Some coverage is better than no coverage – but sufficient coverage is best. Unfortunately, when it comes to individual disability insurance, many people are taking risks by going with coverage that may not meet their needs. This is especially common among high-income earners. One policy may not be enough for these individuals. By stacking disability insurance coverage, high earners can secure the disability insurance coverage they need.
More Money, More Responsibilities
Most people would be happy to earn more money, but there may be some truth to the idea that having more money can also create more challenges. At the very least, people with more money tend to have more financial obligations.
You buy a house, and maybe a second house, too. Even if you don’t have a mortgage, you still have to pay property taxes and property insurance, and those costs can add up. You have family members who depend on your income, and they’ve become accustomed to a certain standard of living.
It’s called lifestyle creep. According to Investopedia, as our discretionary income increases, the things that used to be considered luxuries become necessities.
A Pay Cut Can Put a Crimp in Your Lifestyle
Disability insurance doesn’t normally replace 100% of a person’s pre-disability income. This is intentional, and it may be necessary. Investopedia says insurers refuse to replace 100% of the lost income as a way to reduce fraud. It makes sense – if someone could make just as much money NOT working as they could working, they might be tempted not to work and just collect benefits. Most people want to maximize their earnings as much as possible, and this can be an incentive for people to work if they’re able to.
However, this also means that people typically take a pay cut when they’re collecting disability insurance benefits. As a result, they may need to reduce their discretionary spending or dip into their savings.
The Size of the of the Pay Cut Varies
If you have to file a disability insurance claim because you can’t work, you’re going to be bringing in less money – but how much less?
- What percentage of the pre-disability income is replaced? For example, if a policy replaces 60% of the earned income, you’ll have a 40% pay cut.
- What is the monthly benefit cap? This is the maximum monthly benefit an insurer will pay.
- Are the benefits taxed? Group disability insurance benefits are typically taxed because they’re usually purchased by the employer or paid with pre-tax dollars, but individual disability insurance benefits purchased by individuals is usually not taxable.
It may seem paradoxical, but high-income earners can have it even worse off. Many disability insurance policies include monthly caps, and they can be as low as $5,000 a month and even generous policies usually max out a benefit level of $25,000 a month for executives. These limits will negatively impact high earners.
For example, let’s say your client earns $200,000 a year, which works out to $16,666.67 a month. Disability insurance benefits only cover 60% of your client’s income, which works out to $10,000 a month. However, the monthly cap means the client only receives a maximum of $5,000 a month. That’s less than a third of what they used to earn.
Now imagine how exposed clients might be if they earned $850,000 a year which breaks out to $70,833.33 a month. If the disability insurance policy has a max benefit of $25,000, they would be left with a $45,833 monthly earning gap – just to get to 60% of their monthly income.
Layering Is the Solution
If one disability insurance policy doesn’t provide enough income protection, what can you do? Layer policies!
You don’t have to make do with a single disability insurance policy. Just as agents sometimes stack life insurance policies to make sure all clients’ financial obligations are covered, agents can also layer disability insurance policies, as long as the combined total does not exceed the maximum participation limits set by each carrier.
- If a job offers group coverage, the client should accept it even if it doesn’t offer enough protection. It’s some coverage, and it’s probably relatively affordable due to the group discount. Likewise, if they have access to association coverage, they can accept that.
- If clients need more coverage, you can supplement the group or association policy with individual disability insurance. This allows clients to increase the percentage of income replacement and gives them access to additional benefits and attractive terms.
- If they still need more coverage, they can layer on a second and third individual disability insurance policy to take income replacement levels high enough.
Should You Layer Disability Insurance Coverage?
Layering coverage can be a practical way to help clients secure the disability insurance coverage they need. Remember, insurance companies won’t replace 100% of a person’s income. Carriers may also have caps on the total benefits a person can receive from all carriers.
Disability Insurance Services can help you strategize the best approach for these complex cases. For more information, get your free download: Layering Coverage to Protect High Earners and contact us anytime for case design assistance.