Filling in the Disability Insurance Gap
Disability insurance isn’t something a lot of clients (or advisors) think of first in a planning conversation. It’s most often an add-on, like asking for extra ketchup packets at the drive thru window. It only comes up once the big-ticket items are taken care of.
It doesn’t get a lot of thought because of two things: people don’t think they’ll need it, and, on the off chance something happens, most people think they are relatively protected.
Maybe. But are you sure? Your goal is to set your client up for financial success and the potential risk of losing income — the base of their financial plan — is a big risk to remain exposed.
Your client’s base needs to be strong. And that means disability coverage needs to be more than an “oh, by the way.”
Look, don’t assume
There are three key sources to consider when it comes to complete disability protection for your clients.
- Group DI coverage
- Individual disability insurance (IDI)
- Social Security disability
Clients may know they have some coverage and think they are all well protected, but when you start to dig deeper, that’s not always the case.
Don’t let your clients find out they needed additional coverage after it’s too late. Let’s look at how different options stack them together to strengthen overall financial health.
Group disability insurance
Many clients who are fully employed will have some form of disability coverage through work. And that may be their go-to reason for not talking about additional coverage. But the group plan will likely cover about 60% of their income or less.
Look at their net paycheck
Group coverage is a great start, but often clients aren’t prepared for the true financial impact. How would living on 60% of what they are used to affect their family?
Group coverage may be enough to cover some fixed expenses like a mortgage, but would leave a large gap in income used for day-to-day needs.
There are also tax consequences. Since the plan is paid for by the employer, with no premiums paid by the individual, any income will be taxed. Suddenly that 60% is down to 40% or less.
And, for higher-earning individuals, there is usually a cap on the policy — typically around $5,000. If you do the math, that means if they’re earning more than $100,000, they’ll start with less than 60% of their income.
A changing workforce
A growing number of clients are self-employed or working as 1099 independent contractors. When changing jobs, disability insurance isn’t typically part of the decision process. If they were previously a full-time employee with group coverage, clients may not have thought about losing their protection.
We’ve seen numerous clients who were not aware that it’s something they need to look at for themselves — until something happened. Traveling nurses. Freelance creatives. Virtual teachers. Many of them are earning more gross pay and can afford to fund an individual policy. If you have clients who have taken a similar professional path, it’s a great way to start a conversation about renewed financial priorities.
In addition to basic group short-term or long-term disability, some employers offer key-person coverage to executives or higher levels of coverage for business owners. There can be discounts available with group plans, including gender-neutral pricing, that owners want to take advantage of. If you work with business owner clients, reach out to our team to discuss creating a custom proposal.
No matter the specifics, when your client tells you they have coverage through work, it’s worth looking at in more detail. Don’t just assume that you don’t need to have the conversation.
Individual disability insurance
In addition to employer-provided coverage, it can make sense to add an individual disability policy to the plan. By supplementing with IDI, if your client does need to use their coverage, they can expect to receive more income, making it much more possible to maintain their lifestyle.
While individual plans don’t offer the same discounts, they offer more flexibility when it comes to coverage.
The client isn’t bound by a certain carrier, allowing you to help them select the carrier most likely to offer favorable underwriting. Plus, since you’re supplementing existing group coverage, the client will need less total individual coverage, which creates smaller premiums for them to pay.
And unlike a group benefit, the income from a claim on an individual policy is tax free. Having the additional income can alleviate some of the stress of being disabled and allow them to focus on getting back to life.
When used together with group coverage, an IDI policy can be the difference between financial stability and barely (or almost) making ends meet in the case of an illness or injury.
Social Security Disability
If your clients bring up Social Security as a fallback option for disability insurance, make sure they truly understand what they’re getting into. The approval rate for a Social Security Disability claim is low – only around 35% of initial claims each year are approved. Often, people seeking disability relief under Social Security face multiple denials and end up hiring legal representation to facilitate their claim.
Make sure that your client is aware of what Social Security DI does and does not cover.
Here are some things you can do to make it hit home:
- Have your clients check their personal Social Security benefits online
- Make sure they are aware of the steps necessary to be approved for Social Security Disability, as well as the wait time associated with a claim
- Compare SSDI to an individual DI policy – definitions and benefits
Designing a plan
Anyone in your client base who works for a living needs disability insurance. Help clients prepare by getting them to think about how a disability would truly affect them. Then, review the coverage they already have and see if there are opportunities to supplement it with an individual policy.
Your clients may have other questions about coverage – don’t feel like you have to be an expert on DI products. You might not be able to solve your client’s DI needs in one meeting. That’s ok. It’s why we’re here and you can always schedule a time to talk with me.
Assuming your clients are covered isn’t going to do them any favors. But by taking the time to discuss the full picture you can change the way they — and you — think about DI.