In this month’s edition of “Money Matters,” Scott talks about the importance of disability insurance and shares planning tips for protecting yourself in the event of an unexpected disability .

Money Matters: The Importance of Disability Insurance Transcript

0:00:00.4 Sterling: Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. And Scott joins us now by phone. Welcome, Scott.

0:00:24.2 Scott Oeth: Good morning, Sterling.

0:00:26.1 Sterling: Yes, you wanted to talk about disability insurance here this morning. What does that mean exactly, disability insurance within a financial planning context?

0:00:38.6 Scott Oeth: Yes, Sterling, this is an important topic, and when people ask me about my business or my work, everyone wants to know about investing. That's the exciting stuff. That's financial offense, right? Building up your assets and building worth. It is very important. I love it. We really want to think about defense, too, and make sure we're not just building a financial house of cards. We protect against different types of risks that could topple a person or a family's financial situation, and one of the real big financial threats out there is disability. For most people, their biggest asset is the ability to get up and get out of work and get out of bed and go to work, and that present value, that stream of earnings is key. If you're doing a good job with planning, and you have enough time and you appropriately put away some of your money, you can get there in terms of funding future goals. But what if you run out of time? What I've found over the years in working with people is the idea of a premature, unexpected death, very tragic and difficult financially.

0:01:47.1 Scott Oeth: Folks understand that, but much more likely is an injury or a bad illness that prevents going to work, a disability. That's the one that's the gap, I find, that is often overlooked. Statistics show one in eight workers will experience a long-term disability that lasts five years or longer before they get to retirement age before they get to the point where they'd expect to be self-funding and financially independent. More than 80% of these disabilities are from illnesses, such as cancer and heart disease, multiple sclerosis, arthritis, back injuries, mental health issues. So, a lot of times people say, well, it's not going to happen to me, but I don't know about you, Sterling. You live long enough, and you do see people in your personal sphere of acquaintances that have some of these things come up, and it can be tough. So, you think about how would you pay the rent? How would you pay the mortgage? How are you going to pay the utilities? What about the vehicle? What about food?

0:02:50.5 Scott Oeth: What about maybe just a little bit of fun stuff? In an event of a disability, oftentimes people's expenses increase. It's not like they're just gone and not earning anymore. They may be there. They may need to revamp their home, accommodate it somewhat. They might need to have extra medical care and things like that. So, there's a term I heard back in the insurance industry called the living death—a long-term disability. It's certainly not in terms of lifestyle and relationship and emotionally, but from a financial standpoint, disability can be a real challenge financially. One of the things we can do is try and transfer some of that risk and say, can we get some disability income insurance that would bring a paycheck into your bank account if you're not able to get up and perform your duties and your tasks of your regular work?

0:03:43.1 Sterling: Yeah, if you want to go into that, I mean, is it something that people can get through their workplace, or is it something that's individually purchased commonly?

0:03:53.5 Scott Oeth: Yeah, very good question. There are a couple different ways to get it. What I should say is this is fairly complex. It's a serious issue, so I really recommend people do their own research on this, consult with an expert, great independent insurance agent, and maybe even separately some other counsel, like a good financial planner, and really read up on it, because there is a fair number of details. So, the first step, Sterling, for a lot of folks is through their employer. Happily, it's become fairly common as part of the employee benefits package where you can have short-term and long-term disability income insurance, and I think in most cases, until you're to that point where you're really confident that you're financially independent, it probably makes a lot of sense to pick it up because it's group pricing, so it's often fairly affordable, and the underwriting is really simple. You just check the box on your employee benefits form and boom, it's in place, but even with that, you really must think about it. If something happened, and even if you elect the 60%—the higher amount—which I think in most cases is probably where people want to be, that's going to come to you in the form of taxable income.

