Disability Insurance? Your thoughts invited...

[spncity]

Talking here about long-term disability insurance.

1. Do you have it? Please explain/expand.

2. Did you have it? Please explain/expand.

Looking for information like... Do we need it? (We are still a several years away from ER). Any rules of thumb for "how much" you should have? Should this relate to each person's income? Do you then drop it when you reach ER? How much does it cost? Know of any good companies?

Does the cost of disability insurance go down as you age since you have fewer years during which you could become disabled and require payments(compared to term life that goes up as you age because you are more likely to die than when young)?

Everyone is healthy, but if accident or illness caused one of us to have to stop working, that would be a big monkey wrench in the works.

And if a spouse needed to be the primary caregiver for the disabled person, both may be knocked out of the workforce - which might negate the idea that the amount of insurance on each person should be tied to that individual's income.

Thanks for any input.

spncity

 

[FinanceGeek]

I signed up for the policy offered via my job, you have a choice to pay the premiums pre-tax (in which case benefits are taxable) or post-tax (in which case benefits are non-taxable). I chose the latter.

I would certainly drop it at ER since I wouldn't be working any more and the purpose of this insurance is to protect you from disability where you cannot work.

I have never shopped for a private policy but I imagine that there are extensive underwriting requirements and exclusions to be aware of.

Personally if you are really very close to ER the risks are lower and it might not be worth having.

 

[Ed_The_Gypsy]

!. Yes, I have it. Bought it privately about 10 years ago when I learned how weak my at-that-time employer's coverage was. This prompted me to buy private term life insurance and health insurance [later dropped for a cheaper corporate plan--bad mistake ]. All this made me independent of employers' benefits--a very good move for me, as I have since become a gypsy.

YES, you need it. Unless and until you are independently wealthy.

I opted for 80% of my salary at the time. You buy for fixed coverage; i.e., replacement of X dollars a year. I make much more today but the fixed payout is still the same. In my case, this is not a problem.

My payments remain the same for the original coverage. They have not diminished with my aging. I don't remember the cost--sorry. Wife pays those bills.

It makes no sense to keep it after retiring. It is insurance against loss of ability to earn income.

Be aware that if disability insurance is part of your employer's benefit package, it is probably purchased with pre-tax income. In this case, the benefits would be taxed. If purchased with after-tax income, the benefits would not be taxed. Take the difference into account when you run the numbers.

I bought mine through an independent insurance agent (one not affiliated with any particular insurance company). I had to talk to a couple before I found one who I had any confidence in. If they sounded too slippery, I walked.

Everyone is healthy, but if accident or illness caused one of us to have to stop working, that would be a big monkey wrench in the works.

Boy, you know it!

And if a spouse needed to be the primary caregiver for the disabled person, both may be knocked out of the workforce - which might negate the idea that the amount of insurance on each person should be tied to that individual's income.

This is a separate problem. If you are worried about this, buy a high replacement policy and make a Plan B. I think it is double-contingency, myself, and therefore highly unlikely. Nobody will sell you insurance for voluntarily leaving the workforce, by the way.

Do some research in your state. Read up on it--BEFORE you talk to the salesmen. You should also know what your employer offers and bring a copy of the terms with you when you talk to the agents.

 

[Martha]

My job provided the insurance. I don't know if this applies to other areas of work, but one issue we had was getting "own specialty" insurance, rather than insurance that only covered you if you were unable to practice law at all. Sometimes a lawyer may no longer be able to practice in a high stress area like litigation but arguably could practice in a new area after a lot of learning.

Same would apply in the medical profession. Maybe a surgeon gets carpal tunnel and can't be a surgeon anymore but could go into a new area of medicine.

In these cases you might want own specialty insurance so you are covered in you can't practice in your area of expertise. For sure you want coverage that provides even if you could do some other line of work, if that work doesn't pay as well you are covered at least for the differential.

Another issue is mental health coverage. In the professions a common reason a person becomes disabled is for mental health reasons. There are often limits on this coverage. I recall that the policy we bought had a two year limit.

IIRC, our policy paid at the rate of 70% of the average income you had for the last three years, including bonuses.

You also want to think about whether there is coverage if you are partially disabled and can't work full time or can't earn as much as you did before your disability. It is good to have the differential income covered.

None of our lawyers ever have made a claim on the policy, but we had several staff members who made claims and were covered. I really liked having it available for staff as it helped some staff members who were really suffering be able to leave work, apply for social security disability, and use the long term disability insurance to pay for COBRA premiums (Medicare takes a long time to kick in for the disabled) and at least some of their living expenses.

