Financial Planning for Geeks

‘Tis the Season of Joy and Accidents and Illnesses

- Insurance

It’s the most wonderful time of the year. There'll be parties for hosting, marshmallows for toasting, and Aunt Bunny will fall down the steps again.

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Watch your step on that snow!

But what if it isn’t Aunt Bunny? What if it’s you? Or, heaven forbid, what if you get horribly sick from the underdone roast beast and are out of work for six months?

We’re talking about long-term disability here. In insurance terms, a long-term disability is an illness or injury which keeps you from working for longer than 90 days. A lot of employers will cover 100% of your salary for the first 90 days of an illness or injury, and then things change.

After the 90 days, it’s very common for your employer to only cover 60% of your salary (typically not including bonuses, stock options and awards, etc.). And since your employer is usually the one paying for the long-term disability insurance, that 60% payment is also taxable to you. So you would really be bringing home 50% OR LESS of your usual paycheck, and some employers don’t offer long-term disability coverage at all.

Could you and your family live on less than 50% of your check? Or none of it? Make sure you’re including extra medical expenses and help around the house when you think through this, since your needs tend to increase if you’re really sick or hurt. If you could get by on 50% or less, that’s great. You don’t need any extra insurance coverage.

But if you’re like a lot of us, most of that comes in tends to fly right out again. Living on half of your salary or less isn’t going to cut it. So what’s a responsible adult to do?

1.      Figure out exactly what you DO have through your employer. What percentage of your salary/total compensation is covered after a 90-day disability? How long does that coverage last? A year, five years, until you’re 65, or ?

2      Get thee to thy favorite insurance broker. Ask them to get you competitive quotes for long-term disability insurance, for as much coverage as they will allow. Tell them exactly what your employer offers. The insurers will never give you 100% of your total compensation because they want you to be motivated to get back to work, but these policies will add to what your employer gives you and hopefully allow you to get by. You can spend the money on anything; you just have to be unable to work to turn on the monthly benefit from your policy. And since YOU are paying the premium, the benefit is not taxable when you receive it. Nice!

    a.      Make sure the policy covers you until you’re at least 65, and a 90-day waiting period is fine for most people. If you don’t have any short-term disability coverage at work you might want to bring that waiting period down a bit or have enough emergency reserve on hand to pay yourself for 90 days. I recommend that, anyway.

    b.      Make sure it’s Non-Cancelable, which means they can’t raise your premium. I realize this makes no sense, but non-cancelable has nothing to do with canceling your policy. It has to do with making sure your premium never goes up.

    c.      Most policies include an Automatic Increase Benefit for free for the first four or five years. If not, you’ll want to pay to add this rider to your policy. The rider allows you to increase your coverage amount during the first years of the policy, and you don’t have to document any pay increases or go through the underwriting process again. When they mail you the notices about paying a little more premium to increase your coverage, do it!

    d.      The Future Purchase Option is similar to the Automatic Increase Benefit, except that it kicks in whenever you have a raise, even if it’s after the first few policy years. You’ll have to document the raise and pay a little more premium, but this rider also allows you to get more coverage without ever having to go through underwriting again. So no matter what your medical history looks like you can always get more coverage as long as you’re earning more. This rider usually costs extra, and if you’re at the end of your career you may not need it if you wouldn’t need to increase your benefit to get by.

    e.      The Residual or Partial Disability Benefit is probably important for most people. This one pays a partial benefit if you are still able to work part-time or with reduced productivity in your current job. If you have this rider, you don’t have to be 100% disabled to qualify for some of your benefit.

    f.      If you’re not retiring any time soon, you might want a Cost of Living Adjustment rider. If you’re out of work for a long time, this rider will give you a cost of living increase in your benefit payment every year. You would only need this if you had a really long disability, so if you aren’t planning to work much longer you might skip it.

    g.      You might also want the Own Occupation rider. This provides the most generous definition of disability, which means it may be easier for you to qualify for your monthly benefit. “Own Occupation” means that if you are unable to work in your current occupation you qualify for the benefit. Even if you COULD work in another occupation, the benefit would still be paid. Without this rider, you might have to take up work in another occupation that you don’t like.

    h.      Make sure your broker gives you apples-to-apples quotes. Tell them exactly which riders you want, because some insurers charge for them and some don’t. You can’t compare the prices accurately unless your quotes include all the riders you need.

    i.      Make sure your broker explains any other riders they are trying to sell you and why you need them. Riders can add to the cost of the policy quickly, and as you can see they’re not appropriate for everyone.

Oh, and by the way: this is NOT the same as the cheap Accidental Death & Dismemberment (AD&D) insurance available through your employer. AD&D only pays out if you get hurt, sick, or killed in very specific ways. I want you to be covered no matter how you get hurt, sick, or killed, so you need to buy both regular long-term disability insurance and life insurance.

What about self-employed people? Well, you don’t have any long-term disability coverage at all, so it’s even more important to take care of this for yourself. You would complete all the steps above, but you would just be buying more coverage than someone who already has some through work.

What about Social Security Disability (SSDI)? Won’t that save your bacon? I wouldn’t count on it. It’s not that easy to qualify, and even if you do the maximum monthly amount you could get is under $2,900 a month. The average is $1,234. That won’t even keep you in gloves and stockings, Kitten! And SSDI doesn’t even start paying unless you can demonstrate that your disability will last longer than a year or result in your death.

 “But Penny,” you may be thinking, “it’s the holidays! Keep it light! I already have enough stress in my life without thinking about cancer or strokes or breaking my pelvis after drinking too much egg nog.” Hey, I get it. I admire you for reading this far; I really do. I would love to write about tinsel and elves, but this is more important. I’m trying to save you from disaster here. I want you to know this is an issue so you can take care of it once and never think about it again. Please protect your ability to earn an income, since it has a WHOLE lot to do with the success of your financial life plan as a whole.

I wish you joy and uninterrupted, abundant income this year and every year until you are ready to stop working for money.

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Penny Farthing

I, Penny Farthing (non-wizarding name Kerry Read ), actually have a day job in the world of finance. This blog came into being because of my deep and abiding love for geeks and Personal Finance.