Income is important; possibly the most important resource to reach financial goals.
A financial strategy can be like a golf swing. In golf, it takes specific, calculated steps working together to propel a golf ball accurately toward the hole. Similarly, a financial strategy might incorporate several financial products and strategies, and for most of us, earned income is the foundation.
“Any structure must have a strong foundation” – John Wooden
I love helping agents, financial professionals, and clients understand income protection so they can make informed decisions about protecting what for many of us is our most important financial resource – a full career of earned income. This paper is a collection of little deposits of experience from working on over 1,800 disability insurance cases since 2009 to help you make choices when protecting income.
Step 1 – Identify the AMOUNT of Income Protection that is Needed to Do the Job
Income is important – at least for most of us. We earn income to pay bills including mortgage, rent, groceries, fuel and contribute to our financial goals such as savings or future retirement.
The bottom line is that our income drives virtually EVERYTHING we do financially, therefore income, and protecting income, is of supreme importance.
Consider asking these questions:
- How much is my income?
- Where does my income go?
- How much do I currently save, and do I save on a consistent basis?
- What is the amount that I have saved so far?
The idea here is to start with full income needed, then assess other resources available if you can’t earn to pay bills.
What are the available resources you might have available to pay the bills in a dire situation? Parents, other family, friends, and GoFundMe are not reliable resources for planning purposes. However, in contrast the income resources below can be relied on and considered when customizing an income protection strategy. If you take these resources into account as you customize an income protection strategy, you could potentially lower your costs by strategically managing risk.
- Company-sponsored short-term disability insurance
- Company-sponsored long-term disability insurance*
- Spousal income
- The amount of cash you have that is readily available
- Life insurance cash values
The objective here is to evaluate the overall impact of income, then assess the resources you’ve already worked hard to establish that could be used if income stops.
Lastly, don’t underestimate earned income’s impact on retirement planning. How successful could a retirement plan be if there are not adequate contributions and adequate time for the contributions to grow? A plan is like two sides of the same coin. On one side, you want to save assets for future benefit and on the other side of the coin, you want to protect those assets.
What about company-sponsored group disability insurance? Imagine a hypothetical example where someone earns $150,000 and they have company-issued long-term disability coverage through their job. The company plan pays a maximum 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 (60%) reduction in income? How do you think a reduction like that would impact a financial plan and financial goals?
A full and thorough assessment of an employer long-term disability plan by a financial professional can help you decide if the company plan meets your needs.
How much coverage is enough? 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:
- Some want to insure a minimal or basic amount of benefit. Maybe just enough to cover housing, utilities, and groceries. (The HUG plan)
- Some put a lot of emphasis on income protection planning and want to cover a maximum amount of their income to keep as much of their lifestyle intact as possible.
- Lastly, some fall somewhere in the middle and work from a budget to protect the best they can within in premium or cost range
Income is foundational and important.
Protect it first, foremost, and forever!
Step 2 – Look at Options for the Right TYPE of Coverage
There is 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 along with questions to ask that will help you reach a reasonable conclusion about the coverage that is appropriate for your needs.
When deciding about a disability income insurance policy, the contract provisions are paramount - even to the most granular level. It might sound unbelievable, but one single word can make a difference on how a claim is paid.
Over the years, working with income protection plans, I’ve been involved with several claims where policyholders are indeed receiving the benefits from their policy. Without speaking to any one single set of circumstances, almost all of us fail to appreciate the realities of a claim.
Maybe I can illustrate it this way. When you are applying for disability insurance, you’ll be signing a form called an application, and as you’re signing that application, you might think about circumstances where you would use the policy’s benefits. Fast forward years later and there’s another signature if you ever need to start the benefits from your policy. It’s the signature on the claim form, and almost every time the circumstances of a claim are never what you thought when signing the application.
Needless to say, we don’t know life’s future circumstance, and for this reason, you want to choose the most comprehensive income protection policy that you can afford.
The wording of a contract is extremely important – Ask for help from a financial professional if you need it.
Below are some questions you may want to ask about an income protection plan (disability insurance policy):
- Will you receive total benefit even if you can earn income in a different occupation?
