to work while you're on claim the benefit of that hire when the true and occupation is that same thing. You're unable to do your exact duties. But maybe you could work in another, different occupation altogether. Then you could still receive the benefit from the carrier and receive that secondary income that you now have in a new occupation, as opposed to with the modified definition. If you were to go seek what they'll call gainful employment, if you were to seek that, then there would actually be an offset from your benefit to the new income. So it's a valuable rider. It's very occupational driven and what I mean by that.
Speaker 3The easy example is, let's say, a surgeon. If a surgeon were to become something, they could have carpal tunnel syndrome or something could happen to their wrist because of what their occupation requires from them. From a duty standpoint they're obviously now unable to provide surgery, right, if they've got something going on with their wrist, elbow, shoulder. But maybe they're not totally disabled in the sense they could still a lot of times go teach at maybe the local university right to the different residents. Or they could find a secondary occupation because, again, they can't be a surgeon at this point. They could find a secondary occupation still in the medical field. Now they would essentially be able to collect their benefits and receive that secondary income without an offset.
Speaker 1So is that a standard policy, or are there policies out there that wouldn't be written that way, that you should avoid?
Speaker 3Yeah, I wouldn't say to avoid it. Generally, when we run the illustrations again, this is where kind of the specialist comes into play and just having working with proposal specialists who understand our experts in the field and understand what each occupation is requiring Generally, what we'll see are kind of base policy that we'll send out would be that modified contract. If once we see again it's a surgeon or somebody like that, that's a little more hands on, it's kind of unique in their occupation, where something that would be disabling to their occupation, but not a more general occupation, that's when we'll throw that true knock on. The nice thing about these policies is they're completely customizable. So, for example, if Randy has us run some illustrations and we provide them and they come back with a modified definition, we go to present it to the client and we explain the differences of those two kind of the nuances of those writers and they're like you know what I really want?
Speaker 3That true and occupation, just peace of mind. Or maybe they have something in the back of their mind that if they were to become disabled they would go work in this other occupation. Maybe they have family ties to something. Then we can always go back and revise those illustrations, to make sure we have it on there. So yeah, we can look at both, but we'll definitely explain the differences. Just because you are paying a significant premium for that true knock. But again, depending on your occupation, it may be worth it.
Individual and Business Disability Insurance
Speaker 5Are you curious why annuities keep coming up as a potential investment option? People are often told that annuities can effectively mitigate investment risks and help secure their financial future. However, annuities often benefit the salesperson and might not be the best choice for you as a consumer. To learn more about the various types of annuities, the negatives of owning them and better investment alternatives, we have a free ebook on our website just for you. To download our ebook Fire Beware. Why Do they Keep Trying to Sell you that Annuity? Simply click the link in the episode notes or visit wisereinvestorcom slash guides. Now let's get back to the episode.
Speaker 1So let's shift gears to business owners for a minute. So you think about a business owner who is disabled, but they're still in the company, so they're still getting probably a K1 and profits. How is that typically handled? Because I have to go back and look at this. But we pay for short-term and long-term disability for our employees as an employee benefit, but I'm pretty sure I'm excluded from that, like I don't get to participate, is that? Am I thinking about this correctly? Is that normal?
Speaker 3So they'll definitely look at it's very unique case by case. The main question they'll have is what are an individual's residuals coming in? And sometimes if those residuals hit a certain amount then there can be an offset there. Business owners are unique, but the main thing that we generally look at let's look at a small business owner, for example. There's another disability on the same disability, chasti.
Speaker 3It's called business overhead expense and that's a product that we often it's so undersold to small business owners, which is a shame. I think the last stat was like eight or nine percent of small business owners have it. But essentially what that does is and when I say small business owner, let's look at an example of like a single practitioner at a dental office. So they'll have employees, they have a front desk staff, they have a dental assistant, they have a dental hygienist, they have $30,000 of overhead coming in every month, but the business is solely reliant on that single practitioner, dentist. So business overhead expense if something were to happen to that dentist, they'll have the benefit coming in to pay everything from their overhead to restock it. It could still pay their employee wages, it could pay their insurance premiums. The intention is to keep the lights on at the office. The max benefit period on that is generally gonna be about two years, but the intention is to give the business owner a two-year window to make sure that they can get healthy in that two years and come back to work. Or maybe it's something where it's more catastrophic and they're not gonna be able to come back to work.
