Today on Radical Personal Finance, we continue our disability income insurance series with a discussion of disability insurance needs analyses, how to figure out the appropriate benefit amounts and what benefit amounts are available. We're going to talk about group insurance and individual insurance. We discuss the definitions of disability within an individual disability insurance policy.

If we have time, we'll get into specific provisions of policies that you may or may not want. In theory, we might have time to talk about taxation of premiums and benefits. Yes, Joshua Sheets, the ever optimistic show host, thinking that we're going to get to all that in the course of today's show.

Welcome to the show. My name is Joshua Sheets. This is the Radical Personal Finance Podcast. Thank you for being with me today. This is the show where we work hard to talk about everything you need to know to live a rich and meaningful life now while also building a plan for financial freedom in 10 years or less.

And we continue our risk management disability income insurance series right now. With the first episode of this series, episode number 337, I gave you my sales pitch for why I think you should buy disability income insurance with a special emphasis on the value of long-term disability insurance. In episode 339, we continued the series talking about why it's so hard to compare disability insurance policies to one another.

We talked about the differences and how you should decide whether to buy long-term disability insurance or short-term disability insurance. We discussed available benefit periods, two years, five years, to age 65, to age 70, etc. We talked about the elimination periods, two weeks, 45 days, 90 days, six months, one year, and how to think through those options.

And then we talked about the different continuance provisions in a disability insurance policy. We talked about the word and the definition of non-cancelable, guaranteed renewable, conditionally renewable. I explained what those policy terms mean. And today, we continue with the nuts and bolts here of talking about how you can make good disability income insurance decisions by, again, talking about those things that I mentioned in the beginning.

I'm going to do this show here for about 45 minutes to an hour. We'll see how many of these things I get through. If not, I might need to wrap up and go on to another show. But let's start first with a needs analysis. One of the things that I haven't talked about is how to figure out the appropriate amount of disability insurance that you need.

There are different benefit amounts that are available to you. And in general, my suggestions and advice to you are simply to get as much as you can get, especially at an early age. If you are young in your career, young in your life cycle, and here I'm thinking of somebody in their 20s, 30s, maybe somebody with a young family, this type of profile of a young family just kind of getting things started off, this is where disability income insurance is the most important because statistically speaking, it's likely that you have higher expenses and lower assets and savings at this stage of life.

This is when disability income insurance is the most important because this is the stage of life that your income is your biggest asset. As you advance through your expected working life, and there's no hard and fast line to this, a 60-year-old can be just as broke as a 30-year-old and a 30-year-old can have twice or three times as much money as a 60-year-old.

But in general, as you are working throughout your lifetime, you will have the opportunity to earn more money and accumulate more wealth as you continue through your working lifetime. So later in life, you should be able to accumulate more assets. You will reach a point in time at which your assets are more important than your income.

You'll also reach a point in time where you know what your expenses are and they're more likely to be relatively stable. A 55-year-old empty nesting couple has a much better idea of what their expenses are than a young family looking at, "Okay, how much is my 12-year-old going to need of high school expenses and what am I going to do about college and what am I going to do about private school and all these other things?" So when figuring out the appropriate amount of insurance to have in the beginning, the answer is pretty simple.

Get as much as you can get. It's that simple. Get as much as you can get. However, you will have the restraint or the constraint that there's a certain amount that you'll be able to get. We'll talk about that and then I'll explain to you how you do a needs analysis.

The insurance companies are not going to let you have an unlimited amount of disability income insurance because they are on the hook if you become disabled. Same thing with life insurance. Because disability and life insurance policies are not reimbursement policies but rather are indemnity policies, there's a risk to the insurance company if they overinsure you.

The difference between a reimbursement policy and an indemnity policy is simple. A reimbursement policy reimburses you for any specific charges incurred, for any specific costs incurred. And so the risk to an insurance company is less under a reimbursement policy because there's a simple way of identifying the amount and you don't have any extra motivation to somehow put yourself in a situation where you're going to get more compensation.

An indemnity policy is one which pays you out a certain amount of money that is not necessarily due to any amount of loss. So life insurance policies and disability income insurance policies are indemnity policies where the amount of your reimbursement is pre-negotiated. The risk here is simplest to explain within the context of life insurance.

Pretend that you make $10,000 a year and you go out and you're able to buy a $10 million life insurance policy and you're feeling thoughts of depression, you're experiencing suicidal thoughts, you're just looking at your family and your situation, you're saying, "You know what? I'm a failure as a father.

I want to make sure that my family is taken care of. I've got this $10 million policy and I'm only making $10,000 a year. I think it'll help my family more if I commit suicide and give them $10 million than if I stick around and only give them $10,000 a year." This would be a very clear example of how with an indemnity policy, which is what a life insurance policy is, if this event happens, in this case death, then the beneficiaries will be indemnified $10 million.

