RPF0339-LTD_vs_STD_Benefit_Elimination_Periods_etc.
00:00:00.000 | Today on Radical Personal Finance, we continue our disability insurance series.
00:00:04.760 | We're going to talk about why is it so hard to compare disability insurance policies.
00:00:09.240 | Also, should you buy long-term disability or short-term disability?
00:00:12.600 | We're going to talk about benefit periods, elimination periods, and continuance provisions
00:00:18.000 | such as non-cancellable and guaranteed renewable policies.
00:00:22.640 | Exciting stuff on today's show, if you're a nerd who cares about spending your money
00:00:27.640 | wisely.
00:00:28.640 | Welcome to the Radical Personal Finance podcast, the show dedicated to providing you with the
00:00:48.640 | knowledge, skills, insight, and encouragement you need to live a rich and meaningful life
00:00:53.720 | now while building a plan for financial freedom in 10 years or less.
00:00:57.120 | My name is Joshua Sheets and I'm your host.
00:00:59.140 | And today I try to equip you with some very important financial knowledge so that you
00:01:04.720 | can protect yourself with disability insurance and not get taken to the cleaners in the process.
00:01:16.960 | The last episode in this series, we talked about why disability insurance is important.
00:01:20.920 | I gave you my sales job on it.
00:01:22.880 | I heard, I just got a note on Twitter from one listener that said, "All right, Joshua,
00:01:26.720 | you convinced me."
00:01:27.720 | So at least I convinced one person to go ahead and consider buying disability insurance and
00:01:32.640 | that makes me very happy.
00:01:34.200 | So I'm happy about that.
00:01:35.200 | So I've convinced you, hopefully, at least some of you to consider it, but now I've got
00:01:39.360 | to equip you with the knowledge to be able to make a good decision for that.
00:01:46.040 | And this is one of the more challenging areas of insurance to teach on because there is
00:01:51.120 | so much variability in the product line and there's so much variation between different
00:01:57.200 | companies, between different policies, et cetera.
00:02:00.640 | And this is going to be one of the areas where you will need somebody knowledgeable in your
00:02:05.520 | camp, which is a convenient time for me to do today's ad, which is Paladin Registry.
00:02:11.320 | Paladin Registry is a registry service for financial advisors.
00:02:14.080 | I went and found them when I was looking to figure out where can I send you guys who are
00:02:18.200 | looking for financial advisors, where can I send you to at least get a start and have
00:02:22.520 | a hope of finding somebody who's competent and who's caring and who is hopefully honest
00:02:28.200 | and will deal with you forthrightly.
00:02:30.680 | The best place that I found so far is RadicalPersonalFinance.com/Paladin.
00:02:34.720 | It's in a relationship I set up with Paladin Registry.
00:02:38.080 | Paladin Registry is a financial advisor referral service set up by their founder, Jack Waymire,
00:02:43.040 | who was frustrated with the same thing I was frustrated with.
00:02:45.360 | How can we vet financial advisors?
00:02:47.600 | So they went through and they developed a point of vetting financial advisors, checking
00:02:51.640 | their backgrounds, checking their qualifications, checking their work history, checking their
00:02:55.240 | disciplinary actions, et cetera.
00:02:57.680 | And only advisors who get through that rigorous screening process are listed in the registry
00:03:01.520 | service.
00:03:02.520 | So if you're looking for a financial advisor, consider going to RadicalPersonalFinance.com/Paladin.
00:03:07.040 | That link will auto-forward you through to a landing page where you'll put in your name,
00:03:10.840 | your address, your phone number, the amount of assets that you have, and any other pertinent
00:03:15.520 | information to the areas that you're interested in.
00:03:18.120 | Paladin will take that information and they will filter it to find an appropriate advisor
00:03:22.080 | for you.
00:03:23.080 | If you've got $100,000, they won't send you to an advisor who has a million dollar minimum.
00:03:26.920 | If you've got $5 million, they won't send you to an advisor who's only got a $100,000
00:03:31.400 | minimum.
00:03:32.400 | So they will filter that through appropriately and they'll put you in touch with a couple
00:03:36.200 | or three good advisors in your area that you can start with.
00:03:38.960 | I can't promise you two things.
00:03:40.200 | I can't promise you you're going to find a great financial advisor there, but I can promise
00:03:44.080 | you it's a good place to start your search and interview those advisors.
00:03:48.600 | A good interview with a financial advisor should be like a job interview.
00:03:51.680 | You're interviewing them to do a job for you.
00:03:53.600 | So interview them, ask them your questions, and see if they might be a good fit.
00:03:57.640 | The second thing I can't promise is that they're going to be experts in disability insurance.
00:04:01.100 | They might not.
00:04:02.100 | And this is leading us right into the very first point on my outline here, which is why
00:04:05.680 | it's so hard to work and find and compare work in the areas of disability insurance.
00:04:11.040 | It is tough, and as I said in the last show on this topic, many advisors just walk away
00:04:15.320 | from it.
00:04:16.320 | They throw up their hands.
00:04:17.320 | I've had multiple advisors who told me to my face and just kind of professional content,
00:04:20.680 | I just don't even bother talking about disability insurance anymore.
00:04:23.000 | It's too hard to sell.
00:04:24.480 | Nobody wants to buy it.
00:04:25.480 | They don't understand it, et cetera.
00:04:26.480 | So I don't even bother to talk about it.
00:04:28.200 | Well, in my mind, that's a breach of duty.
00:04:30.400 | It's a breach of professional duty.
00:04:32.520 | I think it's a breach of professional duty if a financial advisor who's working with
00:04:37.040 | a family who needs disability insurance and doesn't at least work very diligently to
00:04:40.960 | get them to buy it first before anything else for the reasons I articulated in the last
00:04:45.280 | show in this series.
00:04:46.920 | But it's also just – well, but it's a reality.
00:04:51.640 | Comparing disability insurance is hard and that's one of the reasons why you don't
00:04:55.200 | hear it discussed either with advisors or even in a public format like today.
00:05:00.240 | Tell me when the last time you heard an in-depth discussion of disability insurance on a financial
00:05:06.720 | radio show or a financial podcast of any kind.