Speaker 3Okay, now at least they have a two-year runway to try to find a seller for that business, rather than having to short sell it right, because the studies show on a small business they go belly up without money coming in the door within months. So what I'm getting at is that's where we like to start with the small business owners and naturally their next question's gonna be okay, and then it'll also pay my income, right, and it's like well, actually that's the one main thing that it doesn't pay. And that's where now we pivot to individual disability insurance. So in a perfect world they would have individual DI to pay their own income, coming in, give them a benefit and then the BOE to keep their business open, pay their staff and things like that. So that's kind of how we approach it with small business owners. Obviously, large business owners is a little different, but if you are in a larger business, like you said, you may have some K1s and other residuals coming in to where it may can offset that policy, but they could still nonetheless have disability insurance.
Speaker 2So what you're saying there in Casey's example is that he has the group long-term disability for all of the staff at Weiser Wealth, but he would probably have to purchase an individual long-term disability policy for himself. Correct, as the business owner? Okay.
Speaker 3And you could still. You can still participate in your group policy. You know you'd have to talk to, obviously, your group rep because there's so many different ways that they can put this thing together. But what we actually see a lot, you know, not to pivot away from it, but with business owners like that, there's what's called guarantee issue plans and that's where we're seeing the market really head towards right now, where you'll have an executive, you know. So the business owner puts a group LTD plan in and let's just for typical numbers, let's call it 60%, and it's gonna be capped to like 6,000 a month. So that's great for most of your employees. That's 6,000 a month, even if it's taxable, is gonna give them a significant portion of their income. A lot of times we'll see the business owner or, if it's a larger company, the business execs they're all exceeding whatever that cap of 6,000, you know 15,000 dollar caps, they're gonna exceed that. So you still get to participate in that group LTD plan. But our recommendations come in. It's like, okay, now we should put something else in for the execs or the ownership team to make sure that we get your income. You know, because what we come and see is they're like they think that when they are doing a great job of providing this benefit for all their employees, the downside is they think they're covered in that as well. They just hear 60% and they're like, no, no, no, we're all covered, we're good, we got 60. When that cap still comes into play, it doesn't matter what your role is at the company, that cap of X, whatever it is, is a cap for everybody. Yeah, so that's where we'll come in, just because, again, the higher the income earner is, the more coverage they're gonna need and they're underinsured under those group LTDs.
Speaker 3So with these individual plans that we're discussing today, we can stack these on top just to make sure that everybody gets cheered up. You know, and we do a nice little. There's a plot diagram that we can put together, but it's very, you know, it's a visual learner at that point, because you see it and it's like, wow, it's like all these people have coverage, except the higher the income grows. Now they're so underinsured. And again it's everyone has this kind of lifestyle. Their family is used to living, used to a certain amount of income coming in. So it's just a nice benefit added.
Speaker 3You know, there's a few different ways they can put it together but it's basically like an executive 162 plan. That's kind of the IRS code that they use, but it's again, it's guaranteed issue. So that's the biggest thing which is similar to group. They're not gonna do medical underwriting and things like that. The only difference is that group LTD plan that you were discussing is, you know, everyone's more of a certificate holder. So it's, you know there's some inherent differences. But rates can go up down the road. It's not portable, right, it's not permanent either. In a couple years if the carer doesn't like that risk, they could pull that block of business from you. Whereas once we stack these guarantee issue plans on top, there's still individual plans for each member. So it's permanent. It's portable. You know they're level premium so they can't increase, but it's just a good. It's a good executive benefit. So sorry for that long-winded answer there, but so long as you're short you can still participate in that group, depending on how it's set up, and then you just may need some individual stack on top.