You can see the risk that puts on the insurance company. So the way they handle this with life insurance is that if you were making $10,000 a year, you could not go out and get a $10 million life insurance policy. You would need to be making a lot of money.

Maybe you could get a $50,000 life insurance policy and now you're simply saying – well, actually, it would be more than that. It would probably be about 10 times. You could get up to about a couple hundred thousand dollar life insurance policy, but you wouldn't be able to get a $10 million policy.

So now you can imagine that same person depressed, feeling suicidal, wondering what to do and they're saying, "Well, I've only got $100,000. Whether I make $10,000 a year or they get $100,000 of life insurance, that's not going to change their life. Maybe I'll just keep on working and see if I can make things better." So the same thing applies with disability insurance.

If you're making $10,000 a year – and I'm just using extreme numbers to illustrate the concept. If you're making $10,000 a year but you're able to get a disability insurance policy that will pay you if you're disabled $10,000 a month, well, now all of a sudden you might be looking at your mountain bike and thinking, "Hmm.

If I could figure out how to ride that off the side of a cliff in such a way that it didn't kill me and it didn't hurt me too badly but it made me disabled, maybe that would be better to be somewhat disabled but get $10,000 a month because right now I'm only making $10,000 a year," or whatever scenario that you want to come up with.

And so that's the risk that the insurance company has to face. So you're always going to be limited based upon the amount of insurance you can get by the insurance company. Now the first thing to recognize is generally here where we're talking about individual disability insurance policies, without getting into the taxation, you do need to know that generally with individual disability insurance policies, you're going to be paying the policy premiums without taking a tax deduction.

So you're going to be using after income tax dollars to pay for the premiums. But your benefit on an individual disability income insurance policy will generally be received free of income taxes. So there can be a significant benefit there for you. If you're making $3,000 in normal employment, well, remember the first thing off your $3,000 is going to come off your Medicare and employment taxes.

So you're going to lose right off the bat 7.65% of that money which will be $230 coming off of a $3,000 payment. You're going to lose 7.65% if you're employed to your employment taxes and your Medicare taxes. So that's going to be a significant decrease. If you were self-employed, you'd lose 15.3% right off the bat.

Plus you're also going to lose your income taxes. Depending on your income tax rate, those may or may not be a lot of money. So generally when you're at a lower rate of earnings, you can basically get as much insurance as you would get if you were working. It will sometimes almost cover 100% of your working after tax income.

So some simple examples would be if you were earning $3,000 a month, you could probably get $2,400 of – maybe $2,200 to $2,400 of disability insurance benefit which would practically be equivalent to what you're making on an after tax basis if you were earning $3,000 a month as your salary.

Now as your income goes up, you'll be able to get more disability income insurance measured in dollar terms but you'll be able to get less disability income insurance measured in percentage terms. So somebody making $30,000 a month, there's no possibility that they're going to be able to reach the same percentage of their income replaced.

The $3,000 a month earner might be able to cover 100% of their current after tax income with a disability policy. The $30,000 a month earner would probably only be able to cover maybe 50% of their after tax income. But the dollar amount of course, 50% of $30,000 after tax would be what?

About $13,000, $12,000 to $14,000 depending on how we ran the math. So the dollar amount of $12,000 to $14,000 a month of disability benefit would be much higher than the $2,200 a month but the percentage is lower. So there's no way that you are going to know this without asking the insurance agent to calculate what's available to you and what options you have available to you.

So that's the simplest way to know how much you can get. The insurance agent will have a program of some sort where it would be relatively simple. If you're an employee, they'll just plug in, "Hey, I'm making $72,000 a year as an employee." You just pop that in the computer and you have the answer right there.

If you are self-employed, if you're a business owner or if your financial situation is more complicated, then the agent themselves will probably not be able to tell you. What you'll have to do is go through what's called financial underwriting. So financial underwriting for – so all disability insurance policies when you buy them are underwritten on a financial basis and also on a health basis.

The health basis is relatively simple. Just like life insurance, when you go to apply for life insurance, the health underwriting requirements vary depending on the amount of insurance that you're buying. If you're buying a very small amount of insurance, I don't remember any numbers, but let's just say a few hundred dollars a month, you may just simply have to answer some medical questions and they'll pull your doctor records to check your medical history with your doctor.

You go up a little bit higher, you may do a tongue swab. The tongue swab is where they check for nicotine and different things. The insurance agent usually will do that. You go up a little bit more and any normally employed amounts of disability insurance, you're going to do – a nurse will come out to your house and they'll do a blood draw, they'll do a urine sample and they'll check your height and your weight and your blood pressure and things like that.

As you go up the ranks in terms of higher and higher amounts of insurance, then the medical underwriting requirements get to become more and more and more. So at the higher levels, if you're a practicing physician earning half a million dollars a year, you'll be visited by a physician, you'll have a physician health review, they'll do an EKG, they'll do comprehensive tests on you, etc.