00:05:10.520 | I've never heard it that I know of.
00:05:13.560 | The deepest it goes is maybe should you buy long-term disability or short-term disability
00:05:17.000 | insurance.
00:05:18.120 | But that's just scratching the surface of the options and it is tough and that's again
00:05:24.700 | why we don't hear it discussed.
00:05:26.200 | Today's show is going to go right over the heads of many of you and I don't think necessarily
00:05:29.680 | you need to grasp all of this information.
00:05:31.560 | But I'm going to do my best to keep it simple so you at least can develop an understanding
00:05:35.680 | of the vocabulary.
00:05:37.520 | So when you're working with an insurance agent, you can feel a little bit more confident
00:05:40.640 | in understanding the presentation that's being made to you.
00:05:43.880 | The first thing to start with is vocabulary in any area of learning.
00:05:49.040 | If you look at the historical model of learning, which is most popular, it's not the only
00:05:53.640 | model but the most popular one is expressed in the classical trivium, which was the idea
00:05:59.280 | of grammar, logic and rhetoric.
00:06:00.840 | The first stage of learning is grammar, is learning the grammar of a subject.
00:06:05.080 | So today's show, that's essentially what we're doing.
00:06:06.680 | I'm going to teach you the grammar of disability insurance and I hope that it will be helpful
00:06:12.080 | to you.
00:06:13.080 | But it's tough to compare among – it's tough to compare among companies because there
00:06:20.960 | is such a variation of products.
00:06:24.160 | It's also tough because there's a variation of the internal policies and everything is
00:06:31.040 | based in a disability contract upon the actual contract.
00:06:35.080 | There are some standardized products that fit – that you can compare things like prices
00:06:41.120 | among.
00:06:42.120 | But even those, if you brought me a disability policy and I wanted to beat it on price, I
00:06:46.360 | could beat it on price almost every time and you might never know the option that I changed
00:06:50.900 | internal to the contract unless I told you, unless you read the contract.
00:06:55.080 | And since unfortunately people don't read insurance contracts, you would probably never
00:06:59.040 | know.
00:07:00.520 | So it's just challenging to adjust among these things.
00:07:04.640 | I'm going to talk – I could talk in the future about many different types of products.
00:07:09.360 | But today, we're just talking about individual disability insurance, individual disability
00:07:14.500 | insurance.
00:07:16.040 | And the reason I'm talking about why it's so hard to compare is to demonstrate to you
00:07:20.120 | that you can't just shop based on price.
00:07:22.100 | In the life insurance marketplace, if you're going to shop for 20-year term and you're
00:07:26.240 | going to shop that with other companies for 20-year term, 20-year term, 20-year level
00:07:30.760 | term is pretty much the same at most companies.
00:07:33.840 | You can have a few riders, a few benefits change.
00:07:36.040 | You can add a little something here, take a little something away.
00:07:38.320 | I've covered that in previous life insurance episodes.
00:07:41.920 | But 20-year term is 20-year term.
00:07:44.040 | It's a pretty standardized product.
00:07:47.040 | But individual disability is not individual disability across the market.
00:07:50.240 | It's all of these things, which makes it very difficult to compare companies and prices
00:07:56.040 | and policies.
00:07:57.040 | But let's start with the biggest question that I usually hear.
00:07:59.760 | "Joshua, should I buy long-term disability insurance or should I buy short-term disability
00:08:05.320 | insurance?"
00:08:06.440 | This is one of those words that many people have heard about and this is one of the debates
00:08:10.640 | that does happen to a small degree in the personal finance world, long-term disability
00:08:15.240 | versus short-term disability.
00:08:17.880 | So let me explain what these are.
00:08:19.240 | A long-term disability insurance policy is a policy that will pay you money over the
00:08:25.600 | long term if you're disabled for a long time.
00:08:32.080 | A short-term disability insurance policy is a policy that will pay you money for a short
00:08:37.560 | time if you're disabled for a short time or if you're disabled for a long time.
00:08:42.960 | It will just only pay you in the beginning.
00:08:45.400 | That's how it works.
00:08:46.400 | Now, the first thing you need to understand about this is that the shorter the period
00:08:50.320 | of time that you're measuring for disability, the more likely the disability is.
00:08:58.000 | Almost all of you listening to this show will have had at some point in your work life a
00:09:04.960 | day in which you couldn't work or at the very least an afternoon in which you couldn't work.
00:09:10.520 | Perhaps you had a headache.
00:09:11.760 | Perhaps you started throwing up at 11 o'clock in the morning at the office and you got in
00:09:15.080 | your car and you stumbled home and you went to bed.
00:09:16.800 | Now, you may have been better the next day, but almost everyone in the audience has experienced
00:09:21.360 | at least an afternoon off of work or a day off of work.
00:09:27.120 | I don't know if it's 100%, but I would feel pretty confident that it's close to 100% of
00:09:32.400 | people have experienced this.
00:09:34.240 | What you can see in my example that if you've had a day off of work due to sickness, you're
00:09:39.280 | thus disabled because of your sickness.
00:09:41.240 | You're not able to do your work.
00:09:42.640 | You're disabled.
00:09:45.040 | You have been disabled at some point in the past.
00:09:48.960 | So it's very likely that at some point in the future, you will be disabled and not able
00:09:53.800 | to complete a day of work.
00:09:56.480 | That's very likely.
00:09:58.280 | Now, if we extended that period out a little bit, say from one day of missed work due to
00:10:05.200 | sickness or injury to one week of missed work due to sickness or injury, there would still
00:10:11.080 | be many of you who have experienced that, but it would quickly drop down from 100%.
00:10:20.000 | Many of us have been out of work for a week or close to it.
00:10:23.440 | Perhaps we were out of work for a week if it was close to Memorial Day or Labor Day,
00:10:27.680 | but the point is that the percentage of people who've experienced that has dropped down,
00:10:33.680 | but it's still pretty high.
00:10:35.640 | And you can most likely concede to me the point that it's pretty likely that at some
00:10:40.360 | point in the future, something will happen that will knock you on your back for a week.
