Why You May Need Disability Insurance — Even if You Are Approaching Retirement
18:39 Share

Hey everyone, really quick before we start the show, the reason I do this podcast is because I'm on a personal mission to improve the financial lives of as many people as possible. I've spent well over 30,000 hours of my life studying financial planning, and since they're just

Thank you so much for joining us.

One, share this podcast with a friend who you think would benefit from this information. And then two, if you're on an iPhone, just quickly hit pause and leave an honest review in the Apple podcast app. Thanks so much in advance for your help and support. Now on to today's show.

Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today we are talking about disability insurance. More importantly, I'm going to be talking about why you need disability insurance, even if you're getting close to retirement. Today, you're going to walk away with three main things. One, a simple explanation of what disability insurance is. Two, a simple explanation of what disability insurance is.

Two, the reasons why you might need a disability insurance policy even if you're on the eve of retirement. And then three, how to buy a disability insurance and avoid getting ripped off. For all the resources, links, and show notes for this episode, you can go to youstaywealthy.com forward slash 44. Okay, let's go protect our assets. Yeah, let's go protect our assets. ♪

In its most basic form, disability insurance replaces a portion of your income. And in the best case scenarios, this insurance could replace as much as 66% of your income, but I just want you to know that you can never replace 100%. So this insurance is just a supplement.

At my firm, we like to call disability insurance paycheck insurance because disability insurance replaces a portion of your paycheck in the event that you are too ill or too injured to work for a long period of time. Now, if you're approaching retirement, you might immediately wonder why you would need to replace your paycheck for a long period of time. If you're just going to retire in two or three or four years,

Perhaps you would just retire now if something unexpected happens. Whether or not you need a disability insurance when you get close to retirement really depends on three things, and we're going to zone in on these three things today. Number one, how much money you plan to save over the rest of your working career towards retirement.

That's number one. Number two, the size of that future savings compared to your existing nest egg. So how much you're going to save over the next, let's say three years versus how much you already have saved. And then three, your spending habits.

In short, if you have a big nest egg, if you've saved a lot of money for retirement and you really don't see yourself saving much more money in the next few years, then a disability insurance policy really might not make a whole lot of sense for you. However, the average 401k account balance for people age 50 to 59 is only $160,000 according to a study from Fidelity.

So given that data, most Americans simply don't have the luxury of just ignoring the possibility of a long-term illness or a long-term injury as they get closer to retirement. And in case you're wondering, the average 401k balance for people age 60 to 69 really isn't that much better. Fidelity says it's around $182,000. So

If you're like most Americans and you're behind the eight ball with your retirement savings and you're not backed by a pension or something similar, you really need to make these final working years count. You need to earn and save as much as possible so that you can get caught up.

If that sounds like you and you feel like you need to save more money for retirement, a long-term disability insurance policy is going to be really, really important. Even if you think you're going to hang it up in a few years, you need to protect your income in a chance something happens to you. A long-term illness or a freak accident could absolutely crush your retirement plan if you don't make sure that your income is protected properly.

Now, even if you've managed to create a nice big nest egg for retirement, you've been a good saver. And on paper, it looks like you've saved a lot of money. You're not completely off the hook here. And I want to share a story with you. Recently, I was working with an engineer and he received a very large windfall. Now, outside of this recent windfall that he got, he had fairly limited savings. He hadn't really done a great job saving for retirement. So he

this newfound money was going to be earmarked for retirement. So he was excited. Now, although he had seven figures to his name from this windfall, which could easily provide a pretty good retirement for most of us, he had really, really terrible spending habits. And when we crunched the numbers, we figured out that this newfound money, even though again, it's a nice six-figure or seven-figure check,

We crunched the numbers and figured out it really wasn't going to last him long if he maintains his current lifestyle into retirement. His spending rate meant he would just blow through this new money really quickly if he were to go ahead and retire today.

For this gentleman, you might be thinking, well, the simple solution is just, why doesn't he just spend less money? Why doesn't he just change his lifestyle a little bit? And while that sounds simple and it definitely is a solution, it can be extremely challenging for people to change their habits this late in life.

especially if it would impact their perceived quality of life. Maybe you don't think this person needs a two-story, 5,000 square foot home, but that's what he thinks he needs. That's what he's used to living in. And for him to just change that overnight is really, really challenging. You might've heard me say on past episodes, our behaviors and attitudes towards money are formed as early as age seven. Like that's when we're learning this stuff. And, you know, obviously a lot of it comes from our parents. So

changing your spending behavior or investment behavior or any of this stuff at age 55 or 60 is extremely challenging and extremely rare. We kind of just are who we are at that point. So

In the absence of a really solid financial plan and probably a really good professional in the picture to hold this gentleman accountable to track and decrease his expenses, a long-term disability policy is pretty much a must for this individual because he simply can't afford not to have the income that he's used to having.

