[podcast src=”https://html5-player.libsyn.com/embed/episode/id/4928017/height/360/width/450/theme/st andard/autonext/no/thumbnail/yes/autoplay/no/preload/no/no_addthis/no/direction/forward/” height=”360″ width=”450″]I know it is the second week of the New Year, however I am still going to wish you a Happy New Year! Do you take your paycheck for granted? Just how important is your paycheck and what would you do if you couldn’t earn money? Join Karl Susman and guests this week as they discuss options available. Transcript to follow:
JIM: As you may or may not be aware, May is disability income insurance awareness month and we’re focusing a lot of our programs this month on disability income, and I think it’s one of the most misunderstood insurance products that people have or think they have.
Today joining us is disability income insurance professional Corey Anderson who has focused pretty much his whole career on helping both groups and individuals make sure they’re protected in this very important area. There’s a saying out there, if you had a golden goose that laid the golden eggs, would you insure the eggs or the golden goose, and that’s what we’re talking about when we’re talking about disability income insurance. Welcome, Corey.
COREY: Thanks for having me, Jim, I appreciate it. They also know me as the DI Geek.
JIM: The DI Geek, well I’ve known you as a geek but I’m not sure if it’s the DI Geek, but any rate, Corey I really appreciate you joining us. I have known you for quite a few years and you’ve impressed me as one of the most knowledgeable people I’ve come across in the country. I’ve learned a lot from you myself. You’ve helped me with even some of my clients when it comes to making sure they’ve got the proper coverages.
I meet with a lot of clients and one of the first things that I do when I get together with them is making sure I underst and what it is they have, whether it’s investments, whether it’s insurance, group insurance, individual insurance, all those different types of things. I consider myself a retirement planner and the problem is if their income stops there’s no way that they’re going to have the retirement they dreamed of. As a matter of fact, they’re probably retiring a lot sooner than they planned with a lot more expense and a lot of limitations.
First of all, let’s just talk about, I hear clients say I’ve got social security, I look at my statement, I’ve got Social Security Disability income right on there. What do I need another policy for?
COREY: Well, you’ve got a wonderful plan through Social Security Disability. It’s one of those things, everything that the government does is great, right. That was a joke a little bit, but anyway, Social Security Disability, more than 50% of the people that apply for Social Security Disability are declined the first time when they’re trying to apply for it. In fact, I have my cousin who’s basically my brother, he’s 35 years old. He’s been out on a long term disability claim for over two years, about two and a half years, and his Social Security Disability policy through Uncle Sam has not paid him. He can’t lift 10 pounds from the floor to his waist. He cannot sit for prolonged periods. He cannot st and for prolonged periods. He’s had multiple spine surgeries. He’s actually going into surgery May of 2016 again, and Social Security Disability still has not approved him. The definition for the Social Security Disability is the inability to do any gainful occupation for which a job vacancy exists in the immediate area, and it’s expected to last 12 months or longer or result until death.
JIM: I hear the ads a lot of times where attorneys say they’ll help you through that process, and I know I’ve found with some of my own client experiences, that’s usually what they had to do is hire an attorney just to try to make sure they were getting the benefits that they deserved if of course they deserved it, and I know it’s a difficult process.
Let’s talk about the benefits that you get. I know a lot of people are qualifying for their disability through Social Security. Isn’t that enough?
COREY: No, it’s not going to be enough. At the end of the day you can pull up your statements on line and look at what your Social Security Disability benefit will be, and you’re going to get nowhere near 100% replacement of your income. You’re probably less than 50% replacement of your income, so it’s not going to be anywhere near what you need, and at the end of the day is when you’re on claim, you’re sick or hurt and you’re not going to work, are you spending more money or less money than when you are working? You’re spending more. We have this beautiful thing called the internet. In my area of the country I can click on Amazon before 10 a.m. and what I ordered is at my doorstep by 5 p.m. Everything is at your fingertips, so you’re on claim, you’re no longer having 40 hours a week going to work, you’re spending more money than when you were working and on top of it social security is going to pay a very small benefit compared to what you were making.