00:10:47.000 | Thus the probability is high.
00:10:49.560 | If we extended that out to a month, the numbers would drop dramatically.
00:10:54.960 | Far fewer of you have been disabled for a month.
00:10:57.000 | I've never been disabled for a month and far fewer of you ever have and far fewer of you
00:11:02.080 | ever will.
00:11:04.600 | If we drop it or extend it out to three months, now the numbers plummet even more.
00:11:09.280 | If we extend it out to a year, the numbers plummet even more.
00:11:12.760 | If we extend it out to five years or 10 years of disability, the numbers plummet even more.
00:11:18.720 | And so the shorter the amount of time of disability, the likelier it is that you'll be disabled.
00:11:24.320 | The longer the time of disability, the less likely it is that you'll be disabled.
00:11:28.640 | Now to compare likelihoods, just consider your own personal experience.
00:11:32.360 | I dare say that most of us know at least somebody who's been permanently and totally disabled.
00:11:39.720 | Or if you don't know them, you know of them.
00:11:43.240 | One simple example, just consider people with learning disabilities.
00:11:46.240 | Consider people who have lifelong conditions like Down syndrome or some other similar thing.
00:11:51.620 | Consider people that you know who may be struggling with muscular dystrophy or consider somebody
00:11:56.320 | that you know who may have had a back injury and had to change their job.
00:12:01.040 | All of those things count as disabilities.
00:12:04.720 | But still, it's much less likely that you'll be disabled for a year than that you'll be
00:12:08.240 | disabled for a day.
00:12:10.560 | Now should we buy insurance for that?
00:12:12.840 | Well here's where we go to the significance of the disability.
00:12:17.280 | If you were out of work for an afternoon, would that impact your financial situation
00:12:23.240 | seriously?
00:12:24.760 | The answer is no, only at the most basic of employment levels where people are working
00:12:31.960 | a minimum wage job and they're stretched to the max does an afternoon of missed work
00:12:37.320 | spell the difference between being current on a bill or being late on a bill.
00:12:41.440 | Most employers, especially many of you listening who are in salaried positions, most employers
00:12:45.560 | will not even acknowledge the absence.
00:12:48.760 | Now some employers will.
00:12:50.120 | A day of missed work for many people is not a big deal.
00:12:53.160 | Again, it's only at the most basic poor levels of society at which a day of missed work is
00:12:58.600 | going to upset a financial plan.
00:13:01.880 | If you go out to a week, some people can absorb a week of missed work and missed pay.
00:13:07.800 | Some people can absorb a couple weeks and some people could absorb a few months.
00:13:12.160 | When you start to go out beyond a few weeks or a few months, the ability to absorb the
00:13:17.680 | financial impact of the disability is much more difficult.
00:13:26.680 | Whether that's because of the challenge of having a year's worth of savings, most US
00:13:34.160 | Americans can't put together four or five hundred bucks for an emergency.
00:13:37.080 | I can't remember.
00:13:38.080 | I was reading some of the numbers that came out recently.
00:13:40.320 | I think it was from the Federal Reserve.
00:13:41.840 | They're talking about, what's it, 40% or 40% or 50% of US Americans can't put their hands
00:13:47.180 | on a thousand bucks.
00:13:48.680 | Just did a quick web search to try to clarify that.
00:13:55.520 | I guess some of the news articles, it looks like 62% of Americans have less than a thousand
00:13:59.200 | dollars in their checking and savings accounts.
00:14:01.280 | So a couple of stories and ways to spin that data.
00:14:04.800 | Let's just keep it simple.
00:14:06.360 | So the majority of US Americans don't have a thousand dollars.
00:14:08.800 | Well, in that kind of situation, if you miss a few weeks of work, it's pretty tough and
00:14:12.640 | it leads to missed payments, bounced checks, etc.
00:14:16.680 | So that can be very, very challenging for many people.
00:14:20.380 | But even in these shorter periods of time, there are other systems of support.
00:14:25.080 | Family and friends, church groups contribute money, will help out.
00:14:29.880 | So these shorter amounts of disability, shorter time periods of disability, there is an ability
00:14:35.360 | to work through them.
00:14:37.280 | Much harder to work through a year.
00:14:40.160 | People's charity and their ability to help is often stretched thin the longer it goes.
00:14:48.080 | So when looking at long-term disability versus short-term disability, I think it's important
00:14:51.400 | to have a practical perspective on this.
00:14:54.560 | Usually short-term disability is defined as a disability that lasts anywhere from a week
00:14:59.720 | or two weeks up through a few months, three months, although it could go as long as a
00:15:05.120 | year.
00:15:06.260 | So anywhere from this couple weeks to three months is usually considered to be a short-term
00:15:10.800 | disability.
00:15:12.680 | Long-term disability is usually considered to be from three months out through as long
00:15:17.360 | as perhaps age 65 or age 70.
00:15:21.360 | Used to be able to get a lifetime disability insurance policy where if you got disabled,
00:15:24.580 | you would get a benefit for life.
00:15:26.420 | Now most of the – that's no longer available to my knowledge.
00:15:30.200 | Has not been available for many years.
00:15:31.520 | It went away a decade or two ago.
00:15:33.760 | And now the latest you can go is usually through about age 70.
00:15:37.080 | Many policies are renewable until 65 and conditionally renewable until 70 as long as you're still
00:15:42.240 | employed with limited periods.
00:15:44.040 | I'll cover conditional renewability toward the end of today's show.
00:15:47.520 | So disability – that's the difference between the short-term disability and long-term disability.
00:15:53.020 | Now let's put our thinking hat on for a moment and let's not make any blanket statements
00:15:56.780 | about whether you should buy one or shouldn't buy another.
00:16:00.160 | And let's think about who should buy one and who should buy another.
00:16:05.460 | But first, we got to talk about premiums.
00:16:08.120 | The total benefit that you can get from a short-term disability policy is relatively
00:16:14.440 | small but the likelihood of using it is relatively high.
00:16:23.040 | So let's assume that you are going to get a policy that pays you after two weeks and
00:16:27.380 | pays you out through a total of three months of disability.