So the more insurance you apply for, the more stringent the medical underwriting requirements will be. But you'll also always go through financial underwriting requirements and it will be the same thing. If you're a simple employee at say earning $60,000 a year, all you need to submit is a pay stub and make a statement of what your income has been the last couple of years.

However, if you're applying for a much higher amount of insurance, it would not be unusual for the underwriters to require three years of tax returns including all of your supporting schedules and other information or to require current financial statements. In some cases, those financial statements could be required to be audited or signed off on by your accountant.

So as you go up, the financial underwriting requirements become more. When you are trying to do financial underwriting on a disability case, it can be very tricky for some people in certain occupations. So for business owners, it can be very challenging because some things are coverable and some things aren't.

One of the challenges is that many business owners need much more disability insurance than they can get, especially if your business is not showing a high profit on paper. When you're running a business and when you're investing in the initial stages, often there's a difference between what your profit is on paper versus what your profit could be and actually is because you're reinvesting heavily into the business.

Well, that's great from a tax savings perspective, but it's not great for the perspective of getting disability income insurance. It's also not great for applying for a mortgage. Those are the two places where you really get hurt when you're a business owner and you're not paying a lot of taxes because you're not showing a lot of income.

So you've always got to be careful with that. If you have other forms of income, so let's say that you've built a portfolio of real estate and you're receiving rental incomes from your real estate or you have a large amount of dividend paying stocks, the underwriter will take those things into account as well and they will count against the amount of disability insurance that you're able to get.

Another reason why in general if you're just getting started and you have a job, get as much disability insurance as you can get because if you were to fast forward down the road and have say five rental houses all paying you money every month, you wouldn't be able to get as much disability insurance as you can get in the beginning.

Obviously you wouldn't need it as much, but you wouldn't be able to get as much. So that's how – those are the major ways the benefit amount is determined, just simply by the underwriter. You can do a needs analysis. This is simple with computer software. What you essentially do is you put it into a financial planning software package.

You put in your income. You put in your expenses. You mark out which of those expenses need to be paid during a time of disability and which don't. For example, you might say I want to pull back on some discretionary amounts of expenses but I would keep these other essential expenses.

Those things are all possible. In general, all of the computer programs do it. Most people that are buying disability insurance, it's just not all that relevant. It's really not all that relevant, which is why I don't spend a lot of time on it. Essentially what a disability insurance needs analysis will demonstrate is that you have a need for disability insurance and even if you put in as much insurance as you could get, most people still won't be fully covered for as much as they really need.

The only time that the disability insurance needs analysis would be very, very helpful would be if you have a large nest egg of money and you're trying to figure out, "Okay, can this get me through? If I have this lump sum of money, if I were disabled, let's say I had a disability insurance policy that was going to cover me for the next 20 years, would I then be okay with this pot of money for the rest of my life?" That is where I like disability insurance needs analysis because in the software packages, it's relatively simple to figure out what do I do with retirement and how do we achieve retirement.

One of the major costs of disability for those who become disabled is the current cost of disability. But the other major cost is the future cost of disability. What I mean is if I became disabled for a period of say five to ten years, and here we're talking about a significant disability.

This is unlikely statistically speaking, but it does happen from time to time. If I became disabled for say five years, I would have all of my current expenses for those five years, but I also have the cost of retirement or the fact that I haven't been able to save and compound money for those five years towards that retirement.

People who become disabled, even if it's for a relatively short amount of time, often find their financial plan significantly disrupted. If they don't have insurance, then all of a sudden they start tapping their assets much more quickly than someone else does. This results in bad effects. That's where the needs analysis software can be simple and it can be helpful as it demonstrates that need.

I've done that many times in sales situations where somebody says, "I don't need disability income insurance. I have a million dollars." I say, "Okay, that's fine, but let's run the scenario of today with your million dollars. If you keep working, yeah, you're going to be rich, but let's run the scenario if you're disabled for five years and let's see what happens to the million dollars." All of a sudden, you find the million dollars is not quite as comforting as you thought it was because now you're pulling out $5,000 a month for the next five years and your retirement shortfall becomes huge.

That's what the needs analysis can show that to you. Finally, you can choose amount of disability insurance based upon a certain thing that you want to cover. For example, you have a certain obligation, a certain debt, a certain stream of payments that you're desiring to cover. I will try to do a – I might do in the future a show on just all the different types of disability insurance because there are many different kinds, but you can choose some of these based upon that amount.

For example, if you were purchasing a disability overhead expense insurance policy as a business owner, these policies function to cover the expenses of your business. You might just simply look down and say, "Hey, I've got $6,000 a month of business expenses," and you just choose the amount of insurance based upon that.

Simple. We're going to cover $6,000 a month for 12 months and you're covered. That's how you choose the amount. Now, let's talk about group insurance merged with individual insurance. Most people who are working in mainstream jobs at large companies have access to some kind of group disability insurance program.

The challenge here is that many workers in the United States of America work in smaller firms. It's much less likely that this type of program will be open to you in a smaller firm than if you're working in a larger firm. How do you figure out what to do with the benefits between them?

