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Should I buy up more disability?

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  • Should I buy up more disability?

    I get 60% disability through work for free. It is a group policy, so I am guessing it is not own occupation (if I have the lingo right). I don't do procedures, so I don't know if I need it ( that is my first question). I believe the payout is pretax on that.

    My second main question, they are offering a buy up, an extra 7% coverage for $32/pay period (or $37 with COLA) or 15% coverage for $60/pay period or 69 with cola. In annual terms, the 7% one costs $844 and would pay out $18,500 (4.5%). The 15% one costs $1570 for $37,000 a year. This upgrade is portable and post tax cost and therefore post-tax benefits. I'm 44 and in pretty good health, I'm the breadwinner with 60-65%, we are 20-25% of the way to our "number" for FI. Our house is maybe 40% paid off, but we live in a very HCOL area so we still have a lot left. This is nice because it doesn't require the hassle of a physical and all, and it has a deadline, so I have to decide! Should I buy it? Could we survive on 60% of my salary, likely but without saving as much for retirement, or we might have to let our nanny go, or things like that.

    Third question, should I buy independent coverage for the first 60% or am I okay since I don't do procedures?  (Can I even by independent coverage for the first 60%?...oops that's four questions)

    Thanks, I feel totally lost in disability coverage

  • #2
    Ask them to send you a copy of the policy (sample policy or master policy, very different the marketing brochure) then really read the definition of disability very carefully.   Also be sure to read the definition of your waiting period and of course the benefit reductions (income offsets).  Finally note that the carrier and employer own that contract, not you so when they make changes down the road you will have to live with those changes, good or bad.

    In regards to the taxable issue if you pay for benefits post tax then it is tax free, if they pay for it on your behalf and then don't push out the cost on your income then it is taxable benefit.

    If you know your monthly budget then look at that and you will know the benefit amount you need if something were to happen, assuming you don't have a stack of cash laying around to supplement you monthly expenses.

    As for the buy up, just make sure your buy up actually buys you something.  Sometimes there are buy ups from 50 to 60, 66, 70% or more but there typically is a policy max of $10k or $15k so sometimes a buy up gets you a bigger % but the overall payment does not change since you might already be hitting the max benefit payable.  An example would be you make $400k, have a policy of $15k at 50% so you are already maxing it out, to pay for a 60 or 70% buy up does not change the amount of benefit they need to pay you because you already hit the policy max.

    Just remember that there really are not loop holes in these policies, just language and the language determines how a policy performs at claim time.  If you don't know exactly how that thing is going to work at claim time then it can certainly feel like a loop hole when they point out the terms of the contract.

    If you get the policy and want to pm me, I will look at it and send it back with notes and highlights for your review.
    Scott Nelson-Archer, CLU, ChFC
    281-770-8080 Direct / [email protected]


    • #3
      really take a hard look at your expenses.  What would continue if you were disabled.  Health care would likely increase.  You might not need stuff like a nanny.  You need to make sure that when you total up the disability income that it will cover your expenses.  I had own occupation for many years and basically bought  as much as they would sell me at the time.  I am in a procedure heavy speciality.  I dropped it several years ago when I knew I was financially independent.  I have several friends who have had to use their policies.  You just never know.  Having Scott above look at the policy is probably wise.