00:16:31.040 | Well if your policy is going to pay you say $3,000 for three months, the total maximum
00:16:36.920 | benefit from the policy is $9,000.
00:16:39.760 | That's a relatively small risk for the insurance company.
00:16:47.360 | Thus, the price of short-term disability insurance policies is usually relatively low.
00:16:57.360 | The biggest player in this space is Aflac, the little duck.
00:17:01.000 | You've all seen their commercials.
00:17:03.000 | Many of you at your workplace have the opportunity to participate in a short-term disability
00:17:07.700 | insurance program with Aflac or with another company that your company has engaged with.
00:17:13.780 | Usually these policies cost anywhere from a few dollars to a couple dozen dollars a
00:17:17.880 | month, relatively low premiums.
00:17:23.280 | But the major reason the premiums are so low is because the total maximum benefit is relatively
00:17:30.720 | low.
00:17:33.400 | If you actually consider the cost of insurance, because it's so likely that many people will
00:17:39.200 | be out of work for a couple of weeks due to a sickness or injury, because that's so likely,
00:17:47.780 | the risk of needing it is relatively high.
00:17:50.400 | And so the cost of insurance is relatively high when compared to the actual benefit received
00:17:58.040 | because the likelihood of needing it is high.
00:17:59.680 | I hope this is clear.
00:18:01.140 | Let me flip it and talk about long-term disability insurance.
00:18:04.640 | Long-term disability insurance, the potential maximum benefit for most people who are buying
00:18:09.800 | a long-term policy is generally pretty high.
00:18:15.480 | If we just simply calculated here the – let's just even skip an inflation benefit.
00:18:22.520 | Let's just say you have a benefit for $4,000 a month.
00:18:25.600 | You're a 35-year-old worker and you've got a 30-year benefit period.
00:18:29.040 | So we can do 4,000 times 12 months a year times 30 years.
00:18:33.600 | Even if you didn't have an inflation rider on your policy that would allow the benefit
00:18:37.960 | to go up over time, that would be a total benefit of $1,440,000, $1.4 million.
00:18:49.600 | So the total maximum benefit available to you, the total maximum value of the policy
00:18:55.440 | of $1.4 million is very high, especially as compared to our $9,000 short-term disability
00:19:02.160 | policy.
00:19:03.740 | But the likelihood of your collecting on it is relatively low because the likelihood of
00:19:10.840 | being disabled for more than three months and being disabled up through – totally
00:19:15.360 | disabled for the rest of your career from 35 to 65, that's really low.
00:19:21.840 | So when you actually look at premiums, the challenge you face is figuring out what's
00:19:27.120 | a good financial move and what's not.
00:19:29.520 | Short-term disability policies will cost you anywhere from a few dollars a month to a couple
00:19:34.480 | dozen dollars a month.
00:19:37.040 | Long-term disability policies will usually be in excess of $100 a month, anywhere from
00:19:42.160 | $100 a month to a few hundred dollars a month.
00:19:45.600 | For some people, it could be up over a thousand or multiple thousands.
00:19:49.180 | But there we're dealing in the world of $25,000 benefit policies a month.
00:19:53.320 | We're dealing in the world of high-income professionals.
00:19:56.180 | So for the most of you, it would be in that middle range of anywhere from under $100 to
00:20:00.920 | a couple hundred dollars a month.
00:20:03.520 | So the challenge that you face is that people easily and quickly jump to buying short-term
00:20:09.600 | disability almost as a – well, sure, I'll go ahead and take this because they can conceive
00:20:15.360 | of being out of work for a month and because it's only a few dollars a month.
00:20:21.120 | But I consider short-term disability insurance to be very high-priced.
00:20:26.620 | And people will usually be slow to buy long-term disability insurance policy because it's
00:20:31.660 | going to be a couple hundred dollars a month.
00:20:33.700 | But I consider it to be very low-priced when compared to the maximum benefit and when compared
00:20:39.320 | to the problem.
00:20:41.760 | So let's talk about the problem of a short-term disability.
00:20:44.460 | You're out of work for a month.
00:20:45.460 | You have no insurance.
00:20:48.340 | Problem is there, but for most people, it's relatively low.
00:20:53.420 | You can get through being disabled for a month even if you don't have much money.
00:20:57.820 | You can put some payments on a credit card.
00:21:00.820 | You can borrow money from friends or family.
00:21:03.320 | You can rely on the charity of friends or family.
00:21:06.900 | You can just simply eat up all the food in your pantry and be late on a few bills and
00:21:10.860 | try to catch up in the future.
00:21:13.100 | Now can that be very difficult?
00:21:14.900 | Yes.
00:21:15.900 | I'm not saying it can't be difficult on a household.
00:21:18.100 | I am saying that compared to the problem of being disabled for five years, it's a minor
00:21:23.380 | inconvenience.
00:21:25.220 | So I would much rather people work and prepare for a long-term disability insurance policy
00:21:30.420 | – excuse me, for a long-term disability event because that's the catastrophic event
00:21:35.060 | versus the short-term.
00:21:36.860 | In general, I would recommend to people that they buy long-term disability insurance.
00:21:41.380 | Now should they also buy short-term disability?
00:21:44.300 | I think it's worth considering for those people who are living paycheck to paycheck
00:21:47.980 | and who don't have an emergency fund of any type, especially in things where – I
00:21:52.820 | mean Aflac does huge business.
00:21:54.980 | Places where people are in the construction industry, places where people are in very
00:21:59.780 | basic jobs.
00:22:01.260 | You're making $13 an hour, making $13 an hour living paycheck to paycheck.
00:22:06.860 | Well, here a short-term disability event can be very difficult.
00:22:10.180 | To allocate $20 a month towards a disability policy that if you hurt your – break your
00:22:15.820 | leg or something and you're out of work for a couple of months will pay out, that
00:22:18.900 | could be a very wise move.
00:22:22.340 | But it probably shouldn't be the first thing.
00:22:26.460 | And again, you come into this challenge of how much money is actually available.
00:22:29.300 | Does the person making $26,000 a year earning $13 an hour, can they actually go ahead and
00:22:35.300 | allocate $100 a month towards a long-term disability policy?