JIM: People don’t think about things like for example your health insurance. If you have group health insurance you’re no longer working for the company. You’re no longer eligible for group insurance, so if your employer is paying for things like health insurance, that’s not included in your wages and now you’ve got to pay some of those expenses as well. You might have additional medical expenses. You might have a spouse who has to take off of work and they’re missing wages because they’re carting you around to the different doctors or therapists or whatever. You know, when the skies are clear we don’t think about stuff like that, and then when it hits us it’s a little bit too late to react.
Let’s transfer now to group insurance. I know a lot of people will have disability income through work, and I know when I first start talking to people, I said, do you have disability income insurance through work, and their reaction almost always is oh, yeah, I’m pretty sure I do. I’ll ask them, is it long term or short term or both, and they kind of look at I like a deer in the headlights, well what do you mean? Now, some of them will say, well I think I got long term disability and it covers me for 180 days. Well, that’s short term disability, so let’s talk a little bit about what’s the difference between short term and long term, does it all come together, is it separate policies? What do you see in the group marketplace?
COREY: Typically a short term disability plan is going to be a three-month or six-month benefit period. Sometimes you’ll see longer, but typically it’s a three- or six-month, or they’ll call it 13 weeks or 26 weeks. Personally short disability I think has its place in the market, but personally I’m not a big fan of it, and when I recommend it when I’m working with a client is I’m a big fan of it if you’re of child bearing age and you plan on having children and that is a covered part of the short term disability, then great, I’m a big fan of getting it, but at the end of the day is if you’re out of work for 13 weeks and you have no paycheck, life is not going to be good, it’s going to hurt financially, but typically most clients can get through that.
It’s a matter of if you’re going to be out of work for two years, five years, 10 years, 20 years, something like that, that’s where you can’t get through that financially, so short term typically 13- to 26-week benefit. You see it a lot of times provided by the employer. If the employer pays for it and they don’t add it to your payroll which most employers don’t, at claim time that benefit is taxable and typically what we see of a group short term plan is it’s typically 60% or somewhere around that of your basic wage, which most people have car insurance, most people have homeowner’s insurance, most people have health insurance, and all of those after the deductible is satisfied are typically paying 100% replacement, not when it comes to disability. We’re talking 60%.
JIM: Then you talked about a taxable, so who knows what’s left after that. It all depends on the rates in the future with our trillion dollar deficits, $20 trillion national debt. We just had some Social Security professionals on not so long ago, and they’re predicting that the pool of money that’s set aside for Social Security Disability income is going to run out of money in 2016, so I’m hearing a lot of things about that. Can we count on all these different things, who knows.
All right, well let’s talk about group long term disability then. Is that something that’s automatically covered then? Can they assume that if they got short term disability? What do you need to do to figure out what you’re benefits are?
COREY: Well, some employers provide group long term disability, some don’t. It a lot of times depends on the area of the country. There are certain areas of the country where you see a lot of groups have it and some areas of the country where not very many people have the group disability, but group disability typically is going to kick in after a 90-day or 180-day waiting period, typically, sometimes longer than that, sometimes shorter, but typically a three- or a six-month wait, and then your benefit period is going to be two years, five years, but most of the time it’s like age 65 or normal social security retirement age, but back to just like short term, you’re typically talking 60%, sometimes higher, sometimes lower percentage of defined earnings which typically is base wages.
JIM: I’ve got a comment on that because I just had a client in, he is a manager in his business. He’s got four kids at home, I think he’s 38 or 39 years old, okay. He’s making about $120,000 a year and I was talking to him about this, and his base wage is $85,000. He gets 60% of that to a cap of $5000 a month. What a rude awakening for him, and not only that, that was short term disability. Turns out he didn’t have long term disability. He was under the assumption all this stuff was covered. You know what? It was covered at his last job. When they explained it to him, it all sounded kind of the same and I don’t think he paid close enough attention. He just kind of assumed it was all the same from his last job, and the definitions as you talked about he had some big shortcomings. He didn’t seem as concerned about it. His wife was on the edge of her seat knowing that she’s juggling taking care of four kids, plus she worked and his paycheck was what provided the money for their kids to go to school because they sent them to private school. His money was what paid for their house and their mortgage payments and the grocery bills. It was a rude awakening for them to find that stuff out.