I remember reading a few years ago about certain companies denying a lot of disability claims. So be sure the company has a good record.

Brewer might have information on what are good companies.

 

[Brat]

I second all that Martha said.

Depending on an individual's risks LTC coverage is worth consideration too, it is typically very cheap for a young person. We seniors are not likely to live 5-6 years after we need care but a young person with a head injury can live a long time. I would opt for a lifetime care policy with long qualifying period as injury is more likely than disabling disease.

 

[Meadbh]

Disability insurance is essential but only while working. I echo what Martha said. The most important features as far as I am concerned are:

1. Pay with after tax dollars if possible. That way, benefits are tax free and you can avoid overinsuring.
2. If you are in a high earning occupation, include an Own Occupation clause. (e.g. surgeon earning $400K loses hand in accident, can't do surgery, but can go back to do a residency in psychiatry and earn $50K; with OOC would be eligible for disability payments)
3. Make sure there is COLA
4. Consider a Future Insurance Option. This allows you to increase your coverage without evidence of good health.
5. The Elimination or Waiting period is the time disabled during which no benefit is payable. Premium will be inversely related to the length of this period. Your choice depends on your emergency fund.
6. Other frills include an office overhead plan for physicians, dentists, etc, who have fixed expenses and staff. Not for me, but essential for those in private practice.

I have group disability insurance through my professional association and when revenue exceeds expenses, we get a refund against the next year's fees. Currently I am paying $125 CDN monthly, which I consider a bargain.

As for decreasing your disability insurance as you approach retirement, I would not advise this. If I were to develop a disability one year prior to my planned ER date, I could collect disability benefits till the "normal" retirement date. There is no need to advertise my ER plans to the insurer!

 

[brewer12345]

I would buy it independently if you don't have it via your job. But I would be very, very picky about who you buy it from. I would really only consider buying it from 3 companies: MassMutual, Northwestern Mutual, and Guardian.

 

[Alan]

I have always had it through my employer and believe it is an essential piece of insurance.

At 26 my brother's son is in the process of coming out of a coma following a road accident resulting in bad head injuries 3 weeks ago. It will be many months, possibly 1 or 2 years before he is able to go back to his job. Wife and 1 year old son. Without his LT insurance his family would be hurting even more than they are now.

I have decided to drop my LT coverage next year as I'll only be 2 years from RE and don't need it any more.

 

[joesxm3]

I would buy it independently if you don't have it via your job. But I would be very, very picky about who you buy it from. I would really only consider buying it from 3 companies: MassMutual, Northwestern Mutual, and Guardian.

I have had mine with Northwestern Mutual since 1987. The salesman convinced me it had less loopholes for them not to pay. Has been pretty expensive due to "own occupation" and other add-ons.

Lately I have started to think that the salesman probably had his own adgenda that might have driven his advice. Guess I was a bit gullible in the early years.

I also now get DI at work. He claims th NM one is much better and I should keep two. I am wondering about that. He says that the way they are structured both would pay out at the same time without reducing each other. Gotta get a second opinion on that one.

Suggest you pay a lot of attention to getting a trustable sales rep then trust but verify.

 

[chinaco]

IMHO - if you need the income from a job and are working... get LTD insurance. The cost is low compared the the financial loss if you become disabled. If you because totally disabled, you would qualify for SSI. I also think you would qualify for Medicare. But the money from SSI is not much.


I have LTD through work. It is fairly cheap. SSI and LTD would get me to 80% of my income.


The only way I would not have LTD is if I could not afford it or if I accumulated enough wealth that I did not need it.

 

[BigBob]

I questioned spending the $$ for it as well in this thread. http://www.early-retirement.org/forums/f38/when-to-cancel-a-ltd-policy-27601.html
(not sure how you guys make links to them...)
My conclusion for myself was to hang onto it for now until I reach my "could survive" level of nest-egg, which may be around 3 years before pulling the plug. o, on retirement, that is)

 

[Bikerdude]

I was on LTD for 1 1/2 yrs. My employer covered the first six months without question but I had to apply for Social Security disability. It takes a while to get approved but in my case I qualified before the six months was up. I forget what would have happened had I not qualified for SS. Anyway, between the two I was making more than when working.

Check your policy to see how SS is factored in.

 

[FinanceDude]

I have had mine with Northwestern Mutual since 1987. The salesman convinced me it had less loopholes for them not to pay. Has been pretty expensive due to "own occupation" and other add-ons.