00:22:39.660 | Hard to say.
00:22:40.660 | So I'm not opposed to either one.
00:22:43.660 | I consider long-term disability to be the more important one for most of you who can
00:22:49.020 | save and already have saved a few thousand dollars or a few months of expenses.
00:22:53.900 | Long-term disability is the major hole.
00:22:56.060 | And if I were starting off with nothing, I would probably buy a short-term disability
00:23:00.060 | policy until I got to the point of establishing myself and building up 10 or 15 or $20,000
00:23:06.900 | in the bank.
00:23:07.900 | But I just wouldn't plan on that being the major impact.
00:23:14.300 | It's a real tension here because you've got to make a guess on things that are ultimately
00:23:20.220 | unknowable.
00:23:22.020 | If being out of work for a month would sink you, probably go ahead and buy a short-term
00:23:27.260 | disability if it's available to you at your job or if it's offered to you as a benefit
00:23:32.380 | because you can pretty easily budget the $20.
00:23:35.280 | But make it a goal to get the long-term disability as quickly as you can, as quickly as you can
00:23:39.100 | budget for it and make it happen because that's the truly catastrophic event.
00:23:43.500 | And then make it also a goal to, for the sake of efficiency, self-insure through a short-term
00:23:49.540 | disability need.
00:23:51.060 | So once you have comfortably established yourself, you're building up your reserves, you're building
00:23:55.460 | up and you've got 10, 15, $20,000 in your emergency fund, then go ahead and consider
00:24:00.540 | dropping the short-term disability.
00:24:02.860 | Because relatively speaking, the price of the insurance is compared to the benefit,
00:24:07.520 | $9,000 and you're paying $30 a month for a $9,000 benefit, that can be a relatively high
00:24:14.720 | cost of insurance.
00:24:16.280 | And a good rule of thumb for running our financial lives is to try to be as efficient as possible.
00:24:21.660 | You want to insure against the stuff – you want to self-insure against the stuff that
00:24:25.000 | you can afford to lose and then you want to insure against the stuff that you can't afford
00:24:29.400 | to lose.
00:24:31.840 | Hopefully sounds a little wishy-washy.
00:24:32.840 | I don't know how to make it any less wishy-washy.
00:24:35.960 | That's the best way I know to approach the long-term disability versus short-term disability
00:24:39.680 | discussion.
00:24:40.680 | Let me define for you three different areas of terms.
00:24:44.640 | I want to talk about benefit periods, elimination periods, and continuance provisions.
00:24:49.120 | And here we're going to get a little bit technical.
00:24:50.680 | Benefit period is exactly what I've been talking about and so is elimination period.
00:24:54.480 | But these are the technical terms that you will decide.
00:24:57.080 | The benefit period is how long, once you're disabled, do you receive benefits from the
00:25:02.720 | disability insurance policy.
00:25:05.560 | You have different options.
00:25:06.960 | Like I said, you may have a policy that will pay you out for a month or three months.
00:25:10.960 | You may have a policy that will pay you out for two years.
00:25:14.520 | You may have a policy that will pay you out for five years.
00:25:17.280 | You may have a policy that will pay you out through age 65 or age 70.
00:25:22.200 | The longer the benefit period, the higher the premium.
00:25:28.680 | The shorter the benefit period, the lower the premium.
00:25:33.200 | And the reason for this is because of the total potential benefit from the policy.
00:25:40.200 | Again, if you're getting a $4,000 a month policy, ignore inflation for a moment.
00:25:46.200 | Let's say you got a $4,000 a month policy for 60 months, five years.
00:25:50.980 | Your total benefit that you might receive from the policy is $240,000.
00:25:56.720 | But if you're a 35-year-old worker and you have that same $4,000 a month and you get
00:26:01.760 | it until age 65, that's that $1.4 million number.
00:26:06.280 | Big difference in risk for the insurance company between $1.4 million and $240,000, especially
00:26:13.360 | when you look at the morbidity tables for disability insurance.
00:26:16.520 | You'll see that once somebody reaches five years of disability, there's a much higher
00:26:21.160 | likelihood that that person is going to be disabled permanently for the rest of their
00:26:24.560 | life than that they're going to recover.
00:26:29.720 | That's different than somebody being disabled for a year.
00:26:31.640 | A year, you might be out for a year with back injury.
00:26:34.520 | But you might be out for the rest of your life if you break your back.
00:26:41.440 | So if you're trying to save on premiums, one of the tools that a good insurance agent will
00:26:45.560 | do is they'll sometimes shorten up that benefit period.
00:26:48.680 | I've had to do this many times, sitting down, looking at a budget, young family, stretched
00:26:52.760 | finances.
00:26:53.760 | They know they need disability insurance, but they also need life insurance and they
00:26:57.120 | also need to save money and they also need to pay off their debt, etc., etc.
00:27:00.720 | Well, what do we do?
00:27:01.720 | Well, sometimes I would love it if everyone had a policy that would pay them out through
00:27:05.560 | age 65 or 70.
00:27:07.360 | But sometimes you can save substantial amounts of money by shortening that up to five years.
00:27:11.760 | And so I would shorten it up to five years knowing that I've covered most of the disability
00:27:17.320 | circumstances.
00:27:18.320 | The likelihood of being beyond five years is less, but I've covered most circumstances
00:27:23.760 | they're going to be in.
00:27:24.760 | That will save us a lot of money on premiums by shortening it up to five years.
00:27:28.160 | So I've covered a three-year disability.
00:27:30.400 | I've covered – and in five years, if they were totally disabled, my theory was I could
00:27:34.640 | help them.
00:27:35.640 | They could figure something out to retrain, use the five years to try to figure out how
00:27:40.240 | to get into a different job of some kind.
00:27:42.760 | But that's the benefit period.
00:27:44.160 | Just always remember the longer the period, the higher the premium.
00:27:46.760 | The shorter the period, the lower the premium.
00:27:49.120 | You should go with the longest period possible if you can afford the premiums or you could
00:27:56.320 | go with the shortest period necessary.
