 Personal Finance PowerPoint Presentation, Disability Income, DI Insurance. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, looking something like set the goals, develop a plan to reach them, put the plan in action, review the results, repeat the process periodically. Most of this information can be found at Investopedia Disability Income, DI Insurance, which you can find online. Take a look at the references, resources, continue your research from there. This is by Julia Kagan, updated March 14, 2022. In prior presentations, we've been thinking about insurance in general. We then moved to the medical insurance. Now we're thinking about the Disability Income Insurance. Note that if you think about classical kinds of insurance, things like property insurance or things like liability insurance or life insurance were often insured against something that we're hoping doesn't happen in the future, but if did happen, would be financially devastating. Therefore, we would like to insure against that possibility from actually occurring something like our home built burning down, for example, or someone suing us for millions of dollars or us dying prematurely. And this, when we're talking about the Disability Income Insurance, we have a similar kind of scenario to those classical kinds of insurances in that we're hoping that nothing hinders us to have a disability which would stop us from being able to get our income flows, which we and people dependent upon us are dependent upon. So we would like to safeguard against that possibly with some insurance to lower the risk in that. The medical insurance and the dental and the vision and that kind of stuff was a little bit different because when you think about those kinds of insurance, you still have that big medical event that you're safeguarding against, but they also kind of expanded it to cover the normal preventative kind of stuff. So in that way, the medical areas kind of confuses things a little bit when you're thinking about the classic kind of insurance. So just keeping those overall insurance concepts in mind, now we're thinking about what is Disability Income DI Insurance? The term Disability Income DI Insurance refers to an insurance policy that provides income to individuals who can no longer work because of a disability. So if a disability happens, can't work, the income stream that we were dependent upon no longer available, that's a problem, that's a risk, that's a risk we might be able to mitigate with insurance. Disability Income Insurance helps protect people from financial losses if an accident or illness renders them incapable of working and receiving regular income. DI Insurance is available through employers, social security, or insurance companies and comes in short and long term disability coverage. So it gets a little bit confusing in terms of who's providing the disability insurance and what are going to be the coverage kind of types for it. Disabilities are based on a number of factors including a person's age and occupation. Policy pays benefits on a monthly basis. So how Disability Income DI Insurance works? Disability can cause a disruption in income and prevent people from maintaining their standards of living, paying their bills or providing for their families. Clearly that's a problem we would like to ensure against. So it's kind of similar, you can think of it kind of like the life insurance where you actually die making it difficult to pay the bills and support people and so on, but similarly if you're disabled then you can't do the same kind of things you would have been able to do. So as many as 43% of individuals age 40 will have a long term disability by the time they turn 65, that's a scary statistics. Enrolling in a disability income insurance policy can help individuals mitigate any losses that stem from an illness or accident that leads to a short term, short or long term disability. DI Insurance isn't designed to guarantee 100% of your regular income. Instead it tends to replace between 45% and 65% of your gross income. So when you're thinking about the insurance you're typically not thinking, well I'm going to have something if I have a disability I get 100% but typically some ratio or amount of it 45 to 65. As noted above most employers provide their employees with DI disability insurance benefits. This type of program is referred to as group insurance coverage. Benefits are also available to insured individuals and their families through the Social Security Administration, that's the SSA, individuals may choose to purchase DI insurance to supplement existing coverage or if they don't have any insurance at all. Premiums are based on a series of factors including your age and occupation. If you work in a field that has a higher risk of injury your premiums will be higher. Clearly that would kind of be the case because just like any insurance what they're trying to do is have a bigger pool of people. Remember that this is something that we're hoping doesn't happen. Possibly the likelihood is that we're not going to have some kind of disability. But if you take the numbers as an aggregate as a whole then you can make decent projections or predictions on at least the stats and that's how they're going to come up with the rates that they're going to be on the insurance. If you're working somewhere like a police officer or a fireman or woman then of course the risks are higher at that point and you would think that that would have an impact on the pool when they do their insurance calculation. So the amount of income you receive is also factored into how much you pay for coverage the more you earn the higher your premiums. Now obviously the age would be a factor as well because clearly as we get older we're more likely to be disabled at some point unfortunately. And also then the income level is going to be a factor because obviously if they're paying out if you get disabled a percentage of your income that means that if you do get disabled then it's going to cost them more so that's going to be part of their actuarial calculation for the insurance calculation. So those all kind of make intuitive sense if you kind of think about how this whole thing works. Policies pay benefits and the event that illness accident or injury prevents you from