The way to do it perfectly is to first look and understand what are the benefits that are actually provided by the group disability insurance policy. Here we would want to get into the actual questions for the policy of how do we actually get paid if we're disabled? What are the policy provisions?

This is difficult information to get, especially without an insurance agent because most people just don't know. Your human resources person is not going to know. They'll have to call the insurance company and get the questions answered. I'll go ahead and tell you what the questions are that I would always send a client.

I always had a written statement. I'll put this on the site in some way. But I always had a written statement prepared for my clients. The first stage of financial planning is I would send them this list of questions and try to get all the details of their group benefits.

So the group long-term disability, the group life insurance, any group long-term care, questions about the 401(k), questions about the pensions, et cetera. The questions about the disability policy are the most important. I'll read them to you and explain why they are important. The first question is, "Does our company provide any long-term disability insurance?" That one is pretty simple.

But many of you do not know if you have something available to you or not. Next question, "Am I enrolled?" Seems silly but it's a huge deal because most people have some kind of disability insurance available to them. But many of them are simply not enrolled. So you have to be enrolled in order for it to work.

Next, "When does the long-term disability benefit begin?" And I have little options. Usually it's either 90 or 180 days after being disabled, usually 90. "What percentage of my income does it cover?" Group disability insurance policies will often put that number in there and it'll be usually 60%, sometimes 67% or a different number, but sometimes 50%, but often 60%.

Next question, "How is income defined?" Big question here is, "Is it base salary only or is it my total compensation?" For example, base and bonus. Some disability insurance policies will cover you based upon your base salary. And for some of you, that's all you earn. But many people, especially high-income earners, have their compensation decided as a formula between a base and a bonus.

And if your disability insurance policy does not reflect that bonus, you might be significantly underinsured. This can be a real challenge. Now, some disability policies do cover bonus. There's no reason why they can't. But many times, these benefits that are provided in a group long-term disability contract are not quite as comprehensive as you might like because often your employer is picking up the tab for this.

But most people are not aware of what's in their disability insurance policy. People are quick to criticize and lobby their employer for a great health insurance policy because they use that. But very few people ever use their long-term disability insurance policy. And so the long-term disability insurance policy is one place where an employer can offer something so that there's something there, but not actually offer something great and save a little bit of money.

And I'm not trying to say employers are being mean to employees, just simply that employees don't usually raise a ruckus about their long-term disability benefits. So we need to know, how is income defined? Is it base and bonus? Is it total compensation? If you are a commission-based salesperson, how is your income defined?

Next, is there a maximum monthly benefit? Oftentimes there'll be a maximum monthly benefit of $5,000 or $10,000 a month. For many people, that's not a problem. For some of you, that might be a significant problem because you're underinsured. Next question is, who pays the premium for the coverage? Who pays the premium for the coverage?

That's important so that we get to taxation. If your employer is paying the premium for the coverage, then the benefit when received by you after being disabled will be taxable. So if the employer is paying the premium, because the benefit's taxable, the individual policy, you'll be able to get a higher amount of insurance with your individual policy than the other way around.

Is the benefit taxable when received by me? That's just a different way of asking it. There are a couple of interesting tax rules where sometimes it may or may not be, but let's skip that for now. Is there a partial disability benefit? And this, as far as I'm concerned, we're going in just a moment to definitions of disability for individuals with disability policies.

But as far as I'm concerned, the most important disability benefit to have is a partial disability benefit. And this is often the biggest lack in group disability policies. Many times the group disability policy will have a clause for a total disability. But think about it. Many of you have pretty safe jobs, and it would take a lot for you not to be able to do anything related to your job.

But it wouldn't take all that much for you to be only able to work 50% of your time at your job. Well, does being able to work 50% of your time at your job qualify you for a disability payment under the terms of your disability insurance policy? It's a big deal.

We'll come back to that in a moment. Next is the policy, have a cost of living provision after I am disabled. This can be a big deal. You're getting $3,000 a month, but all of a sudden you're 30 years old. I was just reading – before I hit record, I was just reading about a story of this guy who was – where was it?

It doesn't matter. I think it was California. But reading about a guy who was arrested by the police and they pulled him out of the police car in handcuffs. He fell on his head and he was paralyzed from the neck down. He was an MMA fighter which was probably why they were pretty rough with him because his arrest was probably pretty difficult.

I didn't read all the details of the case. But point was he was pulled out of a police cruiser. He was pulled on his head and he was paralyzed from the chest down. I think I said from the waist. Excuse me. From the chest down, no longer able to function.

Well obviously he's totally disabled. But things like that can happen. You can hurt yourself and you can still do some work but you just can't do everything that you were doing before. Or you can still work and do everything you were doing before and you just can't do it for as much time.

