Episode Transcript
[00:00:00] Speaker A: In this episode, we talk about five reasons the disability policy you have at work may not be enough. Let's get started.
[00:00:06] Speaker B: Let's get some money from New Money, New Problems. It's the New Money New Problems podcast. A show for successful professionals searching for the tools they need to navigate financial opportunities and, uh, obstacles they've never seen.
Negotiating compensation. Purchasing your first investment property. Helping your family with money. The highs and lows of entrepreneurship. New Money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the New Money New Problems podcast.
[00:00:45] Speaker A: Hello, my name is Brenton Harrison of New Money New Problems and your host for the New Money New Problems podcast. It's an interesting time of year. In addition to fall being right around the corner and the weather changing, it's already early voting time in most states, as you can see if you're watching on video. I have my sticker on my chest from early voting this morning, and I hope that wherever you are, you are, if you have not already about to exercise your privilege to vote. Uh, another time of the year that it is that we've covered in the past couple of weeks is open enrollment. And open enrollment is the time of year where many employers ask their employees to go through their options and pick the benefits that they're going to use for the upcoming 12 months. And this is something we've touched on briefly in the past. And I will admit that it's not the sexiest of topics, but I'm also committed on this podcast to sharing the things that are relevant to you and important to you, even if they're not the things that are the sexiest of topics all the time. So if this is one where you know that you should listen, but maybe it's something that you might skip over if left to your own devices. Turn that Speed up to 1 1/2 times speed so you can retain the information, but get onto something else a little faster. So let's talk about disability insurance, what it is and how having a group policy impacts your finances. Disability insurance is really paycheck protection. It is a form of coverage that makes sure that in the event that you are ill or unable to work for an extended period of time, that you have a portion of your pay that's coming back in the door. Now, in this episode, we're going to talk primarily about long term disability insurance and some of the shortfalls that you can see with group policies as compared to what you need in your personal life. And when I say shortfalls it does not mean that group insurance for disability insurance isn't something that you should have. As a matter of fact, it can be one of the more cost effective ways to get coverage because both group policies are offered at more cost effective rates. And also it's highly likely, especially if you're a high income earner, that your employer is picking up a portion of that tab so you're not having to pay 100% of the monthly cost. And since I told you that, we're going to go through reasons that this group policy may not be adequate, and we're also talking about the fact that your employer may pick up the cost. Let's start with number one. And number one, the first reason why you may need to consider getting coverage on top of what your employer offers is because your employer may be paying all or a large percentage of that disability policy. Now, why is that a problem? The problem is that when you have a disability insurance policy, whether you own it or your company owns it, if you were to go on claim and actually receive benefits, the taxation of those benefits is dependent on who pays the premium. So for example, if I have an individual policy and it's set up to replace 60% of my pay, and most disability insurance policies are designed to replace 60% of your pay, then if I make $100,000 I paid for the policy on the front end, I happen to be totally disabled, I start getting $60,000 a year, $5,000 a month, and that entire benefit that I receive is not taxable, I can spend it all without worrying about federal income taxes or state income taxes. But with group policies, it works differently. Because with group policies, whatever percentage of the premium your employer pays on the front end, that percentage of the benefit will be taxable to you as income on the back end. So going back to our example, if you're looking on screen now, let's say we have a person who makes $100,000 in salary and that they have a group disability policy that aims to replace 60% of their pay in the event of a total disability. Well, that would mean that they would go from $100,000 a year to $60,000 a year, and that is already a significant reduction. Losing 40% of your pay is no joke. But in this example, if the employer pays half of the monthly premiums on the front end, then half of the benefits, in this case $30,000 a year, would be subject to income taxes. So you're already taking a 40% reduction in pay and then a portion of the 60% that remains would be subject to income tax. So you may find that after those taxes are paid that you go from making 100% of your pay when working to 50% or less when taxes are considered. So if you're a person, especially one who is a high income earner or one who lives in a highly taxed area, who has an employer who covers some or all of your disability insurance, the first reason you may want to consider having your own policy on top of your group one is because you may have a bigger reduction in the event of a total disability than you realized. The second reason your group policy may not be enough is you are heavily dependent on commissions, overtime or bonus pay. When you look at how most group policies are structured, you'll often find that whatever percentage they replace is typically 60%. Some go as high as 67%. That percentage is based on your base pay only. Now, if you're a person who is a realtor, uh, or a salesperson and you receive