performing material or substantial duties for your occupation. Benefits are tax free because the policy holder uses after tax dollars to pay premiums. So special considerations disability income insurance policies contain a specific monthly benefit amount that is based on your monthly or annual income. For instance your employer provided a benefit may be may pay $3000 a month unless stated in the policy language DI policies do not coordinate with social security benefits but pay in addition to it look for an index policy that keeps up to date with inflation as your benefits likely won't kick in for some time. So in other words if you're looking at the kind of benefits that they're going to be paying out you also want to be considering well if they're just going to have that amount that they're going to be paying out is it going to be indexed or increased with inflation which for the last you know some time you might not think is a big factor but you know we're going into a period of time now where it might be more of a bigger factor and obviously it's something we want to make sure is in the consideration. Most insurance companies provide plans that carry a maximum benefit period of 2, 3, 5 or 10 years however some company have plans that pay up to the age of 65, 67, 70 or for the rest of your life. Once again the price increases to purchase and extended benefit period. So policies have waiting periods before you're able to receive any benefit payments so these refer to the amount of time or number of days that you are disabled before benefits kick in. So these periods which are also called elimination periods vary by employer and insurer. The most common period is 90 days. The shorter the elimination period the more expensive the premium which of course that kind of makes sense as well just in terms of how you would expect the policies to work. Policies do not pay 100% of an employee salary and may not guarantee job protection but there are certain protections that come with most policies. You got the non-cancellation policies mean insurers can't cancel the policy for any reason unless you stop paying your premiums which is nice. Guaranteed renewable policies allow individuals to renew their policies without any changes which again is nice. This kind of goes into that idea that we often hear in like the medical area where you have the pre-existing conditions and stuff you would think that over time as things change you would like to be able to re-up the policy fairly straightforwardly generally would be nice and if there's not an interruption in the policy then you would think it would be nice if you were able to re-up it without the problems. But the insurer may increase the premiums at any time. So how to get disability income insurance. You aren't required to have DI disability income insurance unlike other forms of coverage such as homeowners insurance so we talked about homeowners insurance in the past often times you're required to do that in part because you got a mortgage on the home and the lender wants you to have that for that reason but in any case but most employers provide their employees with some type of disability insurance as part of their annual benefits package so they may also give the option of additional coverage premiums are paid through regular payroll deductions workers compensation is a form of disability insurance so you got the workers comp disability insurance mandated by the government so that's kind of government mandated disability insurance individuals receive benefits through employers who are covered by the Workplace Safety and Insurance Act this form of disability insurance covers injuries or illness as a result of employment compensation usually covers medical fees that are related to an employee's injuries or the equivalent of sick pay during a medical leave so notice once again this form of disability insurance covers injuries or illness as a result of employment so clearly that would kind of make sense because if you get injured on the job then that would be kicking in and part of the benefit or part of the rationale for that is that you don't have it you're trying to say that we're going to cover that if it happened basically on the job which hopefully would lessen kind of lawsuits maybe between people that say people are trying to sue the company for injuries on the company if the insurance can kick in that might be one rationale for it but notice that that would be injuries that happen on the job it's likely that you could have injuries that didn't happen on the job that it would be nice to have some coverage for because you could be in the same circumstance that you can't basically do the job that you were doing before if you have some kind of injury even if it didn't happen from the job the quality and scope of the employer provided and workers compensation coverage may leave a disabled employee short of the protection they require many employer offered plans are part of a suite of coverage and may not pay to the level and employee needs to meet their expenses you can choose to elect supplementary coverage on your own through a private insurance company if you so choose so obviously this is an option that we might want to be considering in some cases so this is especially important for self-employed individuals and small business owners who may not claim workers compensation for themselves employed then you've got the same kind of risks that could be there but you might not have the same kind of coverage due to being the self-employed in the small business for example say a sole proprietor reporting say on a schedule C for example of the tax return as noted above you may qualify for disability benefits through the Social Security Administration however so this is another kind of government funded kind of thing Social Security Social Security disability insurance and supplemental security insurance that's the SSI provide benefits to insured individuals and their families being insured means you worked long and recently enough and contracted through Social Security taxes on your earnings in other words the Social Security program is in essence one in which you can think about us putting money into the Social Security with that usually happens through the payroll taxes so if