0:04:56.4 Scott Oeth: So, could you run your household? Could you support your lifestyle? Could you keep saving for retirement or that next vehicle or your child's college fund if you're on 60% of your current income and it was a taxable benefit? I think that's the starting point. That's the foundation for most folks is try and maximize their group provided through their employer. Oftentimes, if someone is in an occupation where there's a professional association, look there as well. Oftentimes, there's benefits available through different professional associations. If you're in a specialty occupation, that's another good place to get that group-type coverage, but beyond that, I think you really should analyze your situation and say, is that enough? You can go out and individually buy an individual long-term disability income policy to stack on top of that group policy. So, maybe you get 60% through your employer, and you work with an insurance agent to buy a separate policy that covers another 15 or 20% of your income. They won't let you cover 100% and this gets to one of my favorite industry terms, Sterling, because they want to prevent fraud and malingering. That's the idea that if you're fully covered, there's no incentive to go to work.

0:06:12.2 Scott Oeth: You just say, my back hurts, you know, and sit there and collect the disability checks. So, usually, they get to that maximum amount. It is a fairly significant amount of underwriting. You must go through the process. They want to know the risk level of your occupation. What's the earnings history look like? They want to look at your medical records, but that could be a big step forward in terms of covering that extra gap that might be there. There's a lot of details, like saying how these policies are designed, but a big one to take a look at is, first of all, what's the dollar limit? You know, if you're a real high earner, a lot of these policies are maxed out. So, think about that, but also there's these terms, “own occupation” or “any occupation.” So, you want to look at that and say, what would this policy cover? Kind of a classic example is maybe you're a dentist. Well, if you have an any occupation policy and you suffer a hand injury, you're skiing on Lutsen or you get arthritis from too much canoeing in the Boundary Waters or something like that, and you can't do your work, they say, well, could you still be a shop clerk or could you still be a telemarketer or something like that?

0:07:18.7 Scott Oeth: That would be “any occupation”. It might not necessarily be what that dentist wants to fall back on, but sure, they could still work. So, the policy would not pay out. This is a real key. Oftentimes, if you're in that type of area where you have specialized knowledge or skill set, put a lot into career or education, you want that “own occupation.” So, if you're not able to do your specific job duties because of injuries, illness, things like that, the policy would pay out.

0:07:48.2 Sterling: Yeah, that's a good one to know of there. Do you have any other ideas or planning tips that we can use to help protect against the risk of an unexpected disability?

0:08:00.9 Scott Oeth: I think the big one is, sure, there are a lot of details in insurance. I really encourage people to put on their to-do list, think about their own situation, what would happen if they had an illness or an accident and not able to continue working? Should they add disability income insurance? But just generally in the bigger picture, I think it really points to the need to just think about your overall financial plan and your position. Enjoy life today but think about yourself in the future and try to build toward a prudent financial plan. Many people like the idea of financial independence, and if you get to that point, Sterling, you say, okay, I've built up enough assets where I can support myself. A lot of people retire. The disability is not that important because work is kind of optional at that point anyway. So, that's great, but being smart about debt, building your net worth, and making sure that your assets are not all speculative and volatile, that there's some there that you could draw off the midterm if need be.

0:09:04.8 Scott Oeth: I'm not one of these folks who thinks everyone should have a side hustle or multiple streams of income. I think in many cases, it makes sense for people to focus on their highest and best use and really maximize their efforts and being excellent in their primary role. I also think it is good to think about what would be the fallback plan? What if your industry significantly changed? Maybe it's not an injury or an accident at all. Maybe it's just that the economy is changing and things are evolving and your job or your field doesn't exist anymore. What would you do? Certainly, what would you do if you couldn't really function in the role that you're in? Do you have a fallback skill or an occupation or job or something like that that you think you'd like to do?

0:09:58.5 Sterling: Well, certainly appreciate your time here. We're talking with Scott Oeth, and we talk finances with Scott the first Wednesday of the month on North Shore Morning. Thanks so much for talking with us today.

0:10:14.1 Scott Oeth: You bet. Thank you, Sterling.