Now you're 30 years old. You're 30 years old and as a 30-year-old, you've got a long time horizon. So say you're collecting – this guy, if he had a disability insurance policy, let's say he's collecting $3,000 a month from his policy. Well, $3,000 a month today is a livable income level.

30 years from now, that won't be a livable income level. So that's important. The next is the benefit reduced by any social security payments I may receive. Sometimes in order to reduce the risk, there – it exists on policies and you can put this on your individual policy, something called a social insurance substitute benefit where your amount of your benefit will be reduced if you're receiving social security payments.

So this can be a substantial thing as well. So those are the questions that you should ask about your group disability insurance policy. The point of those questions is to understand what you actually have. I've reviewed hundreds of policies that are great and I've reviewed hundreds of policies that are OK and I've reviewed a lot of policies that were terrible.

They just – yeah, they were called long-term disability insurance but the protection for the individual was minimal. Now here's the major challenge. If your employer is paying for your disability insurance, you can't opt out. You actually – you usually can't opt out even if it's terrible. I tried it one time with a client and the policy coverage was so terrible.

I said you should opt out of this thing and just get an individual policy to cover the whole amount. They couldn't do it. What you can do is if you're not enrolled, don't enroll until you find out the details of it and you can't find this stuff out from the little sales thing.

It's not going to tell you that. You can sometimes find it if you have the comprehensive booklet. But in general, this is where you have to sit down with an insurance agent and let them read through it and find it or you'll have to get on the phone and ask them these questions.

Again, I will post these questions at the website and you can use it to email it to your HR coordinate, HR benefit person. If you're a financial planner, feel free to steal my questions. This was always a standard thing. The first time I ever met somebody, I always saved this on my phone as an attachment and we were going to get into group disability – group benefits.

I just said you don't – unless you know, just email this to your HR coordinator and send me their answers. It worked really, really well to get a good, accurate understanding of what benefits somebody actually has. When you have a group policy in force, the insurance company, if you're applying for an individual policy, will take that policy and they'll calculate the amount that you have, calculate your income and calculate how much they're willing to offer to you.

If you don't have a group disability policy in force, then you should usually go and get an individual disability policy first because you'll be able to cover the maximum amount of your income versus the group policy. Now oftentimes, your group policy will be cheaper than your individual disability insurance policy.

Many times, you'll pay much less money. It wouldn't be surprising to me if somebody were to call me up and say, "Joshua, I can buy group disability insurance policy for $23 a month and you're telling me this individual disability policy at $97 a month. Obviously, I should go with the group." Well, don't go so fast.

The reason is you can't make that assessment accurately until you know what the group policy is and what the terms of that policy are. This is usually the major mistake people make. They jump on the group policy because it's cheap. But when actually look at it, we all of a sudden find out, "Well, yeah, it's cheap, but it doesn't have a partial disability benefit.

It doesn't have a cost of living adjustment after disability. It's capped at $5,000 a month and it doesn't cover your bonus." Yes, it's cheap and it's $20 a month, but it is in no way comparable to this really good disability policy over here that's $140 a month. With disability insurance, there's no way to cut the corners.

You've got to actually compare it based upon what's in the policy. In a moment when I go into some more of these definitions of disability, you'll see how as an insurance agent, man, you tell me how much you want to spend and I can build you an insurance policy that matches that.

You can't start by shopping on price for disability insurance. You've got to start of what you want and what's important, what options are necessary because I can take a disability insurance policy. It's $185 a month and I can drop this benefit and strip this other one out and let's go to the cheap option of this other benefit and let's shorten up the benefit period and let's stretch out the elimination period and hey, I took this $180 policy and it's now $32 a month.

Is that really what you should do? The obvious answer is no. You should start and understand the benefits that you want, that you need, and that are important for your situation based upon your financial assets, etc. and then go to the price. Obviously, also, we always have to fit this into the amount of money that's available.

Money is, for most of us, the amount of income that we have is not infinite. If we're working with a budget of $300, we've got to fit all of the needs into that and that's where again, you might say, "Well, I'd like to have a benefit period to age 65 but I can't do that and get disability insurance for my spouse and get life insurance for me and get life insurance for my spouse and have any money to save to an emergency fund.

I can't do all those things." So what we're going to do is for now, we're going to shorten up the benefit period from age 65 to five years and that will allow us to get life insurance for everybody. As an insurance agent, you always got to fit everything into the budget that you actually have.

Budgets can be flexible. Sometimes if you're a client, sometimes the budget that you tell the insurance agent you have and the budget you could actually come up with are different but at the end of the day, we're going to have a hard number of budget. If you're spending more money on your insurance than you are on your food budget, you're generally not going to be happy with your insurance agent.

Most people are not happy with that. I think those are the major things you need to know about group insurance versus individual insurance. Those are the key things. Obviously, an individual disability policy will go with you when you lose your job. A group insurance policy won't. So that's important also.

