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A Guide to Disability Income Protection

A Guide to Disability Income Protection

| May 21, 2019

I’m Sam Duffey, and I love helping folks understand income protection!

At the writing of this paper (2019), I’ve worked with financial professionals & clients on over 1,300 disability insurance cases since 2009, and I’d love to report that I have had a great impact on their understanding of income protection strategies. In reality, it’s the people that I’ve worked with case after case who have given me experiences, and that’s exactly what I hope to share in this paper organized into an easy to understand process for developing an income protection strategy.

A financial plan can be kind of like a golf swing which has several components like a smooth backswing, hip transition, shoulder follow, along with proper wrist and grip that work together to result in a golf ball being propelled predictably and reliably toward a hole. I know this because I struggle with almost all of those components!

Like a golf swing, a financial plan may include several financial products and strategies. Therefore, the first step in our process is intentionally designed to uncover the importance of income and how it permeates through an entire planning strategy.

Step 1 – Decide the right AMOUNT of income protection.

Income is important – at least for most of us.

For many of us, we earn income to pay bills and contribute to financial goals, like savings, retirement, etc. Our income drives virtually EVERYTHING we do financially, therefore income and protecting income is of supreme importance.

Can you think of anything more important than income or cash flow, financially speaking?

Idea #1

Income is important – maybe even the most important factor in reaching financial goals.

Since income is foundational to most of our financial plans, here are some questions to consider when thinking about how much income protection is adequate:

How much income do I make?

Where does the money go? Good examples are housing, groceries, utilities, automobile, entertainment, and recreation to name a few.

How much do I save?

No single plan fits all, so it might be a good idea to start with full income, then look at resources that could be reliably accessed if injury or illness prevented the ability to work and earn.

Before you determine what resources could potentially be relied on, I’d like to mention what is NOT reliable.

My parents are great examples of folks who would literally do anything to help my family and me if we were in a dire situation, but relying on them is not planning, that’s hoping. Therefore, family, friends, and GoFundMe are not reliable for planning purposes.

So what can be relied on? Below is a list of potential resources that could help your income protection planning by potentially shifting risk strategically to lower insurance costs. Some resources may include:

Cash in the bank

Cash values in life insurance

Company-sponsored short-term disability insurance

Company-sponsored long-term disability insurance

*theses benefits are often taxed or have limited payouts. Therefore company provided plans as well individually owned coverage should be reviewed in detail to determine when and how much is paid if a claim occurs.

Spouses income

In this step, the objective is to evaluate the overall impact of income then assess the resources you’ve already worked hard to establish that could be relied on if income stopped.

Lastly, don’t underestimate earned income’s connection to retirement planning. Think about it, how successful would a retirement plan be, if there are not adequate contributions to the plan? Poor, because almost every financial plan or goal, commonly a retirement plan, requires inputs which most often come from working and earning income.  Adequate money and adequate time are necessary to reach financial goals.

Recapping step one, which starts with a broader perspective to understand the need for income with simple questions like, how much you earn, where does the money go, and what resources are already available if injured or ill and can’t work at full capacity.

Idea #2

You can potentially save premium if a plan is designed around current resources you already have in place.

What about company-sponsored group disability insurance? Imagine someone who makes $150,000 with company long-term disability coverage through their job. The company plan pays a max of $5,000 a month resulting in a $7,500 gap between what he earned while healthy and the company benefit if injured or ill and not able to work. How many folks could take a $7,500 income reduction in a situation like this? How do you think a reduction like that would impact a financial plan and financial goals?

How much should be covered? I’ve found that people buying disability income insurance usually fall into one of three categories when deciding how much of their income to protect:

  1. Some want to insure a minimal or basic amount of benefit. Maybe just enough to cover housing, utilities, and groceries. (the HUG plan).
  2. Some put a lot of emphasis on income protection planning and want to cover a maximum amount of their income.
  3. And lastly, some folks fall somewhere in the middle and work from a budget to insure the best they can within in premium or cost range.