So for obvious reasons, and for all the reasons I just mentioned, we suggested that this client purchase a long-term disability insurance policy while he continues to work and save more money for retirement.

So even if you've managed to save a good chunk of money for retirement, on paper, it looks like you've done a really good job. It really is important to take a close look at your spending habits to make sure that you can maintain your current lifestyle or at least something close to it through the end of your life. If spending is going to be an ongoing challenge for you, a long-term disability insurance policy is going to be really, really important in your final working years.

If you're listening to this and you're in agreement that a disability insurance policy makes sense for you or might make sense for you, it's possible that you think you're already properly covered through your employer. A lot of people tell us, well, I already have a long-term disability insurance through my company. They pay for it. They provide it. However, most employer-provided disability insurance plans just simply aren't sufficient. So I just want you to know that, that most employer plans aren't enough.

Sometimes they cover less than half of your income, which definitely isn't enough. However, even if your employer allows you to buy additional protection, which is really common in employer plans, they'll say, hey, we'll give you 40%, but you can buy up to 60%. So that's really common. But even if they allow you to do that, most company policies have what's called an own occupation definition of only two years. Now,

Now, this is an issue. And I want to explain with a very, very hypothetical example why this is an issue. So let's say that I'm an accountant at a big corporate accounting firm. And in my spare time, I like to practice juggling chainsaws. Yes, chainsaws. Just stay with me here.

During one of my chainsaw juggling performances that I'm doing on the side, I injure my hands, go figure. And without working hands, I can't use the number pad on my keyboard anymore. And therefore I can't do my job as an accountant. I'm still in good spirits though, because I remember that I have an employer provided disability insurance policy. And this policy kicks in after 180 days.

My normal salary, just to keep things simple, let's just say is $100,000 per year. And since I was smart and I purchased the additional protection, they pay me $60,000 or 60% of my paycheck, which is something I can survive on. I'm used to 100,000, but I'm injured. I'm probably not doing much. So $60,000 is something that I can survive on. But this is where things get really interesting.

Two years later, my benefits just end. They end. And they end because of the own occupation definition in my employer policy that only covers two years. And again, most employer policies that I look at have the same definition that only covers for two years.

After two years, this own occupation definition states that I have to prove that I can't perform any job, not just my job as an accountant, but any job. So I might not be able to be an accountant because I can't use my hands and I can't crunch the numbers, but maybe I could find work as, let's say, a door greeter at Walmart since I don't need my working hands to do that job.

If that's the case, then I can perform a job, any job. I'm able to be a door greeter. And if that's the case, my company would turn off my disability insurance after those two years. And I would now be earning the salary of a door greeter, which is fine, but it doesn't come anywhere close to my six-figure salary as an accountant that I've been so used to. Not only am I going to have a tough time surviving on this new income, but

But now my retirement is truly in jeopardy because I don't have any extra income to save for retirement.

And because most employer-provided policies I see have this issue, it's really, really, really important to supplement your policy with a private insurance policy to make sure that you have really good protection. And you can shop for private long-term disability insurance policies anywhere you choose, but you can look at sites online like Policy Genius. There's a bunch of them, but that's just one to consider. You can also shop with a local financial professional or insurance agent that you trust.

Now, a few things when you go out shopping for disability insurance. First, I want you to make sure that you look up the ratings at a company called AM Best. AM Best is a ratings company. Look up the rating of the insurance company that you're considering and avoid any insurance company with a credit rating below A.

I also want to make sure that you shop around with at least three different companies. So maybe there's a financial professional in your town or an insurance agent in your town that you really trust. And that's great. And you can get one quote from them. And yes, I know they're going to shop a bunch of different companies. That's fine, but go to them. They're one, but I also want you to go to two other people or two other places to get some additional quotes. So

make sure you shop around with at least three different people or three different companies. And when you're getting this quote, when you're requesting a quote for disability insurance policy, I'm going to give you some features that you're going to want to ask for to make sure that you're properly covered. And there's, let's see, there's six of them. So maybe you're driving or working out or something right now, and you don't have time to write them down. They are really important. So I'm going to link to them in the show notes and

These are the features that you're going to want to ask for when you're getting this disability insurance quote, this long-term disability insurance policy quote. The first is, we just talked about it, an own occupation definition that doesn't change, right? We don't want it to end after two years or change after two years. So number one is we want an own occupation definition that doesn't change.