a lot of your pay through commissions, you could, in some instances, if a number of people or a large percentage of the people at your job are paid in a similar fashion, find examples where a portion of commissions are considered. But for the most part, even if you are a high commission earner, you will often find that the only thing covered by that group policy is your base pay, no matter how small. Now, that's a big deal. But even if you're not in a commission pay environment, you may also be heavily dependent on your bonus pay or if you're an hourly worker, your overtime pay. There are others who, yeah, they make a good base salary, but they're dependent on that quarterly or semiannual or annual bonus that they receive every year. And when people say that they're not dependent on those bonuses, oh no, I manage my cash flow just fine. I will ask them. Let's go back to the last three years of your bonuses and tell me what you used those bonuses to cover or to invest in when you received them. There are some people who truly aren't dependent on those bonuses and they stick the money in cash or they invest the funds for future use. But if you say you're not dependent on bonuses, and I look back in the last three years and you've used them to pay down credit card debt or increase your monthly savings because you are running low on reserves, then you may think that you're not dependent on that bonus, but your finances say otherwise. So if you receive significant bonuses on which you depend, understand that in the event of a disability, not Only would you be receiving that potential 40% reduction in base pay. Not only would you potentially pay taxes on a portion of that benefit, but the bonuses that you receive that I am assuming are going to be performance based are also not covered in that percentage. The third reason your group disability insurance may not be enough is you depend or receive significant equity compensation. I really can't wait till we get to the, uh, portion of these podcast episodes where we start to talk about equity compensation in detail is something that we deal with very regularly when it comes to our client base. But equity compensation are things like employee stock purchase programs. They're things like employee stock ownership programs. They're things like restricted stock units and warrants. They are ownership or forms of ownership in your company that you either receive as a portion of your regular time at your job, meaning that the longer you stay, the longer you vest in these benefits and they're just yours. An example of that would be restricted stock units. You have restricted stock units and it is stock in the company and it's restricted because you have to stay at the company a certain period of time before that stock vests and truly becomes yours. So it's promised to you, but until you fulfill the time requirement, it does not vest or become yours. Now there's other forms of equity compensation where instead of you just receiving the stock, you have an advantageous way of purchasing the stock that could be a stock option where you have the ability to buy it at a predetermined price that may be lower than the fair market value. There's also the employee stock purchase programs where you can buy into company stock at a discount over a certain period of time. And there are a great number of people out there who work at companies who offer equity compensation who either depend on that equity compensation to be a big driver of their future wealth, or their companies, like the Metas of the world, like the alphabets, Googles of the world, who actually keep their base pay relatively low, at least when it comes to the cost of living in the areas where they have offices. And the reason they can keep it low is because they give their employees significant equity compensation. And they are assuming that those employees are going to cash out at least a portion of that equity compensation and use the proceeds to live on on a yearly basis. You typically see restricted employee stock that would vest quarterly or semiannually, in some cases annually. But when you look at larger companies like in Alphabet, it wouldn't be uncommon to see that stock vest every single month. And it's because they're assuming that those employees need to sell some of those shares to cover their monthly expenses. So whether you are in the extreme where you work at a place where you do need to cash them out every month, or you're just someone who receives significant equity compensation and you want to make sure that you can continue to use it as a driver of wealth, understand that neither of these camps are covered by your group disability policy. Not only that, I would say that for most people with whom we work, the significant additions to their equity compensation come based off of performance. So if you're thinking that, oh, you know what, I get 200 additional shares that are granted to me typically every single year when I have my performance review, well, if you're totally disabled, you're not going to have a performance review, so that's not something that's going to be granted. So for all of the forms of compensation you receive, you want to have an honest assessment of how much you depend on those forms of compensation, either because you have to have it or because you are planning on using it for your future wealth.
[00:10:30] Speaker C: This is the New Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:10:48] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news. We've crafted the New Money New Problems gap finder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended family's finances could pose to your household.
Please head to newmoneynewproblems.com Gapfinder to complete it today. Again, that's newmoneynewproblems.com gapfinder to take the assessment.
[00:11:22] Speaker C: You're listening to the New Money New Problems podcast. Subscribe now at New Money new problems.com welcome back.
