Meet John Doe, 50-year-old non-smoker male with a base salary of 150 000$. He answered me the same objection when I was worried about how a disability would impact his retirement. I had proposed him a disability insurance policy due to his high income and age bracket. John ask me, “Mike, do I really need this?” My answer to him was no. No one needs a disability policy or any policy for that matter. We will all make due, figure it out and deal with it. However, is that what you want for yourself, make due? How much do we want to burden our loved ones with something happens? How much does dignity cost?
After analyzing his group insurance contract at work, I realized there was a major shortfall in his coverage. Not only was he capped at 60K total coverage, he may have been “kindly” asked to do some other work. Income replacement insurance, or disability insurance, has some nuances that make all the difference. Typically, your work coverage, like John, will protect your job for two years. This is known as “own occupation”. After two years of consecutive disability, the insurance carrier will re-evaluate your ability to have some other comparable gainful employment. This means they may cut your coverage after two years, even if the contract stipulates coverage until age 65 or retirement.
There are two factors working against John that can be addressed with a simple individual income replacement policy. Number one factor is the shortfall. Knowing John very well for over 10 years, I know he would figure it out and get through it. He is also very active and keeps in shape. He lost weight this year by eating better and exercising more, something I need to take notes on. The impact is not on his ability to pay the bills for the next two years, rather how the next two years will impact his retirement. His ability to save would be ruined, and he would likely have to dip into his savings. John started to save later in life, and has been trying to catch-up. He is doing great and has almost achieve financial independence. How would a disability affect that? It would derail his plans and would add more work time to achieve financial independence.
The other factor that can be addressed is John’s age. Although he is less likely to get disabled because of his age, if he does, it will take him longer to get back to work. This is a paradox in your mind as it was in mine at first. Upon careful consideration, the actuaries got it right. It takes us longer to heal as we age, plain and simple. If something has not happened to us by now, it will likely not happen. Therefore, his two-year own occupation clause in his group insurance contract is a lot worst for John than it would be his children for example. As the work force ages, this risk is being heightened. If you are around fifteen years away from retirement or think you never will retire, I urge you to seek professional help with your group insurance coverage and consult an insurance professional. Send me your booklet and I can help.
I demonstrated to John the following 4 types of coverages that are personalized for him:
1. Disability Top-Up
a. With Return of Premium
2. Disability Offset
a. With Return of Premium.
Since both additional options have return of premium, I will take a moment to explain this concept. If in either scenario John would claim 20% or less of his disability coverage, he is entitled to receive 50% of his premium after 8 or 10 years. Each company works slightly differently, discuss your options with your insurance professional. I prefer this type of return of premium instead of a return of premium of 50% or even 100% at age 65. The longer it takes to receive back your premium, the less likely you will receive your premium refund. As always, I mention that according to many actuaries, it is not worth the money. I believe it is a personal choice, many people like the idea of getting their money back if nothing happens. Many see this as a forced savings. As I say, trust your gut feeling and chose what will make you happy.
The disability top-up as the name implies, increases the amount of disability coverage starting from your group insurance. For example, John would receive the maximum coverage of the group of 5K/month and the top-up would add roughly 4K/month. John will pay for the coverage he will receive. The risk with this is after two years, he may lose the 5K/month and only keep his 4k/month. The good news is he will receive this until age 65.
The disability offset works slightly differently. John would purchase coverage for entire 9K/month until age 65, however, for the first two years he would receive his group coverage of 5K and only 4K from his personal policy. Remember, we cannot receive more income during a disability when compared to our working income. This refers to the rule of 85% all source maximum. In general, individual policies will cover 70% of your working income. Either way, you are “encouraged” to get better and go back to work. The offset is very useful in protecting against the two-year clause of your group because it will fill the entire void left by your group insurance. The risk here is you are paying for benefits you may never receive. It also a costlier option since you have higher coverage.
John took one of the recommendations, however, I do not think it is important to know which he took, as it is very personal and truly a case-by-case analysis. I hope this article will encourage all the readers to open that booklet you received when you got hired, or contact your resource person to look it over. Maybe share this with a colleague or someone else you know. I always recommend professional advice, as the resource person at work understands the plan as they understand it. It is a great start, however, the search for answers should not end there. Take control of your destiny, financial freedom isn’t a myth!