One thing I would recommend everybody, and I’m sure you concur, is they should be pulling out their benefits right now and confirming what they think they have, because I rarely come across anybody who knows exactly what they have. Their assumptions, they normally assume much more coverage than they actually have, and the time to find it out is when you can do something about it, not at claim time. Would you agree?
COREY: Yes, I couldn’t agree more. Usually we see a lot of the group plans only covering base wage and we see that where you get commissions, you get bonuses. We had a Mercedes dealership in the Twin Cities that we were reviewing their group plan, and their group disability plan didn’t cover commissions. Well, last time I checked at a Mercedes dealership you have all the sales people on commission, and then at this Mercedes dealership all of the mechanics were on commission, so literally you have maybe half of the staff at least not covered by the group disability plan, so you see a lot of that where it’s not covering commission, bonus.
Another thing you see a lot of times is like deferred comp or something where you have maybe stock options, stock grant type stuff. That’s not going to be covered by your group plan, and like you had said earlier health insurance, where most people don’t pay the real cost of health insurance at their employer. Their employer typically, we see a lot of times where the employer subsidizes at least half of the premium, if not more, if you have a family we see many families that $1000 of the monthly premium is paid for by the employer but they never even notice that, and when do they realize it, when they’re sick or hurt, not going to work and all the sudden they get the Cobra bill and their premium just went up $1000 a month for health insurance.
JIM: I know personally, I had my adult daughter on the plan and my wife’s on the plan. January 1 my health insurance provider went out of business. I was paying $880 a month, it went up to $1460 and my out of pocket increased. I’m paying the full boat, so for those of you that don’t know what your health insurance benefits are worth, especially when you’re looking at something like disability income insurance, if you become disabled and now you lose your health benefits and you’ve got to pay all your bills on 60% of your pre-disability income and then no bonus included, no commissions included if you’re in that boat, and then on top of that now you’ve got your health insurance to pay for. You’ve got all this happening, it can really devastate a family financially.
I know you know some statistics about when a typical person is disabled. I have read some statistics about mortgages and how many people lose their homes versus dying versus disability. What have you found?
COREY: Well, you have more than half of all mortgage foreclosures are caused by something medical, so right there it shows that people are sick or hurt and they’re not going to work, and it typically causes the foreclosure of the home.
One other thing I want to comment on the health insurance, I’m 37 years old, my wife is 37, we have four beautiful children. I’m self employed and I get the privilege to pay a little over $1000 a month on my premium, and my deductible is over $12,000 a year, so I share that example always so that clients can see kind of what is the real cost of health insurance and get an idea and a perspective on that so they really think about how much is my employer subsidizing because sometimes people get frustrated with their wage at work and it’s like, have you actually seen all the benefits sometimes that your employer is providing?
JIM: Yes, my deductibles are only $7000 apiece for a total of $21,000 and then it doesn’t cover 100% after that either, so I’m really excited, looking forward to that medical bill that might come up.
At any rate, we’re going to take a short break and when we come back let’s talk about what we do to fill in the gaps that might be left by group insurance. Please stay tuned.
JIM: Welcome back as we continue to visit with disability income insurance professional Corey Anderson, pretty much spent his whole career helping people underst and their disability insurance and underst anding where the gaps are, and helping them find solutions.
First of all, let’s just talk about the many people that are out there. They don’t even have group coverage, okay, they’re completely on their own. What do you tell something like that?
COREY: I say at the end of the day is if you’re sick or hurt, how are you going to pay your bills? You cover your home, your auto, your health insurance, what pays for all of those premiums and pays for the actual vehicle and pays for the actual home? Your ability to get up, show up, and make an income, and so if something were, let’s look at getting you individual disability insurance, you set the premium. A lot of people say, how much is this going to cost? It’s just like buying a car. You can buy a Cadillac Escalade or a Geo Metro or somewhere in between.