[00:11:38] Speaker A: All right, let's get into the fourth reason why your group disability policy may not be enough. And that reason is your income is significantly higher than the average pay of your co workers. So we talked in the first half of the episode about the fact that it's pretty standard to see that 60% of your income or 67% of your income would be replaced by your group coverage. What we didn't talk about the fact is it is also pretty standard for a group policy to have what's called a benefits cap or a benefits limit. And what that means is they do aim to replace that percentage of your pay, but only if it does not exceed the monthly benefit limit that they've set for group coverage. So, for example, you might find a company that says, our group policy replaces 60% of your pay, as long as 60% of your pay does not exceed $5,000 a month. $10,000 a month would be another number that I would see very regularly when it comes to group policies. So let's go back to a version of the example we used in the first half of the episode. We're going to assume that they're paid 200,000 and that their group policy replaces 60% of their pay, which means that if there were no benefit limit in the event of a total disability, they would receive $120,000 a year. That's $10,000 a month of benefits. But now let's assume that that group policy has a monthly cap of coverage at $5,000 a month, which would be $60,000 a year. Well, that means that if this person had truly 60% of their pay replaced, it would be 120,000 because of that benefit cap. In the event of this disability, they would go from making $200,000 a year all the way down to $60,000 a year if they were totally disabled. That is a serious reduction. If they don't read their policy carefully, they could be going about their business having no idea that the overwhelming majority of their income was left unprotected. Now, this is something, when we talk about you making a significant amount more than your coworkers, that you just need to know the limits. Because I would say that if you work at a place where everybody makes $200,000 a year, that it's highly likely that your group disability policy is going to have higher limits. So when you look at the big corporations of the world, Instead of a $10,000 monthly limit, it may be 25,000, and you may be perfectly fine if 60% of your pay doesn't exceed those higher limits. But if you work at a company where you're one of the executives and everyone else makes a significant amount that's less than yours, or you're a vice president, or you just make a good deal more than the person sitting next to you, you need to be aware that it is a good possibility that your monthly benefit is low because they typically keep it in line with the average pay of employees that are on that group plan. So be aware when you're reading your employee benefits packet or looking online, ask about the monthly benefit limits if you don't see it readily available, and make sure that 60% of your pay either falls within or is not too high over that monthly cap. And the last reason, at least for this episode, there are more that you would want to consider getting your own policy on top of your group plan is if you work in a highly specialized field. Now, when I say highly specialized, that can mean a lot of things. Instead of you being an engineer, you may be into robotics or AI, a very specialized field. If you're a physician, it may just not be that you're a physician, it may be that you're a surgeon or a vascular surgeon. But whatever it is that makes your field specialized or makes it easier for you to be disabled than your peers, it is very important that your group policy, or any policy that you have, be considered own occupation coverage. And own occupation coverage is a type of coverage that makes sure that in terms of what makes you disabled, they are considering the tasks that apply to your particular profession or subspecialty instead of the task of a general profession. So in our example of someone who works in robotics, it doesn't matter if you're an engineer. What most matters is, can you do the task of someone that works in robotics? And if you can prove that you can't, you can go on disability claim, even if you are actively working within another specialty of your field. So, for example, if you're making $200,000 a year working in robotics, and for whatever reason you can't perform the tasks of someone who works in robotics, then if your policy says it replaces 60% of your pay, you can start collecting 60% of your pay as a person who works in robotics. Now, let's say that after a year, or after six months, or after two years, you retrain yourself to perform the tasks of another field in engineering, or maybe you're teaching robotics, but for whatever reason, you still can't perform the tasks yourself. You can collect 100% of your pay in your new profession or new subspecialty while still collecting your benefits from the subspecialty that you cannot perform. That's the power of own occupation coverage. And if you work in a field where many people around you have subspecialties, then you might see own occupation group coverage as a part of your policy. But again, if you are in an area where you are more specialized than your peers or earning more than your peers, then it is crucial that you read the details of that policy to make sure that you're subspecialty is what's covered and not the general profession of which you're a part. So those are five reasons that the disability at your job may not be enough, and why it may necessitate you looking for some coverage of your own to supplement what you have through your employer. I know we didn't get into how to structure that individual policy. That's an episode for another day. But as we're in open enrollment season, I want you to have some of these ideas in your mind as you read through these benefits carefully this year, um, unlike last year, to make sure that you're putting yourself in the best position to optimize your benefits for 2025. We'll be back next week for part one of a two episode series with a special guest, and I hope to see you all there.
[00:17:14] Speaker B: Let's get some Money from New Money, New Problems this was the New Money, New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