Number two, we want a cost of living adjustments so that our payments from the insurance company increase with inflation. A dollar today is not a dollar tomorrow. So we want to make sure there's a cost of living adjustment that's part of that disability insurance policy. Number three, we want benefit coverage up to age 65. So make sure you look for that number and ask for that feature.

Number four, we want it to be a non-cancelable contract. Sometimes the insurance companies have the option to cancel the contract. We don't want that. We want a non-cancelable contract.

Number five, we want the biggest and longest deductible you can afford. So if you have a really nice rainy day fund, you have cash set aside and you can afford a high deductible and you can afford to wait maybe longer than 180 days. Maybe you can wait 360 days until your disability insurance policy kicks in because you have this cash savings on the side.

you can afford to increase that. And by doing that, you're going to have a lower premium. So depending on how much cash savings you have, you may be able to extend the time in which your policy kicks in. Again, my example was 180 days, but you can push it out to 360 days, meaning you have to wait 360 days for your disability insurance policy to kick in. And again, that will lower your premium.

And then lastly, a feature that is a partial disability provision. And this is so that you can work part-time and still receive your benefits. That's called a partial disability provision. And again, these are six features that I think are really important. So when you go out shopping for disability insurance, make sure you ask for these six features or at least talk about them with your insurance agent or the company that you're shopping with. So again, I'll link to all those in the show notes with some additional resources and

And then lastly, when you're shopping for a disability insurance policy or really any insurance policy for that matter, you may be offered certain extras. And these extras are often called riders in the insurance world. So riders, if you hear the term riders,

Your light bulb should be going off and say, okay, I better watch out here. Some extras are great, like that own occupation definition I spoke about, but others are a complete waste of money. And this is how insurance companies make a lot of money by convincing you that you need a rider like a retirement savings feature. You don't need a retirement savings feature added onto your long-term disability insurance policy.

So when working with an insurance agent or company to purchase this disability insurance policy, make sure that that agent understands exactly what you want from that policy. And again, you can use that list of features as a starting point. And then you're going to need to carefully review these proposals. Don't just take their word for it because again, they will sneak in these extras, these writers in there to make a little bit extra money. So

Tell them what you want, get your quote, and then make sure you review the policy proposals. Now, I can't tell you how many times we've requested to review the full policy proposal and they'll send us a two or three page snapshot. That's not what you want. You want the full policy. You want to read the fine print and make sure that there are no extra writers in there that you don't need because that's going to increase the cost of insurance.

Because disability insurance is so important, we've talked at length today about why it's important, it can be rather expensive. It's not cheap. It's not term life insurance. So we want to do everything we can to make sure we're fully protected, but also make sure we're not overpaying for this important insurance.

When in doubt, make sure that you're working with someone that doesn't earn commissions for selling insurance. If they earn commission selling insurance, the more you purchase, the higher your premium, the more money they're going to make. So there's a huge conflict of interest there. In the show notes, which you can find at youstaywealthy.com forward slash 44, you'll

In the show notes, I will link to a few resources for you to find a professional that doesn't work on commissions and they can guide you through this process and get rid of that potential conflict of interest.

If you have any questions or you need additional guidance with disability insurance or any financial planning topic for that matter, go ahead and shoot me an email at podcast at youstaywealthy.com. I promise I read and respond to every email. So let me know if there's anything bothering you, anything keeping you up at night. If there's something I didn't cover today with regards to disability insurance, just let me know and I can tackle it in a future episode or just respond to you personally.

Thank you as always for listening and I'll see you back here in two weeks.

Hey, it's me again. I just wanted to say thank you one more time for listening and remind you to please, please, please leave a quick review. If you're on an iPhone, leave a quick review on iTunes. If you're enjoying the show, I'm getting great feedback from listeners just like you. And I really want to keep the momentum going. So if you have a chance on your iPhone, leave a quick review on the Apple podcast app. And thank you so much in advance for all of your help and support.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