00:27:58.440 | If I were a 50-year-old worker, I had a lot of money for retirement, I only needed the
00:28:03.800 | five-year premium – well, five-year benefit period, then I would consider it.
00:28:07.760 | So that's how the benefit periods work.
00:28:09.440 | And you can choose these.
00:28:11.000 | It's a choice.
00:28:12.000 | If you're an agent or a financial planner, you should look at this as a flexible thing
00:28:15.640 | and figure out what's right for the client, especially when we get to some of the other
00:28:20.200 | benefits.
00:28:22.200 | There are ways to work with certain companies.
00:28:24.000 | There are ways to shorten the benefit period while still having a catastrophe plan for
00:28:28.200 | the longer period.
00:28:29.200 | We'll get to that when we talk about social insurance substitute benefits.
00:28:32.720 | Next, elimination period.
00:28:34.200 | The elimination period is kind of like a deductible.
00:28:36.760 | The elimination period is this.
00:28:38.440 | How long do you need to be disabled before the policy kicks in and starts paying you
00:28:44.520 | money?
00:28:46.600 | The key thing here is the shorter the elimination period, the higher the premium.
00:28:52.620 | The longer the elimination period, the lower the premium.
00:28:56.960 | This should be intuitive to you now because by recognizing that you're much more likely
00:29:01.720 | to be disabled for a month than you are to be disabled for a year, you can recognize
00:29:05.480 | that the risk to the insurance company is much less if you have a one-year elimination
00:29:11.240 | period versus a one-month elimination period.
00:29:13.520 | Thus, your insurance will be cheaper.
00:29:16.240 | When you're looking at the elimination period, you've got to treat this just like you treat
00:29:19.040 | a deductible on other types of insurance.
00:29:21.320 | How much money do you have and how much time can you get through?
00:29:24.960 | In essence, this is what we do by steering people who are middle-class people, have savings,
00:29:29.800 | have reserves, have credit cards or lines of credit available to them.
00:29:34.880 | This is why we steer them to a three-month elimination period versus steering them to
00:29:38.960 | that one-week elimination period because it results in a substantial decrease in cost
00:29:44.600 | and they can get through that three months.
00:29:46.500 | They can handle that as a deductible.
00:29:48.800 | Most people can get through three months if they have to.
00:29:53.360 | But this also implies a planning point.
00:29:55.840 | Many of you are very good savers.
00:29:58.760 | Many of you have significant amounts of capital and reserve that's liquid and easily available.
00:30:05.120 | Well, in this situation, if you're simply trying to plan for a worst-case scenario,
00:30:09.680 | a catastrophe, you might choose a very long elimination period in order to save premiums.
00:30:15.040 | You might choose one year or more if you can find a policy but one year is often the maximum.
00:30:20.420 | You might choose a one-year elimination period knowing that this policy will only pay out
00:30:26.120 | in the worst-case scenario where you're disabled for more than a year.
00:30:31.320 | But you might be confident knowing that, "Hey, if I am disabled for more than a year, this
00:30:36.840 | thing is going to pay out through 65," and that would be something worth considering.
00:30:41.960 | Now the premium savings here, you will have to ask your agent to run some cost comparisons.
00:30:47.400 | Generally, I would always just do a three-month period for most people because if you're disabled
00:30:52.600 | for three months, most people are going to want to go ahead and start receiving that
00:30:56.240 | benefit period.
00:30:57.680 | But it is an option for you to have a longer elimination period if you just don't like
00:31:02.960 | insurance, "I don't want to waste money on insurance.
00:31:04.840 | I have lots of liquid cash," okay.
00:31:07.300 | Sign up for a one-year elimination period but have a very long-term policy.
00:31:12.100 | That way, you've covered the catastrophe of not being able to work for a very long time
00:31:16.720 | without buying too much insurance that you're going to be upset about paying the premiums.
00:31:22.560 | Next, let's talk about what we call continuance provisions.
00:31:26.240 | So these are fundamental to the way that the insurance policy works and they're a little
00:31:30.620 | bit confusing.
00:31:31.620 | There are two major words that are used.
00:31:33.740 | One is called non-cancelable and the other is called guaranteed renewable.
00:31:38.080 | Now you would think – and what this is is what rights does the insurance company have
00:31:43.080 | to cancel your policy on you or to change the terms of the policy?
00:31:49.160 | That's what these provisions are covering.
00:31:51.760 | You would think that non-cancelable means that the insurance company can't cancel
00:31:56.760 | your policy on you and you would think that guaranteed renewable means that the insurance
00:32:01.480 | company is guaranteeing that they have to renew the contract for you at the current
00:32:06.200 | premium rate.
00:32:07.720 | You would think that but for whatever reason, you'd be wrong because it's exactly the
00:32:12.280 | opposite.
00:32:13.560 | So what guaranteed renewable means is as long as you pay the premiums for the insurance
00:32:18.760 | policy, the insurance company cannot take the contract away from you.
00:32:24.200 | I'm going to repeat that again.
00:32:27.520 | Once you have the insurance, as long as you pay the insurance premiums, the insurance
00:32:33.280 | company cannot take the policy away from you for any reason.
00:32:41.120 | Let's talk about how important this is.
00:32:44.120 | First of all, you get the disability insurance policy and then you get a little older.
00:32:50.840 | You get sick.
00:32:51.960 | You get hurt.
00:32:52.960 | You're not disabled.
00:32:54.640 | But now all of a sudden, you're a higher risk.
00:32:57.360 | So because the policy is guaranteed renewable, as long as you pay the premiums, the insurance
00:33:02.760 | company can't take it away from you.
00:33:05.280 | That's very important and it's an important component of disability insurance policies.
00:33:12.200 | Almost all – I have to cover myself because there's always some area of the market that
00:33:16.400 | I don't know and somebody that accepts.
00:33:18.280 | But almost all disability insurance policies are guaranteed renewable.
00:33:23.280 | That's why you got to get them.
00:33:24.360 | Individual disability insurance policies are guaranteed renewable.
00:33:27.640 | There are some other things that are interesting in the terms of that contract that you should
00:33:33.320 | also pay attention to.