Now let's talk about the definition of disability. By far, the most important feature of a disability insurance policy is going to be the definition of disability. Before I give you some of the language, let me just ask you. If I came to you, pretend that I'm your insurance agent, I want the best for you and you're telling me, "Joshua, I'm disabled," how would I prove or how would you prove to me that you're disabled?

What would be the actual definition of disability? Let's come up with a couple of simple examples here. Example number one, you go skiing with your family, you run into a tree and you break a leg. Are you disabled in your job? Example number two, you go through a time period of severe depression and you're not able to function effectively.

Are you disabled? Example number three, you are diagnosed with cancer and it's a significant form of cancer. Now you're going through chemotherapy, radiation treatments, and you're working through with your oncologist trying to beat cancer. Are you disabled from your job? Example number four, I don't know, what would be a very common thing?

Just insert any accident, illness, you lose an eye, you were in a car accident and you're paralyzed from the waist down. You bang your head and you have a concussion, you're out of work. What would it take for you to prove to me that you're disabled? You can start to see how the most important thing is the actual definition of disability because under two different definitions of disability, let's talk about this in terms of the paralyzed from the waist down.

If you're earning your income as an electrician or a carpenter, it's very likely that you're now disabled from being able to work as a carpenter if you're disabled from the waist down. But does that necessarily mean that you can't get a job working as an accountant if you have the mental ability to do it?

You can start to see that we've got to figure out what am I disabled from and how disabled am I? It becomes more difficult. The first thing that we want to talk about is what is the best definition of disability? The best definition of disability will be what's called own occupation disability.

In the insurance lingo, you'll hear this talked about as own-oc versus any-oc. Own-oc is own occupation. Any-oc is any occupation. Own occupation, the best definition of total disability for own occupation would be the inability of you, the insured, to engage in your own occupation. It doesn't matter if you could go and retrain and do something else.

If I'm disabled from what I'm doing now, my own occupation, I want to be considered as being disabled. Really, really important. People with highly specialized jobs for which they've trained a tremendous amount of time will appreciate this to a very high degree. The most common people who actually appreciate this hugely are physicians because they know I've spent a tremendous number of years studying and learning and practicing in this very highly specialized skill.

Therefore, it's very important to me that I be able to do this very highly specialized skill. If at all possible, you want to be protected from disability in your own occupation. What about any occupation? There are a couple of ways that any occupation could be determined. These terms that I'm giving here will vary among companies, but these are generalized terms.

You'll just have to figure out with the insurance agent you're working with and with the company that you're working with which specific terms are being used. You definitely want to get an own occupation if you can. The next one would be an ENEOC. This would be where you're considered to be disabled if you're unable to engage in any occupation for which you're qualified by reason of training, education, or experience.

The idea here is to have some level of appropriateness. This would be called a modified any occupation or a modified own occupation. The idea is to say to some degree we're going to take into account your experience and training. Yes, we know that you could go and sit at the front desk of a condo and buzz people in and buzz people out, but it needs to be any occupation for which you're reasonably suited due to your training or your education or your experience.

If you've got a master's degree and you've been highly trained in a specialized occupation just because you can go sit in front of a condo and buzz the buzzer to let people in, we're not going to say that that's what you need to do. That would be called either, again, depending on whether we're doing any occupation or modified any occupation or modified own occupation.

Then the final leg of the three, which is the worst, would be truly any occupation. This would be get close. When I've said in the past that I place no emphasis or value whatsoever on Social Security as far as the likelihood of receiving Social Security disability payments, this is why.

We're getting here to like the any occupation definition as defined by Social Security. Here is their definition of disability. Social Security defines you as disabled when you have the inability to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

That's the technical Social Security definition. I'll read it again to you. The inability to engage in any substantial gainful activity, the inability to engage in any substantial gainful activity by reason of any medically determined physical or mental impairment, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Basically, you got to not be able to do anything and it's got to last and be expected to last for a long time, like at least a year, or you better be expected to die from this problem. This is a serious cost to you. This is really not the type of disability insurance that most people want to have.

Hey, but you can get it. It's cheap. It's what Social Security disability is. This definition of disability is the most important. Now, there may also be specialty definitions of disability. This is where you have to check your contract. If you are in a specialized occupation, there may be a specialized definition of disability, but in general, you want to get to as close to an own occupation definition of disability, which brings us to a question of saying, "Okay, if I'm disabled, then what?" This is another thing you want to look at your contract to understand.

Back in the '70s and '80s, I think they started to dry up by the '90s, but in the physician marketplace, there was a major thing that happened with disability insurance policies. You used to be able to buy what was called a true own occupation definition of disability for as a physician.

What this meant is if I were practicing as a surgeon, as a physician, I'm considered to be disabled if I can't practice my surgical specialty. Let's say I had a disability policy that covered me for $15,000 a month. Well, this is a substantial benefit. So, I go out and I'm out skiing and I fall and I break my hand.

