Everything You Need To Know About Disability Income Insurance | Tan Phan, MSFP, CFP®

Everything you need to know about disability income insurance. 7 in 10 working Americans couldn't make it a month before financial difficulties if they become disabled. 1 in 4 will have financial problems immediately if they cannot work. According to the Council for Disability Awareness, disability insurance claims rates show that approximately 90% of disability are caused by illness, not injuries. Hi everyone, my name is Tan and I'm an independent certified financial planner practitioner. Today, we're going to talk about disability insurance. In my practice, I have seen a lot of dentists and surgeons get disability insurance because they need to protect their hands. What is disability insurance? Disability insurance is protection against an illness or injury that may result in loss of income for a period of time. What does that mean? If you become disabled, disability insurance will pay a percentage of your salary. The payment stops when you can't go back to work, use all your benefits you purchased, and are as stated on the contract. Three main types of disability insurance. One, an individual policy where you buy from insurance company. The premiums are higher than a group plan because it is portable, which means the policy is yours as long as you pay the premium. Two, a policy part of a group plan where you buy disability insurance through your employer. Three, an employee-sponsored plan where the employer pays the premium, you get the coverage, and the benefits are taxable to you as wages. The premiums are lower on a group plan than an individual policy because you are buying a policy with a group of people. It may have all the features and benefits compared to an individual policy, and most of the it is not portable, which means you no longer have coverage when you leave the company. In addition, you want to know how you can qualify for disability benefit in the group plan because they are normally only cover catastrophic events, but about 90% of disability are caused by illness. You can get short-term or long-term disability insurance. Generally, short-term disability coverage is for less than two years and replace up to 60% of weekly wages. For example, if you are making $1,000 a week, the coverage is $600 a week. Long-term disability coverage is coverage for more than two years and replace on average up to 60% of monthly wages. For example, if you are making $10,000 a month, the coverage is $6,000 a month. Clients often ask me, why do insurance companies only cover up to 6% of my wages? The answer is the money is tax-free and there has to be incentive for you to go back to work. Normally, there is a cap of $5,000 a month or 6% of wages, whichever is greater, for short-term disability coverage and no cap for long-term disability coverage. Other types of disability coverage are guaranteed issue multi-life, simple underwriting for businesses with 10 or more people, fully underwritten multi-life, regular underwriting for a group of employees applying for policy together, business overhead expense, reimbursement for documented overhead expenses, buy-sell protection, for multiple owners in a company to fund a buy-sell agreement, key person, protects the business should a key employee become disabled, loan protection, reimbursement for a loan payment, accidental death and disbursement, lump-sum payment for accidental death or disbursement, critical illness, lump-sum payment for a diagnosis of a pre-specified illness, high-limit supplement, for high-income earners who want small protections on top of their current policy. There are other types of disability coverage but it is not for the majority of investors. How to qualify for disability insurance? It depends on the type of policy you have and the definition of disability. For example, own occupation. You qualify for benefit when you cannot do your current job but can do other jobs. This type of policy is the most expensive. Modify own occupation. You cannot do your current job and you cannot be working to claim benefits. Any occupation. You cannot do any job. Modify any occupation. You cannot do any job that are similar to your current job and you can easily become qualified. Popular disability insurance policy designs in the industry is two years on occupation than any occupation. Why? You start out easier to qualify for benefits than other options and to keep the premium low compared to the policy that is only on occupation. For example, the policy will cover you for two years if you cannot do your current job then it will cover you until age 65. If you cannot perform a job that is similar to your current job and a job that you can easily qualify. Important disability insurance writer and terminology. There are so many writers and terminology in disability insurance but I only want to cover the most important ones. Benefit period. How long you can claim benefit. It could be two years, five years, until retirement, until age 65, etc. Inflation protection. This feature allows your benefit to increase by three percent or five percent at a simple all compounding rate annually. If you are young, you want some type of inflation protection. If you are near retirement, you might not want it due to the extra cost relative to the higher benefit in the future. Waiver of premium. I really like this feature because you do not have to pay the policy premium if you are disabled and collecting benefits. Residual rider. If you return to work at a lesser pay after being disabled, the policy will pay the difference between the former pay and the current pay if there are available benefits. Partial disability rider. You cannot perform one or more important duties of your own occupation but are still able to perform other duties. Guarantee insurability rider. You have the right to purchase additional coverage in the future without going through underwriting. Social insurance substitute rider. Provide benefits that are integrated with social security, worker compensations, or other social insurance. The