Lately I have started to think that the salesman probably had his own adgenda that might have driven his advice. Guess I was a bit gullible in the early years.

I also now get DI at work. He claims th NM one is much better and I should keep two. I am wondering about that. He says that the way they are structured both would pay out at the same time without reducing each other. Gotta get a second opinion on that one.

Suggest you pay a lot of attention to getting a trustable sales rep then trust but verify.

The NML policy is portable, whereas if you leave where you work you lose the coverage.

Also, NML's policies are more economical once you get past the first 5 years or so, where you're paying the agent's commission. NML's policy's used to be participating, meaning they paid a return of dividend for good loss experience, not sure if that is still happening........

If you're going to FIRE, probably don't need DI anymore.........

 

[jarts98]

I purchase my own LTD coverage (I'm self-employed) and have done so for years. In earlier times, the kids were younger and the saving accounts were light, so LTD made perfect sense. Now as the kids near college and our investments are (barely) enough for true FI, I'm wondering whether to renew the LTD in the spring. Obviously it was originally purchased when income replacement was vital.....now I'm contemplating early retirement, so why insure for the loss of something I'm considering giving up?

In researching the subject on this forum I ran across this post from a few years ago. Does anyone know of any new issues to consider, perhaps anything that has changed in the last few years that would alter the opinions given above?

Thanks.

 

[brewer12345]

I purchase my own LTD coverage (I'm self-employed) and have done so for years. In earlier times, the kids were younger and the saving accounts were light, so LTD made perfect sense. Now as the kids near college and our investments are (barely) enough for true FI, I'm wondering whether to renew the LTD in the spring. Obviously it was originally purchased when income replacement was vital.....now I'm contemplating early retirement, so why insure for the loss of something I'm considering giving up?

In researching the subject on this forum I ran across this post from a few years ago. Does anyone know of any new issues to consider, perhaps anything that has changed in the last few years that would alter the opinions given above?

Thanks.

I suggest you conduct a thought experiment: imagine you are totally disabled and cannot work for the rest of your life. Will you have enough money? If the answer is no, time to renew for another year.

 

[healthyandfun]

A must

Purchased policy through employer approved company many years ago--called income replacement insurance. Current selection replaces $2000 a month, 90 days after accident/illness up to five years. I chose this since I have a healthy emergency fund to tide me over if needed and many sick days. Also, premium was much lower with that selection as opposed to 7 or 30 days. Allowed to change selections once per year. It has given me peace of mind over the years especially the early ones when I had meager savings. Suggestions by Martha are spot on.

 

[ERhoosier]

Early in life LTD is crucial. Your future earning potential is your biggest financial "asset" and IIRC the ave 30yo is roughly 6x more likely to suffer LT disability than die during their working lifetime. And LTD is always cheaper to buy while young & healthy. However as others have posted, LTD is usu not needed if/when FI.

 

[jmzf1958]

I'm 55. I bought private two private disability policies in my thirties. I was in a skilled profession and bought own occupation coverage. When I was 40, I was single with two children. After 23 years of working in this profession, at age 43, I became disabled. I was able to collect on both of these policies. I took a settlement with the one company three years later, and I am still collecting on the other one until I'm 65. My life and my children's standard of living would have been much lower had I not had the insurance. I would have had to have sell our home, sending them to college would have been a struggle.

Having the insurance was the best decision I've ever made. The one thing I didn't have that I should have was the cola. I didn't realize how important it was. When I was young, I just thought I'll just buy the basic insurance, I'll probably never use it anyway so why spend the extra money.

I was also fortunate that I could collect on a NYS disability pension with medical coverage and nys workers comp as my injuries were caused by my profession.

If it were not for the private disability policies, nys disability pension and workers comp, my only alternative would have been social security disability, which I also have, and my savings, next to nothing at that time from the divorce and raising two young children.

I have had a nice life with no financial worries. I would strongly urge you to purchase the insurance. It will be worth the money should you become disabled. Just my story.

 

[JoeWras]

Bought a private, portable, LTD "buy up" policy 17 years ago when younger.

I'm still w*rking, and have the option through my employer now. I am instead now buying it through my employer and dropped my private, portable policy.

Why? The "ravages of inflation" made that policy kind of useless. What looked to be good in 1995 is not so much now. It felt like money just draining out of my account for a benefit that would have been pretty trivial.

I'm putting that money into LTCI instead. When I finally ER, I won't have any disability insurance.