Okay, well, now I can't do surgery. So, I'm automatically considered to be qualified and automatically considered to be disabled. But obviously, I'm still an intelligent person. I just broke my hand. I could still practice other forms of medicine. I just can't do surgery because I can't hold the scalpel properly or I can't do the very fine motor controls that are necessary for my surgical specialty.

What happened is many times somebody who was in that situation would qualify as being disabled. They would then go ahead and retrain, reskill, slightly shift their specialty and go ahead and earn a full physician's wage at another occupation while also collecting their $15,000 a month disability benefit, income tax-free, which is pretty sweet.

That type of definition of disability has gotten very difficult to find, very difficult to actually get that true own occupation definition of disability. And so, here's where when we get into the next thing, which is how is disability determined? You need to read and understand your contract because there are three major ways with most disability insurances policies that disability is determined.

You'll be considered disabled if you suffer a loss of time, a loss of duties, and then here we would get into a question, is it and, is it or, or is it and/or? And/or income, time, duties, income. This is the thing that's going to prove that you suffered a disability.

So the first one is time. Many times you want your contract to cover you if you're disabled for a period of time. You might still be able to do all of the things that are associated with your work, but if you just can't do them 50 hours a week, you can only do them 20 hours a week, you want to be considered disabled by the policy.

Next would be duties. You might still be able to work a full work week, but there were some duties of your job that you couldn't do before, excuse me, that you could do before that now you can't do. So you want that to be covered if possible. And then also you might suffer a loss of income.

But depending on your job, this loss of income might or might not lag the actual loss of time and duties. Income is ultimately the key indicator of your disability. Do you actually have a decrease of income? But sometimes, again, in many specialties, income will lag. If you were in a commission-based sales job and you had a bunch of things negotiated, or if you were receiving payment from things in the past, your income might not be affected until say five months or six months after your disability.

But do you want to give up disability benefits during all those periods of time? So that's – you need to understand in your contract how that is calculated. Some contracts and the contracts that I used to work with whenever possible would cover you for any of those three, loss of time or loss of duties or loss of income.

And usually though, you need to prove the loss of income after a period of time, so often something like six months. If you were still working 20 hours a week and you – but you never had a decrease in income, then the insurance company would say, "Well, you're not actually disabled.

The disability policy might not pay under those circumstances." So those attributes and features of the disability policy are extremely important. You can see now when I said I could make a policy cheap, just change it from own occupation to any occupation and all of a sudden now, we're going to have a major change.

Or again, that true ONOC versus modified ONOC. True ONOC meaning that you can receive your – you can double dip. You can get your disability benefit and you can go do other work. Very hard to get now. Most people are not going to be able to get that. Most disability policies are what's called a modified own occupation definition of disability, meaning that you can be disabled but if you're earning income at something else, that's going to affect and offset your benefits.

It's a much fairer thing. Fairer for the insurance company, better for the insured because you're not trying to negotiate something where you're going to double dip and get all this extra money. It just sets up too many conflicts of interest and too many risks of adverse selection for the insurance company.

Next thing is provisions. Here, I'm going to talk about total disability, partial disability, and presumptive total disability. It's possible that you might be completely disabled. It's possible. It happens. But on the grand scale of just statistical probability and likelihood, it's unlikely that you would be completely disabled. I'm giving you my sales pitch that I used to give to people.

What I found as a financial advisor – any of you financial advisors listening, here's the number one way to overcome objections in the sales process. Always give your client all of the objections that they're going to have before they have them and you feel like – and your client thinks that you're reading their mind.

Because people would be skeptical, especially disability insurance. What's the number one thing that everyone thinks is not going to happen to them when they're thinking about buying disability? "I'm not going to get disabled." Okay. So after a while, I started realizing, "Well, this is stupid. I have to answer this question every time." I would just look them right in the eye, especially men, and just say, "But the chances are, realistically, you're not going to get disabled, right?" Okay, great.

Now we can deal with that and talk about it. I don't have to have it lingering in the back of your mind. Same thing with the idea that, "Well, I'm not going to be able to do anything." Again, we're the worst. Every man would be like, "Oh, give me my laptop in a hotel room and I'll figure out a way to make money." Okay.

So I just took that and I'd always put it into my sales language. So realistically, Mr. Prospective Client, give me a break. It's possible, I guess, in theory, that you could be totally disabled. But realistically, statistically, it's really unlikely that you could be totally disabled. I bet if I gave you a laptop, even if you're in your hospital room – I think I said hotel room, excuse me – even if you're in your hospital room, if I gave you a laptop and a cell phone, you could probably figure out a way to make some money, couldn't you?

Nodding along, of course, because that's what they were thinking. Okay. So now let's talk about that. Total disability is important because it's possible you could get totally disabled. But the most important benefit in a disability insurance policy is a partial disability benefit. And the idea here is that if you suffer a partial disability, you're not totally disabled.

You just can't do some of the things that you used to do or you can't do them for as much time as you used to be able to do them, then you still want to be covered. This is a big deal because, again, most disabilities that people experience are partial disabilities.

