Most Americans do not have disability insurance in their employee benefit package, but those who do may have a false sense of security. When approached about disability insurance, many are quick to say: “I have disability insurance coverage at work.” This response is the perfect opening to engage the client in an examination of just what their benefit might look like.
Question 1: How much would your monthly benefit check be?
Sixty percent of salary sounds like a reasonable amount to cover essential expenses at least for a short time. Ask the client to calculate a potential monthly benefit check, assuming a benefit amount of 60 percent of salary. For example, the monthly gross benefit for someone earning $120,000 would appear to be $6,000. (120,000 x.60)/12. However, there’s a good chance the benefit could be less than that, as you’ll see in the questions below.
Question 2: Does your work plan include bonus or commission as part of the “annual salary” used for benefit calculation?
Most group disability plans do not include commission or bonus in the policy definition of salary. Even though bonuses may not be guaranteed, annual household spending patterns often count on an annual bonus. Update the benefit calculation adjusting for commission or bonus in the annual salary.
Question 3: Does your plan have a monthly benefit maximum?
Disability plans usually apply a maximum to the monthly benefit such as $5,000 per month. Adjust the benefit calculation to reflect the maximum benefit amount. In our example, a $6,000 monthly benefit is reduced to $5,000 due to the benefit cap.
Question 4: Is Your work benefit taxed?
If the employer is paying for the coverage, the benefit is taxed, leaving the employee an even smaller take home benefit. In this case, if we apply a 25% tax to the $5,000 benefit, the employee is taking home $3,750 each month. Conversely, individual disability insurance policies typically are not subject to tax because the premium is paid by the insured.
Question 5: How long will could you cover expenses at this level of income?
Most disabilities are temporary and resolved within two years. Using the benefit calculation from the previous steps, ask prospects to evaluate their financial position after a disability of 6 months, 12 months, and 2 years. This exercise creates awareness of the financial vulnerability even a short disability can cause, and lays the groundwork for a discussion about ways to reduce financial risk. The features of individual disability insurance policies address each of the limitations addressed above. They have a broader definition of salary, a higher maximum monthly benefit, and are usually not taxed. Best of all, the coverage is portable and not contingent upon the employer.
Bonus Question: Will contributions to your retirement plan continue?
The challenges of saving for retirement are compounded when income is interrupted. Medical expenses often increase while income decreases. Continuing retirement contributions is likely out of the question during periods of disability. Some people may need to borrow from retirement accounts to make up for reduced income. Either way, retirement savings are impacted furthering the financial implications of suffering an income-interrupting disability. According to RetirementOptimizer.com a two-year disability reduces a retirement portfolio by 5 to 11 years. Retirement Plan disability insurance protects retirement plan contributions while the insured is disabled. It is an important supplement to even the most generous disability coverage.
Before the client conversation, work with your DIS representative to develop proposals with varying benefit periods, benefit amounts, and features. After asking the client these six questions, you’ll be prepared the answer the client’s question, “What will it cost?” We encourage you to download our most popular sales script, The Wealth Preservation Plan, to hone your presentation.