Speaker 1Got it what we see? These advertisements with Nick Saban and Deon Sanders for the duck for Aflac. Is that disability insurance or is that something different?
Speaker 3So Aflac does a great job of marketing. First off, everyone knows the duck.
Speaker 3They have a full suite of different products they have. It's more of a short-term disability and, like I was saying earlier, this is where people in the industry can argue is it is a one year, is a two year. With Aflac they will go up to the two years a 24 month benefit period. It's there's still some inherent differences on that, but it is more of a short-term. They also offer critical illness, which is kind of another sister product of disability insurance. It's like it sounds.
Speaker 1I think that's how, yeah, I think that's how I would identify them. More is like you know, if you have cancer, they're going to send you X amount of dollars. I know that, you know. For you know, my wife's a school teacher and they had this Aflac, like maybe an Aflac I don't remember policy, but basically went down the list. You know, if you lost your arm, you got paid this. You got cancer, you got paid this. You know.
Speaker 1And I started looking at the numbers and I'm like, all right, so we're going to pay $120 a month for this and if you get cancer, I'm going to get 10 grand. And I, you know I don't know for most of our listeners that 10 grand really makes a difference. And so I started looking at that going. I think this is a really good deal for Aflac. Yeah, it's just, I guess.
Speaker 1Honestly, I'm like you're not probably not going to have cancer in the amount of time that this covers and then, if you do, you're going to get 10 grand, that's it. I mean, maybe give me a check for 100 grand. I might be interested in paying the $120 premium, but you know, I'm not saying it's not needed, and maybe for more blue collar type families. This makes sense, but I don't know what is your take on. You don't have to say if you like it or don't like it, you can just tell me what the purpose of it is. But no, no, that was my first. That was my first experience with it. I was like I don't know if 10 grand really helps me.
Understanding Disability Insurance Options
Speaker 3You make great points and I'm not. You know I don't represent Aflac at all, we don't. That's not a carrier that we work with. They're just such a large company, they've got their own, you know. You know people working it. But to I will say it to the credit of critical illness, the product as a whole, because there's a few other carriers that do offer critical illness it can be beneficial Because the one thing like I was saying earlier, your question about disability insurance, how much can you get?
Speaker 3It's all income driven. So you can get about 60% of your gross with individual DI With the critical illness you can. Actually it's more like life insurance where you can just pick a value. You know you can pick a benefit amount that you want. So you know we've, we're working in case right now the person wanted a $500,000 critical illness benefit for their spouse because their spouse is a state home spouse and so they don't have an income so they can't get disability insurance. So now this is a great product because now it's okay, now you have a $500,000. That is again. God forbid they come down with a cancer, a stroke, you know I mean paralysis, coma, so it's more critical illness things, as obviously we mentioned, but they will receive that and still, on the large scale of things, it's kind of cents on the dollar. So it can make sense for that, just again for protection and peace of mind of the more extreme things that can happen to an individual.
Speaker 3But to your point about looking at, you know, the whatever they were charged, 120 for a $10,000 benefit. That's kind of where my mind goes with short term disability. And again, it can be a great product for individuals who really need it. You know, let's say, someone more in a blue collar marketplace, maybe they're a painter or in construction or things like that. They may need something to where, if something happens, you know they hurt their knee or ankle or something, they can't climb on a ladder for three months. Okay then that's great for benefit to come in. But when you start looking more at some of the more different occupations, you are paying somewhat of a significant premium for whatever X amount of dollars it is. But being that your benefit period let's call it six months there's going to be a break even period where, after you pay premiums for, let's say, five years, you may exceed whatever the total benefit for six months is. So do you see what I'm saying Like, right, there's a cost benefit, and now there, and that's where you have to do it.