Can still work. It just can't work at all. So in many policies, you'll have a sliding scale where you've got to at least be 20% disabled. If you were saying, "Well, I was working 55 hours a week, but now I can only work 50 hours a week," well, I'm sorry.

You're not that disabled. The insurance company is not going to pay you for that. But if you were working 40 hours a week and now your doctor has restricted you to 30 hours a week because of your back pain, you're facing chronic back pain that's occurring when you're standing and you can't work effectively anymore, that's a 25% disability.

And so if your hours are reduced, you're going to suffer a 25% loss of income. So you want to make sure that your policy covers you for that partial disability and makes up that 25% loss of income. Anywhere from 20% to 80% would be considered a partial disability. If you get to the point where, yeah, you can work 40 hours a week.

You were working 40 hours a week, but now you can work four, well, let's just go ahead and you're going to be considered totally disabled at that point in time. So partial disability is the most important thing because most disabilities are not total disabilities. They're partial disabilities. There's sometimes one other benefit and I like this other benefit.

It's called presumptive total disability. Some of the policies I used to work with, the presumptive total disability would say if you lose the use of both hands, both feet, one hand, one foot, or you lose your sight, your speech, or your hearing, you'll automatically be considered to be completely disabled even if you're still able to work.

So again, this comes back to that example I used of paralysis. Let's say that I had a paralyzing event and I had a disability policy. I could do my job right now, speaking to you through this microphone, whether I were sitting in a wheelchair or not. That wouldn't affect my ability to actually do this job.

It would make my life inconvenient, but it wouldn't affect my ability to do the job. But at least if I had that paralyzing event, I would, under the terms of a presumptive total disability, regardless of my ability to work and earn income, I would be receiving a disability benefit.

That could be extremely helpful. So I always like it when policies have that in there. Is it a must? I don't think it's a must, but I think the chances are so remote. I think the insurance companies, it's a cheap benefit to have in there. So many of them have that, the presumptive total disability.

That's how you figure out what's in your insurance policies. Those features right there, which is probably like drinking from a fire hydrant if you're not familiar with these terms. Those features determine how valuable or not valuable your disability insurance policy is. If you're working in the United States of America and you are earning wages, you're going to be covered under the Social Security Disability Insurance Program.

I consider that program as worthless as anything because of that definition of disability. You qualify as being disabled under Social Security. You can't be able to do any gainful activity, any substantial gainful activity. Not just, "Oh, I can't do any substantially gainful activity for the next couple of months." This has got to be a long-term thing.

You're not sick. You're not fighting cancer. You've got to have something where you can't do anything for at least 12 months or you're going to die from this thing. Then even there, you get into the stacks and the lines. Just the rates of application, the rates of approval are tiny.

The amounts are tiny. I consider Social Security Disability Insurance to be completely worthless. That doesn't mean there's a problem of all disability insurance. It's just you've got to actually check and understand what are the benefits of my policy. I'm going to save taxation for another day. Save taxation. I'm going to save a discussion of some of the other types of disability policies.

I've been primarily talking here about individual long-term disability income insurance. But there are other kinds. There are buy-sell policies. There are disability overhead expense insurance. There's all kinds of interesting wrinkles. Maybe I'll do that in a different show. Thank you all so much for listening to this disability series.

I hope that this has been useful to you and helpful to you. I know many of you have been encouraged and motivated to go out and purchase disability insurance and I love hearing that. Man, I wish I had an insurance license to rake the commissions in on this. It's what I always wanted as an insurance agent, sit down in a format like this and just talk and give you a chance to learn and educate you and then sell policies.

Because once you educate your clients, it's so easy to sell a policy. Unfortunately due to the ridiculous laws that we have in the United States, I surrendered all my licenses. So I can't take any commissions. But hey, you know what you can do is you can send me money.

So the way you do that is go to RadicalPersonalFinance.com/patron. You sign up to support the show there. That allows you to put some money from your pocket into my pocket as a way of saying thank you, Joshua, for this valuable content. I really appreciate those of you who are doing that more and more all the time and I thank you each and every one of you who's doing that.

The second thing that you can do is if you want to consult with me on a specific topic, I'm available to you to consult with you. The way you do that, go to RadicalPersonalFinance.com/phonecall. That will link you through to information. I can consult with you on any topic. I did a consultation with somebody on their disability insurance program recently and I just went through there.

They were working with an agent that was selling them a policy. I went through and explained. Here's how this works. Here's how you would decide if you wanted this. Here's how you would decide if you wanted that. I can't make specific recommendations of companies or things like that that would get too close to the line of selling insurance.

Since I don't sell insurance, I need to stay away from that line. I can educate you and I can tell you if you're getting clear, good advice or not. If you'd like to sign up for a consulting call with me, I'd be happy to do that. I think that consulting client was extremely pleased with the results of that call.

RadicalPersonalFinance.com/phonecall. (upbeat music)