When I was in college I had a car that was literally $100 car, same thing with the disability insurance. We can get you a plan for a couple hundred dollars a year. I’ve got many clients only paying a little over $200 a year, and I’ve got one client paying $1500 a month, but that’s because he makes a significant income and has a significant amount of health issues, so you customize it. A lot of times people will say 1% to 2% or 1% to 3% of your income. I don’t know if I like throwing out those numbers from the st andpoint of you customize it.
Literally the other day I was looking at a policy for a client and the premium that he went with, there were a bunch of different options and he went with a premium that is one-third of the highest priced premium and he still got a phenomenal contract, long benefit period, et cetera, so you can really hone it in to what you want.
JIM: The key is you should sit down with your insurance professional, figure out how much risk do you want to assume and how much risk do you want to transfer to the insurance company. I always say h andle the risk that you can afford to weather the storm, but whatever you can’t weather on your own, transfer that to the people that have much deeper pockets than you do, and that’s the insurance industry, and they’re built to h andle this kind of stuff.
Let’s talk about more unique situations. Let’s say we’ve got somebody like I was talking about earlier, base pay of $85,000, making almost $120,000, and literally his group coverage covered him $5000 a month because it capped out at that, and that’s all taxable. We don’t know if we can even count on Social Security Disability, and his family is literally living on $10,000 a month of income. His wife’s wages mostly go to pay the income tax, so he’s pretty much paying most of the bills, so we’ve got $30,000 to $40,000 shortfall of what he needs to get by each month. What can we do for something like that?
COREY: Well, first off the calculation is technically wrong. I don’t mean to point this out, but I said 60% to $5000 of $80,000 which is really $4000 a month of benefit, not $5000 a month.
COREY: We think it’s $5000 in our head, but it’s not $5000, it’s $4000, and that $4000 is then taxable. You can probably get, and I’m guestimating here, probably another $4000 a month of individual on top of that group plan, and then that individual plan would be tied to the employee not to the employer.
Back in the day when we came out with the new Papaca (SP?) health insurance that that came out, one of the big things with it was portability and from the st andpoint of you would always have health insurance and there would be no gaps and no pre-existing conditions. Well, if you start at employer A, you quit at midnight tonight and you start right away in the morning at the new employer, you have a new waiting period. You have a new pre-existing condition exclusion, so if you move with health problems you might not be covered right away for certain things that could come up.
JIM: That was a good point, because he just switched employers so he’s trying to find out this information, and he found out, oh, yes, it’s in 90 days that I’m covered. Anyway, with all that said, he wasn’t covered at all.
COREY: Let’s focus on him. Let’s stay on his topic, so 90 days before he is eligible, but let’s say that he even had coverage day one, so he would have had coverage day one but they would still have a new pre-existing condition exclusion, so let’s say he’s on heart medicine and he switches employers, goes to a new employer, has coverage right away and three months in he has a heart attack. He’s not going to be covered because that’s a pre-existing condition, and usually you’re not covered for the first 12 months for pre-existing conditions. You’re covered for everything else, but not pre-existing conditions, so even if there wasn’t the three-month waiting period you would have that issue, but with him he had three months before he’s eligible, then once he’s eligible he still has typically probably 12 months of a pre-existing condition collusion, whereas if he had an individual policy the individual policy is tied to him, not to the employer, and that plan follows him with employer to employer, if goes self employed, also if he switches occupations, all those types of things, that plan follows him versus staying with the employer.
JIM: Now, the thing really to consider too is when we’re young we’re invincible. We’re never going to get sick, we’re never going to get disabled, we’re never going to die, we’re going to live forever, and we do a lot of our planning that way, but another important consideration is getting that portability policy as young as you possibly can because most DI policies on an individual basis, and correct me if I’m wrong, they’re based on their issue age when you first buy it.