Speaker 3So again, whenever clients ask for short term, it's not like no, we're not going to offer that, it's just you want to talk through that because they love the idea of what happens if I can't work tomorrow. You know I need something coming in in a couple of weeks. And it's like, okay, well, let's look at your occupation and there's just a few different factors you look at so it can make sense in the right place. But otherwise that's generally when we try to pivot more to the long term just because that's going to be more significant. But again, the critical illness, yeah, you'd have to look at it. I don't know athletics pricing, obviously, but they, you know, depending on the benefit amount, and then again it's kind of a cost benefit analysis. Whatever that premium is, you can make an argument for it. That's another product.
Speaker 1If you're living paycheck to paycheck, that's when you need that short term the most Exactly, because you know if you don't get the next paycheck then you're in trouble.
Speaker 3Exactly.
Speaker 1But you know wealth management clients to I don't know that we have any there live paycheck to paycheck. They all have reserves. It's a little different conversation, obviously, at this level. But yeah, I was just always wondered, because every time open enrollment comes around, you know she wants to sign up for everything and I'm like I don't know if this makes any sense for that you know they should pay you a lot more money. My cost of you getting cancer is much greater than $10,000.
Speaker 3So yeah, exactly that's why sometimes, again, just working with an independent broker, someone like Randy or yourself, where you can kind of shop the market out, because there are going to be carriers that price it differently, and now it's like okay, if you can get $100,000, $250,000, or, excuse me, benefit policy, and now it's still only cost you $120 a month. Now you can make an argument that that may make sense. The other caveat to that because again, in the DI world it's always case by case. Let's look at the client, things like that To your point. It definitely blue collar versus white collar. It can make more sense from one the other.
Speaker 3But something that we do see a lot, for example, is like a CRNA. So a nurse, anesthetist, that's a white collar industry. They make great money, they're 1099. And we, you know, we had a case where she was like, well, if something happens to me and she falls and messes up her arm or her wrist or something, she's like I may be back at work in three months, but I'm not earning any money in that three months because I can't be providing the care to the patients that I need. Then that's another place where it's like okay, you know, let's get some short term disability, because that makes total sense. So, even though the it is more important in the blue collar industry, we do still see some unique occupations where it's like you know what, maybe this does make sense in the white collar as well. But again it just goes back to that. It's case by case, you know, client by client.
Speaker 2Well, I will, and I would say that this is a point where everybody that is employed needs to pay attention, because a lot of employers do offer short term disability in their, in their employee package and a lot of people have not taken it and a lot of times it's. It is a pretty good deal at a group level, and so pay attention to what your employer is offering, because you really need to know what, what options are there, and sometimes that short term through the employer is a good deal.
Speaker 1Absolutely so, piggybacking on that, either short term or long term, if you, if you, if you're paying for that through your employer, your employer just covers it. What happens if you go out and buy additional policy? So did they stack on top of each other? Or does one say no, you first and me?
Speaker 3That great question. So a lot of times in a perfect world, how we do is we'll dovetail one end of the other. So a common long term disability policy has that 90 day elimination period and so a lot of times for a short term even if it was you know it's just for easy numbers let's say it was the benefit period was three months there won't be any offset there whatsoever, because even if someone were to go on claim by the time they come off claim for the short term, then the long term disability policy starts, and so it's. You know it's a very smooth transition, even if we see it now go six months or a year. That's kind of where every care is going to handle a difference. But generally they'll make a business decision and they'll still offer the full whatever you're eligible for in the long term.
Understanding Disability Insurance Policies
Speaker 3Just because they look at it like, ok, maybe for three months or six months you are going to be receiving more than what you should, you know, or 100 percent maybe of your income. But then they know that immediately after that that short term falls off and then you're just on a long term. So it's fine. But they definitely take into consideration to your point of what other benefits do you have? Or what other policies do you have? Because if you had some group coverage, that could still be, you know, stage 65 or something like that. Or maybe you're an individual who already purchased your own long term disability, you know you're in a different occupation, your income's gone up and you're looking at a secondary policy. They will take that into consideration, just because, again, the idea here is they want about 60 percent of your gross. So, depending on your taxation, everything will see. I've seen this high as like 85 percent income replacement, but they will take that into consideration because they don't want to overinsure an individual. They definitely want you know there to be that.