00:33:35.840 | I'll repeat it again.
00:33:37.160 | As long as you pay the insurance premiums, the insurance company cannot take a contract
00:33:43.120 | away from you for any reason.
00:33:48.200 | So one example I've seen many times and I've often told people, if you have a safe
00:33:52.560 | office job and you're going to go out and start an entrepreneurial business.
00:33:57.240 | Well, when you're starting an entrepreneur, as an entrepreneur, you're not going to
00:34:00.440 | be making a lot of money in the short term.
00:34:02.240 | Thus, you won't be able to get insurance coverage.
00:34:05.000 | So if you're going to start a business, get your disability insurance now because
00:34:08.600 | you're not going to be able to get it in the early years of entrepreneurship.
00:34:11.900 | Get your disability insurance and you'll be covered while you're building your business.
00:34:16.500 | This could also be applicable to some of you who are changing jobs or industries.
00:34:22.320 | If you have a safe, secure office job, get disability insurance.
00:34:26.640 | If you change to a job in a different place, a job of a different occupation, as long as
00:34:32.760 | you pay the insurance contract, the insurance company can't change the terms on you.
00:34:38.200 | So if I were a middle income office professional, knowing what I know about insurance, I would
00:34:44.880 | buy disability insurance.
00:34:46.780 | Now at the time of application, you can't have any intention of changing jobs.
00:34:51.600 | Depending on the company, the application will specify that.
00:34:55.840 | You will sign and affirm that you don't have any intention of changing jobs in the
00:35:01.160 | forthcoming period, whether that's 90 days or whether that's two years.
00:35:03.920 | Just depends on the insurance company.
00:35:05.360 | You got to read the contract, read the application.
00:35:08.400 | But if I had the safe, secure office job and I were working, I would get my disability
00:35:13.120 | insurance.
00:35:14.120 | Then if later on, five years later, I decided to go and get a job as a skydiving instructor
00:35:20.280 | or I decided to go and get a job on a North Sea fishing boat or I decided to go and get
00:35:25.240 | a job as a roofing contractor, I would keep and maintain my disability insurance coverage.
00:35:33.080 | Now under many contracts, the way that they determine disability is it's whatever disability
00:35:37.840 | you're doing at the time of – excuse me, whatever work you're doing at the time of
00:35:41.720 | disability.
00:35:43.280 | So under many contracts that I sold in the past when I had an insurance license, I would
00:35:48.160 | sell the contract and I would always clarify this for my clients, why it was so important
00:35:51.800 | and so valuable.
00:35:53.880 | Because the way the contract is written, it's whatever job you're doing at the time of
00:35:57.640 | disability.
00:35:59.320 | So you're working a safe office job.
00:36:01.920 | You get the coverage and then you go and you start a job as a roofing contractor.
00:36:06.400 | Well if you fall off a roof and if you're disabled from roofing, the job that you're
00:36:10.680 | doing at the time of disability, not at the time of application, then under the terms
00:36:14.560 | of the contract, you would be covered and you would have benefited from a significant
00:36:20.280 | coverage.
00:36:23.140 | I don't know that a roofer is even able to get disability insurance coverage or you
00:36:28.320 | would have been able to benefit from an inefficient – inappropriate pricing model, a pricing
00:36:35.320 | model – pricing differential to your benefit because the cost of insurance for somebody
00:36:40.640 | who is a skydiving instructor is going to be much, much higher than the cost of insurance
00:36:45.120 | for somebody who's sitting in a cubicle.
00:36:48.440 | So it's very important.
00:36:49.440 | That's why the contracts are guaranteed renewable.
00:36:52.280 | This can also come into play in a couple of areas where things like travel.
00:36:58.460 | If you anticipate traveling, I had a situation with a client one time.
00:37:04.640 | The husband was in – was a construction office worker.
00:37:12.600 | He was an office worker for a construction company and the wife was a nurse.
00:37:18.040 | And in doing their planning, I recommended to them disability insurance.
00:37:23.040 | Now, he had some group long-term disability insurance in force.
00:37:27.160 | So I recommended to them a supplemental policy for him and then I recommended to the wife
00:37:33.360 | a primary individual disability insurance policy.
00:37:36.320 | Well, in looking at it, they chose to buy the primary disability insurance policy for
00:37:41.400 | the wife and then they chose to not buy the supplemental policy for the husband.
00:37:47.440 | Well, a few years later, three or four years later, they decided to leave their careers
00:37:53.400 | and move to Africa as missionaries.
00:37:55.640 | Well, because of the disability insurance contract that I had placed for the wife, that
00:38:00.920 | disability insurance contract was good.
00:38:02.760 | They were going to be doing – she was going to be working as a medical missionary in a
00:38:06.240 | very rough country in Africa.
00:38:08.040 | Well, under the terms of the contract, she would still be covered if she were disabled
00:38:12.960 | even though they're living and working full-time in this very difficult country in Africa.
00:38:18.040 | That was a valuable provision for her because they could pay it under US-American rates.
00:38:24.280 | They could pay it under the safer conditions and they wouldn't even have been available.
00:38:29.000 | He was looking into getting disability insurance.
00:38:31.480 | I was able to find him one quote, actually placed it with Lloyds of London and I was
00:38:37.800 | able to get him one offer from Lloyds of London.
00:38:40.680 | However, the benefits were so small and the prices were so high that it just simply didn't
00:38:46.280 | make financial sense and I recommended to them that they not do it, that they just simply
00:38:50.920 | face that risk and self-insure or just care for it in another way.
00:38:56.480 | So they didn't buy that policy.
00:38:58.720 | But if earlier they had taken my recommendation and my advice to buy the supplemental policy,
00:39:04.920 | numbers are unclear but at this point in my memory, maybe it was a couple thousand bucks
00:39:08.560 | a month, then they would have been able to maintain that policy even though they had
00:39:12.680 | moved from the United States working as an office work to working as a medical missionary
00:39:19.320 | in a difficult country in Africa.
00:39:21.780 | So these are some interesting aspects to that guaranteed renewable provision which make
00:39:26.120 | it so valuable and this is one of the reasons why I am a strong proponent of helping people
00:39:32.840 | get coverage and helping people get individual coverage at an early age.