- Physicians Only: Can you receive total benefits even if you stay in your practice?
- Can you receive partial benefits if working in your current occupation but not as productively?
- Will your benefits keep up with inflation?
- Do you have both fixed premium and graded premium options to best fit your financial plan?
- What is the time frame that can you convert from graded premium to level premium?
- If you exercise the conversion option on your policy, are ALL provisions of the contract guaranteed?
- 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?
- Are mental/nervous disabilities covered for the entire benefit period?
- Does your contract have the ability to add coverage as your income increases? If so, will health questions be asked?
- Do presumptive benefits require that you are permanently or irrecoverably disabled?
- Can you cover retirement contributions?
- Is the promise (a policy) supported by a highly rated financial institution?
There are of course other attributes to consider and not all these need to be answered to the affirmative to have a policy that fits your need. However, it’s always best to, thoroughly read the policy! I cannot stress this enough… When evaluating a policy, opinion doesn’t matter at the time of claim. The actual contract provisions reign supreme.
Step 3 – Make Sure the Carrier You Choose Can Fulfill the Promises of Your Policy
In the 1990’s there were lots of disability insurance policies sold by two carriers who no longer exist today! Imagine if you were a 30-year-old consumer who purchased a policy during that time and now the company you chose is no longer there?
Keeping in mind that a 30-year-old in the mid-90’s is probably still working today and possibly at the peak of their career! What if something happened where they needed to use their policy?
The policy you buy might in fact help you tell the story of a 30 year or more career!
The reason that I end the paper addressing carrier financial strength is because you want to work with a company that is positioned as well as possible to fulfill the promises made in the policy. Therefore, in addition to the base contract and optional features, you will want to evaluate the management of the insurance carrier that is responsible for administering a claim during what might be your most stressful time dealing with injury or illness.
You want to work with 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 to help evaluate the management of an insurance company is the Comdex rankings** which provide easy to understand scoring from financial rating agencies. The companies with the highest rankings can help provide confidence for the consumer.
In summary, the big ideas we’ve covered are:
Idea 1 - Income is important – maybe even the most important factor in reaching financial goals,
Idea 2 - You can potentially save premium if a plan is designed around current resources, you already have in place.
Idea 3 - The contract words are everything. When evaluating a policy to make sure it’s doing what it’s supposed to do, opinions don’t matter at the time of claim and the actual contract provisions reign supreme.
Idea 4 – The company backing up the policy is critical. As a professional you are telling the story of your next 20, 30, or even 40 years. You want a company that is positioned to help you share that story if necessary.
To anyone who reads this, your income might just be your most important financial resource. I hope the insights herein have helped you understand a little more about protecting that most valuable of assets.
Truly,
Sam
What are the next steps to protecting one’s income?
There are several different ways to approach the buying process to obtain disability income insurance once a decision has been made to protect income. When working with potential clients, I like to use the following process:
- Decide that income is important and worth protecting
- Start a background evaluation with an insurance company. This includes an application and sometimes also requires physical/medical information and/or financial records
- Once an offer is made from the insurance company, work with your financial professional to make choices about features and options that fit your desired coverage and budget
Bonus: Regarding Business Owners and Disability Overhead Expense Policies
A disability overhead expense policy provides an important benefit to keep a business operating in the event the owner (specifically a revenue-generating owner) is not actively working due to an injury or illness.
Why a Disability Overhead Expense Policy?
- We find that many business-owners, especially fee-for-service professionals, are themselves the revenue-generating component to the business
- Policy provides the owner the with the peace of mind knowing they will have time needed to heal and return to their business / practice
- Policy may help an owner who doesn’t heal sell the practice/business with as profitable of an income statement as possible.
*These 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.
** 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).
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Ashford Brokerage is not an affiliate or subsidiary of Guardian. Ashford Brokerage is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. Ashford Brokerage is authorized to offer products of The Guardian Life Insurance Company of America (Guardian), New York, NY and its subsidiaries, and is not an affiliate or subsidiary of Guardian. The Guardian logo is a registered service mark of Guardian, used with permission. California Insurance License 0J09024, Arkansas Insurance License 15480533. 8466784.1 Exp. 10/2027.