benefit is reduced dollar for dollar. For example, you receive $4,000 a month from your disability policy, $1,000 a month from social insurance substitute, and $300 a month from social security disability benefit. How much money will you receive monthly? You will receive $4,700, $4,000 from the disability policy and $700 from social insurance substitute. $1,000 minus $300 received from social security disability policy benefit plus social security substitute minus social security benefit. Non-cancelable. This policy guarantees that you can renew the policy at a fixed level premium until a specific age or stated number of years. Guarantee renewable. This policy guarantees you can renew the policy but the insurance company has a right to adjust the premium. Conditionally renewable. The insurance company may terminate the policy under certain conditions. Conditions automatically qualify for four benefits or blindness, deafness, loss of speech, loss of two or more arms and legs. When do disability insurance benefits start? Elimination period plus 30 days. But remember to read and understand your contract. You should have emergency funds to cover the elimination period plus 30 days because the benefit pay at the end of each month. When you see 30 days elimination period, it means you will get the first paycheck in 60 days. If you see 60 days elimination period, it means you will get your first paycheck in 90 days. Why? Because benefit or pay at the end of each month. Longer elimination periods will have a lower premium than a shorter elimination period because the insurance company can pay benefit later and by the time you start receiving benefits, you are better and can go back to work. What you should know about disability insurance policy if you have one or planning to purchase one? You should really understand your policy and know how to qualify for benefits. What is your policy definition of injuries and sickness? Are there any exclusions? Does the policy have social security disability benefit offset provision? Some long-term policies provide a dollar-for-dollar reduction in benefit when you receive social security disability benefits. For example, the policy states it will pay you $1,000 a month when you become disabled. If you receive $600 a month from social security disability, the policy will only pay out the difference which is $400 a month. You want to purchase a non-cancellable or guaranteed renewable policy because you want to make sure you can continue your policy when you need it most. Clients often ask me, what about social security disability insurance? The definition of disability under social security is that social security pays only for total disability. No benefit or payable for partial disability or for short-term disability. You cannot do work that you did before. You cannot adjust to other work because of your medical conditions and your disability has to last or is expected to last for at least one year or to result in death. That is a strict definition of disability. What you should know about social security disability insurance. The process takes about two years. It's a long process and hard to qualify. Social security is looking for ways to not pay clients because the benefits are only for those that really need it. The average disability payment is $1,198 a month. Taxations of disability insurance benefits and premium deduction. If you purchase an individual policy and you pay for it, the benefits are tax-free and you cannot deduct the premium on your tax return. Three essential categories insurance companies look for when qualifying investors for disability insurance. One, investor health and medical history. Two, verification of earned income. Three, the investor occupation. The 2% rule. The annual premium should be around 2% of the investor annual income to ensure affordability. For example, if you are making $100,000 a year, $100,000 times 2% equals $2,000 in annual premium for disability insurance. If you are making $50,000 a year, $50,000 times 2% equals $1,000 in annual premium. Best practice for designing an affordable disability insurance policy. Reduce the benefit period to five years. Reduce the benefit amount. Reduce the residual option. Remove the cost of living adjustment rider, which is called COLA. Remove catastrophic future purchase options and other riders. Extend the elimination period. Get a quote for multiple insurance companies. What type of disability insurance do I need? Income protection is important, but disability insurance is not for everyone and it is not a one-size-fits-all product. It depends on what your personal needs, age, occupation, income, network, financial responsibility, etc. It is important to remember that some coverage is always better than none. Always make sure you are able to cover your basic monthly expenses. Questions to ask to see if disability insurance is right for you. How long could I afford to pay my basic monthly living expenses if I were unable to work due to sickness or injuries? How long could I continue to pay the mortgage if I were unable to earn money? How will my family lifestyle be impacted if I am unable to earn income? What is my plan if I cannot go to work tomorrow? If I become disabled, who will take care of me? How much does disability insurance cost? The cost depends on a lot of factors, such as how much coverage do you want? What type of coverage do you want? How long do you want the coverage for? How old are you? What is your current health and medical history? What is your occupation? What additional rider do you want on the policy? If you would like some quotes, please visit 10fan.com slash insurance quote to fill out the form so I can shop around for you. In life, we have a lot of plans, such as getting married, having kids, owning a home, starting a business, taking care of our families, and making the world a better place for the next generation. A plan is only as good as the cash flow that is coming in. Hmm. A plan is only as good as the cash flow that is coming in. Thank you for watching. This is Tan, your trusted advisor.