I look at some of these folks that were smart when they were young and bought these policies and they’re paying literally peanuts for an awesome coverage plan, and a lot of them have these guaranteed purchases options and ability to keep the policies, keep pace with inflation. When I talk to someone who’s starting to think, you know what, maybe I might get disabled someday, maybe I should look into that, and now they’ve got some health ailments and they’re paying the premiums of a 50-year-old, it’s almost enough to have them have a heart attack when they see the premiums, you know.
COREY: I think of it as the insurance company says, how much money do we want to collect between now and age 65, and how many years do you have to pay premium. It doesn’t work out exactly to that, but basically a 45-year-old is typically double the price of a 25-year-old. A 55-year-old, double the price of a 45-year-old. It doesn’t work out scientifically exactly like that, but it’s pretty darn close, so the younger you buy it, you end up saving that much in premium and it’s something where you have coverage the whole time and you didn’t go naked without the coverage.
JIM: You know, I have a friend of mine, he would probably appreciate the fact that I’m saying this. I was just with him, he’s close to my age, he’s past the half century mark and he was out skiing. We were at a business meeting together and I was leading the meeting, and he asked if he could spend a few minutes talking about the virtues of wearing a helmet when you go skiing even though it doesn’t look cool. Here he got in an accident, cracked the helmet in half, broke all these bones in his body, he’s going through rehab right now, and then he talked about a neighbor kid of his is in a coma from a skiing accident that wiped out and hit their head, and he told me this when my daughter was going out to Colorado skiing so I made sure but she said oh, yes, we all wear helmets, so I felt much better about that.
Disability can happen at any age. It can be an accident, could be a sickness. Look at Christopher Reeves. There are so many things that can happen in the blink of an eye, you don’t want to go this alone. What final tips would you have for people if they’re looking at this right now?
COREY: When we make a decision on disability insurance, there are three basic decisions. Definition, how do you actually qualify. Benefit amount, how much do you get per month of benefit, and your cost, how much do you pay in premium, and I think you can apply that to any of the plans you look at. What you’re going to see is if you have group insurance, high benefit amount, very, very low premium, so what suffers is the definition. There are so many contractual problems to a group plan.
When you’re looking at an individual plan, how do we try to get all three, how do we get a high benefit amount, great definition, plus try to keep the premium reasonable, and the beauty is these days there are a lot of options within a plan, that you can design it and pick and choose and do a little nip and tuck here to save some premiums, so really shop when you’re looking at it, have your advisor look at a few options, and when you’re looking at it remember words matter. Group insurance, everybody says it’s cheap. Well, there’s a reason it’s cheap. Words matter.
JIM: Give me an example of a word that matters.
COREY: The words in there are own occupation versus any occupation, quick example, my cousin Travis that I was talking about earlier, his group plan paid him for two years because he couldn’t do his own occupation at time of claim. After two years they stopped paying him saying he can go do any occupation, which I don’t agree with. I’m actually dealing with it, but they’re saying he can do something, which maybe he could go do something, but he can’t perform any of the duties he did before and so the group plan stopped paying at two years because of that.
JIM: Well, there are a lot of moving parts. We say it on this program all the time, don’t go it alone. There are a lot of options. There are a lot of myths out there, and I think the first thing you owe it to yourself, make sure you completely underst and how you’re covered for a disability if it happens to you, and make sure you’re comfortable with that risk. If you’re not comfortable with that risk, you need to do something about it while you can, while you’re healthy. Once you’re sick, it’s way too late and we’ve had guests on this program and throughout the month we’re going to have some real life stories to share with you of people who went it alone and didn’t have the coverage or people that had the coverage and what a difference that made.
We were focusing today on individuals, how they’re covered, but as business owners there are issues like disability buy/sell. If you get disabled the life insurance doesn’t pay on a buy/sell. There are policies that will pay a lump sum so you can buy partners out. There are a lot of different ways to structure it. Business overhead coverage so the business can keep running so you have a chance to sell it as more than a fire sale price. There are a lot of considerations, too many for us to go into in this short period of time, but talk to your advisor.
Any other comments you should share with that, Corey?
COREY: No, I agree with all of what you said and I appreciate you having me on the show.
JIM: All right. Thanks, Corey.
COREY: You’re welcome.