Speaker 1I guess my point is it'd be two separate carriers. So let's say, keep it simple. You make 100,000 a year. You're covered by your employer at 50 percent, so you got 50,000 coming. You've qualified for long term disability 50,000. Not not disabled enough to be able to take SSDI. So you got employer getting pay or paying you, or the company insurance companies paying you 50,000 long term disability. But you also have a policy that covers you, personal policy that covers you at 50 percent. Do they, do they negate each other, or do you get now 100 percent?
Speaker 3No, so at the time of underwriting is when they'll look at that, so they'll say so, let's just for to make the numbers a little easier.
Speaker 1So underwriting, they won't let you do that.
Speaker 3Yeah, on the application they'll ask hey, what other you know policies do you have in force? We'll say they've got this plan. It's 50 percent, you know, capped it, whatever it is through their employer. The individual carriers that we work with will even say is it taxable or not? Because rather than saying OK, you may get five, you may get 5,000 a month through your employer, but because your employer is paying it, that's going to be taxable. So let's just call it 3,500 now, so they'll allow you to still get that additional individual policy to make sure that we can get you close to that 60 percent gross. So it's just a, it's just a numbers game at that point. But it is a nice kind of value add that the carriers will say, ok, this is taxable, so you're actually eligible for a little bit more than what it looks like on paper.
Speaker 1So what? So everyone's kind of capping you out between that 60. You said you saw one at 85 percent, but they're kind of capping you out at that 60 percent range.
Speaker 3Yeah, they generally do it 60 percent. That's why we always kind of it's like air quotes here. But 60 percent of your gross is just kind of the. It's kind of like the golden rule in the eye, just because that's, that's across the board generally what we see. But the reason I was saying 85 is that's what. Like 60 it'll be. 60 percent is what the the numbers come out to when you run the quotes. But then it could, once you take an excitation taxation, all that, your take home I've seen as high as like 85 percent. So did that make sense? Like it's 60 percent gross, but when you look at your total numbers of take home it's anywhere from 75 to 85 percent.
Speaker 1Yeah, because you're you're not putting money into the 401k anymore, your taxable income is probably less. So yeah, it kind of backs into that. That makes sense.
Speaker 2I've got one more question. Yes, sir, I've got one more question. Are there any considerations for terminal illness, disability? No reason. I'm asking that is because I just recently had a long term care client who was not able to care for herself because of terminal illness and, surprisingly, the insurance company waived the elimination period based on the evidence of the terminal illness, and so she was able to start getting long term care claims before the elimination period. Anything like that available in DI?
Speaker 3They generally still want you to satisfy the elimination period. You know there are other writers like you can throw in. There is a catastrophic writer where you'd actually have a secondary benefit come in addition to your base benefit and that has to be, as it sounds, catastrophic. But generally speaking the carriers still want to see that 90 day elimination period satisfied. And I say 90 day elimination because that's kind of the sweet spot for these carriers. You can customize that. So sometimes people will. If maybe they have a great short term disability contract that pays for six months, so it's 180 days, then you can go on a long term. We can go 180 days. You don't get as much savings on premium as you would think and on the flip side of things, if you shorten that elimination period, if you shorten that elimination like 60 days, the premium drastically increases. So they've all kind of funneled into that 90 day elimination period. But ran into your question, we generally see them. They still want you to satisfy that 90 day and then they'll pay the benefit.
Speaker 1Just to clarify taxes. So if your employer pays your premium and you're on disability, the disability income is taxable. If you pay your premium, your benefit is not taxable. And I assume that if you're splitting the payment with the employer somehow, that it's partially taxed and partially not taxed and they would sort that out on your 1099, I assume.
