To many people, the idea of protecting your income from illness or injury seems simple. All you have to do is save or invest some money for that “rainy day”, right? Perhaps you feel comfortable knowing you’ve got some equity in your home that you can access. Oh, and didn’t someone say that you could take a loan against your 401(K) at work? Maybe you’ve already got a group Long Term Disability policy at work. Even if you do, I challenge you to read the contract language that dictates if you will get paid and for how long. The purpose of this article is to help you think about your income a bit differently. The agent or advisor who understands how to properly integrate disability insurance into your financial life is a good catch.
What’s really at stake for those who buy disability insurance? (Getty Images)
Coming into this business, I could have ended up like many others, selling cheap life insurance and expensive mutual funds to unsuspecting consumers. Thankfully and early on, I had the opportunity to go narrow and deep on this niche part of personal finance with my clients in the medical community. This experience has been invaluable for both myself and my clients, especially the ones who have become disabled over the years (there have been several). I had to learn some new language and distinctions around money and how we protect it. Part of my challenge from day 1 was to take a product that is thought of as highly complex and confusing and make it simple for people to understand. It’s been clear to me that a product that cannot be easily explained on a yellow pad should not be sold, to anyone!
In that spirit, let’s first establish some working definitions. There are about as many definitions of an asset as there are people on the planet. I think it’s important to align with a definition that best suits your objectives. For me, an asset is anything that provides you cash flow today or has a high likelihood of doing so in the future. Conversely, a liability would be anything that removes cash flow today or has a high likelihood of doing so in the future. Now let’s explore the question of what your greatest asset could be.
After asking many people what they think their greatest asset is, I often hear the following responses: “My 401(K), my brokerage account, my business, my house, or on occasion: I’m actually worth more dead!”. Those are all valid interpretations, though not what I’m driving at. I see your greatest asset as your ability to generate value in the world through your life’s work. Unfortunately, many people never discover this, then “life happens”, and families suffer unnecessarily. I never learned this in high school, in college, or sitting around the dinner table with my family. I’ve discussed in previous papers the “no talk rule” most of us as children lived under. We never discussed finances as a family. For many, this produces a false sense of security that everything will just work out. Here’s the hard truth - things don’t just work out in the absence of a strategic plan that includes risk management.
You might find this interesting… As of 2016, the U.S. Bureau of the Census reported annual median personal income in the United States as $31,0991. That includes both full time and part time workers though is considered quite low by everyone I’ve interviewed on the subject. So to get a sense of the economic value of you as a producer, there’s a simple math formula. To make this exercise simple, assume your annual income is $131,099. The annual median again is $31,099 in the United States. Subtract the two and you have a $100,000 difference. Now, the question to ask yourself is this – how much money would I have to have in a relatively safe investment that would yield at least $100,000/year, indefinitely? The most robust studies on the subject of “safe money” indicate that you can expect no more than 3% of annual interest in such an account long term. This number was closer to 4% 15 years ago and tends to move with prevailing interest rates. If you take your $100,000 of additional income above the median, and divide it by 3%, you can see that you’d need $3,300,000, earning 3% annually, to replicate your income above the national median! So in other words, your ability to produce this kind of income is equivalent to an asset worth $3,300,000. Who wouldn’t want to protect this if there was a way?
Imagine you have a goose that lays golden eggs, over and over again. And your option is to insure the eggs that you’ve got now, or the goose. Which do you choose? It doesn’t take high level math to realize what makes the most sense in this scenario. Isn’t it interesting all the things we buy insurance for in the world? Here’s a short list of relatively new items we can insure: pet insurance, mobile phone screen insurance, travel insurance, identity theft insurance. And yet, the one thing that is responsible for creating all of our financial opportunities either goes unprotected or under-protected. This is part of the value of having a specialist on your financial team to help navigate the complexities of protecting that which matters most.
Here’s another way of looking at the perceived cost of disability insurance. Keep in mind that it’s really asset protection as much as it is income protection. As after a disabling event, you’ll not only lose income, you’ll also lose the assets you’ve accumulated along the way. If you lose assets, you also lose time. How much time did it take you to build the assets you’ve got now? You don’t get it back. So when looking at a sample illustration for disability insurance, think about those three factors – your loss of income, your loss of assets, and your loss of time. Does it get any worse than that? I don’t think so. This is an overly simplified look at cost as the factors that impact it are gender, age, occupational duties, etc.
*Tax Free when paid for with after-tax dollars
Most people don’t think to acquire disability insurance on their own, unless there’s already a serious medical concern. And if that’s the case, there’s a fair chance a private disability insurance policy will be declined or have an exclusion. By all means, if you do have a pre-existing condition and are offered a group long term disability plan through your employer, TAKE IT. It may be the only disability insurance you ever get. Although not ideal, if a text distracts another motorist and you become the victim of a nasty accident (and live), you should expect it to pay a claim.
Here are some key questions to help you determine if your agent is up to the challenge of your income protection…
- Is the agent captive to any one insurance company? No two disability policies are identical so contract language matters. It’s like the engineering supporting your dream home. It’s got to be the best design, with value and cost factored in, just for you. If your agent only represents one company, you may have to accept the terms of that company and live with the consequences.
- Is your agent skilled licensed in working across state lines? When it comes to disability insurance, the skill of the agent is critical. This is far more crucial than having a local agent. Oftentimes, people think that they can simply ask their life or property and casualty agent about it. Sure, they might be able to find a policy. That doesn’t not mean they are an expert on the subject. Interview them to determine how many policies they have placed and what types of occupations they’ve worked with. No two agents are the same!
- If you have a pre-existing medical condition or any other concern, is your agent able to do the due diligence required to get a good faith estimate as to what is possible for your case? I find that many financial advisors in the industry shy away from disability insurance simply because it's a lot of work.
- Does your agent understand the 3 key elements of a policy – Total Disability, Partial Disability, and Recovery? There are well over a dozen key ingredients to a policy though these are the key areas to address. A good agent should be able to immediately map this out for you without blinking an eye. “Let me research that and get back to you” is not a good response when you ask your agent about income protection.
- What are the company financial ratings backing up the promise the company is making to you? What’s the history of the company? What do they specialize in? Just like agents, companies also tend to specialize in types of products and occupations. Again, a good agent knows this and can give you access to the ratings data. Company strength matters and is a close second place to the language in the contract.
Are you too busy for your own good?
It’s true that it takes some time and effort to solve the challenge of income protection. It’s better to find out sooner rather than later if you can qualify for a good policy. At least you’ll have the option to accept or decline it. Unfortunately, many people wait until it’s too late to discover what is possible. Premiums at an older age or medical conditions can be a prohibitive factor. If you have significantly more income than the national median as discussed, and still have many years left in your career journey (and don’t deal with unexploded ordnance as an occupation as I did in the U.S. Navy), then you are a good candidate for a quality disability insurance policy. My commitment is that everyone I meet, who is a good candidate, gets the clarity and strategic thinking they need to make this support and integrate with their financial plan.
These are the personal views of the author and do not represent the views and opinions of The Guardian Life Insurance Company of America, or its subsidiaries or affiliates thereof.