00:39:37.360 | At an early age before they face any difficult circumstances.
00:39:40.840 | In my own family, I've had two family members that have been disabled with carpal tunnel
00:39:44.960 | syndrome and it's a common thing.
00:39:47.400 | Now both of them are doing better now but both of them have resulted in lost work due
00:39:51.200 | to not being able to use a computer and had to do crazy things to be able to use a computer
00:39:56.520 | due to overuse and repetitive strain injury.
00:39:59.640 | So these types of things matter and they matter not just when you're working on a ladder every
00:40:03.600 | day, they matter when you're sitting in an office.
00:40:05.320 | Let's go back and talk about non-cancellable.
00:40:08.400 | If you buy a contract that's non-cancellable, that means that the company does not have
00:40:12.840 | any right to change the pricing of the policy.
00:40:17.400 | If you buy a policy that's only guaranteed renewable, that's not non-cancellable, then
00:40:22.800 | the company has the right to change the pricing of the contract on a class basis.
00:40:28.800 | Meaning they can't zero in on Joshua Sheets and say, "Well, Joshua Sheets, we don't like
00:40:32.600 | what he's doing and we think that we're going to increase the premium for him because he
00:40:37.360 | gained weight or he got sick or he got hurt."
00:40:39.700 | But they could look down and say, "Look, all males between the ages of 30 and 40 in Florida
00:40:44.920 | were experiencing an inappropriate level of risk and so we're going to increase the premiums
00:40:51.500 | on all of them."
00:40:52.500 | They could do that.
00:40:53.880 | And so the only way that I could avoid that is by buying a policy that's non-cancellable.
00:41:00.140 | Non-cancellable means the premiums are locked in.
00:41:01.640 | However, non-cancellable is going to be higher in premium costs than guaranteed renewable.
00:41:08.800 | In my work, I sold very few non-cancellable policies.
00:41:12.320 | Almost all the policies I sold were guaranteed renewable.
00:41:14.880 | However, that's not a blanket recommendation.
00:41:17.880 | There are industries, for example, physicians, might very seriously want to consider paying
00:41:24.080 | the additional money for a non-cancellable contract.
00:41:28.720 | You might also want to seriously look into the specific insurance company that you've
00:41:33.480 | chosen to work with and see if you're comfortable with only a guaranteed renewable contract
00:41:39.240 | or if you need that additional layer of protection of a non-cancellable contract.
00:41:43.880 | Finally, conditionally renewable is the last continuance provision.
00:41:48.120 | Conditionally renewable, many policies will be in effect for up to age 65.
00:41:52.320 | And you'll see this where they're conditionally renewable through age 70 if you're still working.
00:41:57.480 | And then at that period of time, the benefits, the terms of the contract will often change.
00:42:01.280 | They'll drop the benefit period to usually two years is the standard thing.
00:42:07.120 | And so those are the things that allow you to make sure that the policy is going to continue
00:42:12.080 | in force.
00:42:13.080 | So this is just the basic starting line of giving you some vocabulary of disability insurance.
00:42:19.160 | I hope these things are interesting.
00:42:20.920 | I hope that in light of the sales job that I did on the previous episode, you can start
00:42:24.400 | to see now a little bit of the flexibility.
00:42:26.840 | I hope also you can just see how, why it's so difficult for people to be able to make
00:42:32.200 | blanket recommendations.
00:42:33.800 | There is no one size fits all in insurance period, but there's especially no one size
00:42:39.560 | fits all solution in disability insurance.
00:42:43.120 | You may safely discount advice when you hear people say, "Oh, only do this."
00:42:47.680 | Because as I've pointed out, hopefully you've heard the scenarios where I've indicated why
00:42:51.840 | I would buy short-term disability insurance and not long-term disability.
00:42:55.760 | Why in some situations I would buy long-term disability and not short-term disability.
00:42:59.880 | Why in some periods at times I would buy a shorter benefit period, a longer benefit period,
00:43:04.120 | a shorter elimination period, a longer elimination period, a guaranteed renewable contract, a
00:43:08.640 | non-cancellable guaranteed renewable contract.
00:43:11.640 | All of these things matter and you have to look at your individual situation to be able
00:43:16.880 | to make an appropriate decision on the subject.
00:43:19.880 | So I hope this is useful to you.
00:43:20.880 | Thank you so much for your great feedback.
00:43:22.920 | Two things as we go.
00:43:24.120 | Thank you to those of you who sign up and support the show as a patron.
00:43:27.560 | Lots of benefits for that for you there.
00:43:29.240 | Number one, you just simply put money in my pocket, which I thank you sincerely for.
00:43:33.800 | Pay me some wages for this work that I'm doing and releasing to you freely.
00:43:37.040 | Thank you for that.
00:43:38.040 | I wish that many more hundreds of you would do that.
00:43:40.520 | It's very important that many more of you continue to do that so I can continue to keep
00:43:44.080 | my incentives aligned with your incentives.
00:43:46.720 | I don't have to bring on lots of advertisers and things like that in order to reach my
00:43:52.920 | financial goals that will get in the way.
00:43:54.600 | So radicalpersonalfinance.com/patron.
00:43:57.280 | Also remember that I am now offering phone consulting.
00:44:00.120 | If you would like to consult with me on a topic like this, this would be a good one.
00:44:03.600 | Go to radicalpersonalfinance.com/phonecall.
00:44:06.100 | Feel free to book a call with me if you want to put me on the phone line and talk with
00:44:09.560 | you and your insurance agent.
00:44:11.080 | If you just want to review something and you want to say, "Joshua, does this pass the
00:44:15.200 | sniff test?
00:44:16.200 | I'm getting a recommendation of this.
00:44:17.720 | Does this make sense?"
00:44:18.720 | I'd be happy to do that type of work.
00:44:20.560 | So radicalpersonalfinance.com/phonecall and you'd be able to reach me there.
00:44:24.440 | Thank you all so much for listening.
00:44:25.440 | Be back with you soon.
00:44:26.760 | [music]
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