we work somewhere we get W2 income we pay into Social Security with payroll taxes so you're paying into the system and then we usually think about the money coming out of Social Security at the benefits time which we often think of when we reach like retirement age for example the money coming out but you can also have other components of the Social Security related here for example but generally you would have to have paid the way the system works we have paid into the system and in order to get in order to get generally the benefits of the Social Security system that's kind of like the general rule so this means you don't actually purchase coverage through the SSI the same way you would through a private insurance company you must apply online by phone in person or by mail to begin receiving benefits which are capped changes are made each year by the agency so we'll probably dive into that in a bit more detail in future presentations types of disability income, DI insurance disability income insurance comes in two different types we got the short and long term disability coverage you got the two kinds here we've noted some of the basic components of each below you got the short term disability income insurance let me guess it's for a short term maybe let's see short term disability provides employees with coverage for time spent away from work for a short period of time I told you it's for a short period of time wage insurance covers events such as an illness accident or injury where the employee intends to return to work after a few weeks months or years don't worry boss it'll just be a few years I'm going to take care of my pinky toe and then I'll be back I promise just pay me for like 10 years or something I'll be back most STD policies have a waiting period of 0 to 14 days before the benefit kicks in benefits may only be paid for a maximum of two years two years so we got the max the cap at the two years so we get the long term disability income insurance then I don't know if I mean if I had to get a wild guess on what the difference is there might be a longer time time frame I'm guessing but as the name implies long term disability insurance covers individuals who may experience a long more lengthy or lifelong events employer plans normally work in conjunction with STD plans that's the short term disability plans and obviously that kind of makes sense when you're thinking about the employer that's thinking of you as a going kind of concern or someone that's going to be part of the company after some point in time you would think so this means that individuals begin receiving STD short term disability benefits before any long term benefits kick in put simply long term benefits begin after any short term benefits are fully paid out so you might then have the conjunction of the two you got the short term benefits and then after that has expired possibly then the long term benefits kicking in if necessary the waiting period for the LTD that's the short for the long term disability benefits can range anywhere between a few weeks and several months the maximum benefit goes beyond STD short term disability coverage from a few years to the rest of the insured individuals life the cost of disability income DI insurance how much does it cost to get this kind of thing the final premium for disability income insurance varies and is based on a number of factors I knew it would be it can't just be a straightforward answer here it depends so policy premiums generally range between 1% and 3% of your gross income insurance underwriters also consider age during the underwriting process which would make sense because as you get older it's more likely you're going to hit up some kind of problem you would think the minimum age for applicants is 18 while the maximum tends to be 60 unlike life insurance disability insurance rates for women are higher per unit of coverage than those for male applicants that's that doesn't seem right but obviously you would think that's probably due to the fact that there might be some you know some conditions involved possibly like pregnancy or something that's going to be skewing the actuarial calculation I would I would assume that difference is dependent upon some kind of biological calculation factored into the actuarial numbers but in any case insurers have historically paid more and higher dollar amounts for claims filed by women so that would kind of make sense so if they look at the numbers they're saying hey when I have to pay out the claims they're usually higher for some reason and that and so when they do the calculations they're trying that the premiums end up to be higher so and in any case this includes those those filed during an earlier period of their lives this may be attributed to pregnancy, childbirth and higher rates of depression and autoimmune disorders I would think you know like childbirth and what not could be a costly and taxing experience on the old body but in any case smokers they're always they're always picking on the smokers smokers can also expect to pay as much as 25% more for the same protection as non smokers because of the higher incident of smoker related illness yeah whatever you just don't like the smoking people anyway same kind of calculation there makes sense because you're going to have more issues most likely they can cause disability which would result in higher premiums due to the actuarial calculation and so on when determining premiums providers often place applicants into a carrier and income classifications the basis of these classifications is on the carriers claim experience for these job categories and incomes the classification with the lowest risk pays less obviously that would make sense young healthy person male apparently because they're not likely to get pregnant I would assume then is less like is going to pay the lower premium you would expect because they're less likely to get injured although young healthy men are often more stupid so they might do something stupid or you know a little crazier maybe but in any case apparently they've done the numbers they've run the numbers and you would think that that might result in the cheaper amounts so that's the recap that's the overview we'll talk about it in a bit more depth in future presentations