Income is foundational and income is important, so protect it first, foremost, and forever!

Step 2 – Decide on the Right TYPE of Coverage

Just like before, no one size fits all when it comes to income protection policies. This guide cannot tell you what to decide, but it can show you a process and questions to ask to help you reach a reasonable conclusion about appropriate coverage.

When making a decision about a disability income insurance policy, the contract provisions are paramount - even to the most granular level where one single word can make a difference in how a claim is paid.

Over the years of my work with income protection planning, I’ve also been able to be involved with several claims. Without speaking to any one single set of circumstances, I can say confidently that the realities of a claim and life’s twists and turns can stress-test a policy and carrier to limits that a typical consumer can’t imagine. Therefore, the words matter when selecting an income protection plan.

Idea #3

The contract words are everything. It may be wise to get the help of someone who has skill and experience to help evaluate existing or prospective disability income protection policies.

Questions to ask about an income protection plan (disability insurance policy):

  1. Will you receive total benefit even if you can earn income in a different occupation?
  2. Physicians Only: Can you receive total benefits even if you stay in your practice?
  3. Can you receive partial benefit if working in your current occupation but not as productively?
  4. Will your benefits keep up with inflation?
  5. Do you have both fixed premium and graded premium options to best fit your financial plan?
  6. How long can you convert from graded premium to level premium, and at conversion are ALL provisions of the contract guaranteed?
  7. Is the policy non-cancelable and guaranteed-renewable meaning the policy words cannot be changed nor can your premium cost change so long as you pay premiums on the policy?
  8. Is a mental/nervous disability covered for the entire benefit period?
  9. Does your contract have the ability to add coverage as your income increases? If so, will health questions be asked?
  10. Do presumptive benefits require that you are permanently or irrecoverably disabled?
  11. Can you cover retirement contributions?
  12. Is the promise (a policy) supported by a highly rated financial institution?

Of course, there are certainly other things to consider and not all of these questions must be answered to the affirmative in order to have a policy that fits your need, but over time, I’ve seen questions like these come up when clients are either evaluating their current plan or a new plan.

Idea #4

When evaluating a policy, opinion doesn’t matter at the time of claim, the actual contract provisions reign supreme. So, read the policy!

Step 3 – Make Sure the Carrier You Choose Can Fulfill the Promises They Make

Would you believe that in the 1980s there were around eighty-six carriers offering individual disability income policies and now about ten (probably less), account for over 90% of new policies purchased!**. Name and date of source is required) These types of policies have rich benefits and provide a tremendous resource if income stops or you can’t work as productively. Therefore, these types of policy claims are difficult to manage. I mention this because it’s wise to give adequate consideration to companies that have long legacies managing individual disability income business and those who have financial backing to withstand the stress-test of time.

One resource that you can use is the Comdex rankings* which provide an easy to understand scoring from financial rating agencies.

Wrapping up, the process for evaluating a disability income policy is simple. Just start with how much benefit is needed then decide what type of policy is needed. If you’d like help working through this process, call me at (205) 626-9347 or email,

Sam Duffey, CLU


Bonus For Business-Owners

Also, consider what could happen to your business if you are unable to perform. We find that many business-owners especially fee-for-service professionals are themselves the revenue-generating component to the business. Therefore planning to make sure your business is as valuable as possible even if the revenue-generating owner isn’t able to produce. A disability overhead expense policy provides an important resource to keep a business operating as well as possible so that the owner has (1) time to heal and return to the practice, or (2) sell at the highest potential.

A law firm without clients has little value just like a medical clinic without patients!

* Comdex is not a rating, but a composite of all ratings that a company has received from the major rating agencies (A.M. Best, Standard & Poor's, Moody's, and Fitch). Comdex percentile ranks the companies, on a scale of 1 to 100 (with 100 being the best). ** Milliman IDI Market Survey, 2007