Speaker 3Yeah, so generally that's exactly it. If it's employer paid, then it's going to be a taxable benefit. So that's why nine times out of 10 on the group LTD side of things, that's an employer added benefit. So it's employer paid, so it's going to be taxable. With individual DI without telling the client what to do that, our biggest recommendation always is you should pay this with after tax dollars, where we see the pushback on that, either the business owner or the 1099 individual. They're always immediately like I want the tax write off.
Speaker 1Or the deduction, yeah, yeah which makes total sense.
Speaker 3But then it's and again I always say it's an educational product, because this is where it's just put on your consultative hat and it's like let's talk through this. Let's say your individual DI policy. Let's just say it costs you $5,000 annual premium, depending on what your income is. Sure you can get a $5,000 a year write-off, which sounds great on paper. But let's say your benefit on that policy is $10,000. If something were to happen to you now because you had that $5,000 a year write-off, now your $10,000 a month benefit is going to be taxable and after three months of being on claim you've probably exceeded your tax write-off right off the bat and now your benefit is still going to be taxable. So we always recommend at the end of the day it's your classic like hey, you should go talk to your CPA about this, but that's always our recommendations. This should really be an after tax, just because, again, that benefit amount is so important to you and your family that you want the kind of approach that we take with individual DI is you want as much tax-free benefit for as long as possible before you worry about all the bells and riders and things like this. So a lot of times when we're looking through the illustrations, like the writers we talked about earlier Truonok, for example they may want that, but then the policy becomes a little expensive or maybe it's out of their budget. And then it's like, oh, let's look at a 10-year benefit period. And it's like I would strongly, strongly advise that we go to age 67 with as much tax-free benefit and forget about all the bells and whistles, because it's just at the end of the day, that's what's most important for your family is getting that tax-free benefit.
Speaker 3The one area I'll say where the tax write-off can make sense is earlier we discussed those guarantee issue plans where a business owner is putting the plan in for their whole executive team. So it's an executive benefit. The common one we'll see is it's 10 execs that are all getting this. So your annual premium that the employer is paying for the executive team could be $50,000, $100,000. I mean we've sold $300 plus $1,000 policies every year. As much as you don't want the benefit to be taxable, this is just a great value add that that employer is paying for. So it's like OK, that makes total sense for you to want that tax write-off and if your executive team or the individual still want more coverage, they can go purchase more on their own, but when the numbers get that excessive, it totally makes sense for the write-off. But for an individual what we call a onesie-toosie for any of your clients out there that's just looking for something for themselves, you really want this to be a tax-free benefit.
Speaker 1Makes sense. Well, gentlemen, thank you for your time today. This has been very educational. Fair listeners found that as well. We have a couple of episodes where we talk about things kind of around disability Episode 212, medical costs during retirement and preparing for the unexpected. Episode 179, long-term care insurance to buy or not to buy. Episode 126, how can insurance protect your wealth? Those are all things related to asset protection. I guess disabilities a little bit along those lines, more like lifestyle protection in that case. Sometimes centered around this is Medicare. We link to YouTube video a Medicare sign-up process explained Obviously, if you need to get a hold of Randy, how do we get a hold of Randy if we want to learn more about disability insurance?
Speaker 2Well, you can just go to my website, wwwltcstepcom or randyatltcstepcom.
Speaker 1OK, and then that's. Our connection to Kyle is through Randy. We are looking for disability insurance. Kyle, thank you for taking time to come and do this. It's always good to hear from experts on different areas, especially with disability, which I think gets overlooked quite a bit.
Speaker 3No, certainly yeah, I appreciate your time. You got to thank for the excellent questions and hopefully this was informative for all of your listeners. So thanks for having me. Good job, kyle.
Speaker 2Thanks a bunch.
Speaker 3Thank you, Randy.
Speaker 2Thank you.
Speaker 1Thanks for listening to today's episode. If you're interested in learning more about Wiser Wealth Management, I want to schedule a consultation meet with one of our fiduciary financial advisors. You can do so by going to wisereinvestorcom or you can click in the episode notes as well. All right, thanks again, guys, Appreciate it. Thanks, gentlemen.
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