Individual Disability Insurance
What is it?
If you get too sick or too hurt to work, you have bills that still must be paid, like mortgage/rent, food, car payments and utilities. This coverage provides you with a portion of your income to pay your bills while disabled.
What does it cost?
Roughly 2% of your income. Pricing varies by:
- Age & Gender& Tobacco Usage
- What you do for a living
- How long after you’re disabled before you want benefits to start and then how long are they payable.
Why do I need it?
One in four twenty-year olds will have a long-term disability in their working lifetime. As you get older, the chances of a long-term disability increase. For most of us, our income is the base that allows us to do everything in our lives.
- If you are age 40, making $100,000/year, you will earn over $2.5 million in your working lifetime. We think to insure our homes and cars, but isn’t your income a much larger asset? Doesn’t it make sense to insure it too?
Definitions of Disability (depending on occupation):
True Own Occ / Own Specialty (THE BEST): You’re considered disabled if you cannot do your specific occupation, even if you choose to return to work in another specialty.
Own Occ / Not Working (Very Good& covers what most clients need): You’re considered disabled if you cannot do your specific occupation, however, if you choose to return to work in another specialty, benefits would stop.
Transitional Occ: (Very Good); You’re considered disabled if you cannot do your specific occupation, even if you choose to return to work in another specialty. If your new job’s earning added to your disability benefit exceeds your prior job’s earnings, benefits reduce or drop off.
Any Occ: (Most economical): You’re considered disabled if you cannot do your job or any other job comparable to it.
Elimination Periods: 30, 60, 90, 180,365 Days
Benefit Periods: 2, 5, 10 years, to age 65, 67 or 70
- Residual – If your condition doesn’t totally disable you but keeps you from working full time, this rider pays you a pro-rata portion of your monthly benefit.
- Cost of Living Adjustment (COLA) – While disabled, benefits are adjusted annually to keep pace with inflation.
- Future Purchase Options: Allows benefits to be increased in the future regardless of your health.
- Catastrophic Benefit: If you lose 2 or more activities of daily living you are paid this benefit.
What is It?
Individual Disability income protection provides the income you must have to meet your ongoing financial obligations. However, there may not be enough income to put money aside for retirement.
Who buys this protection?
Primarily highly compensated individuals who have maxed out the individual income protection that they can buy. Retirement Security benefits are paid in addition to any other disability benefits you have.
How does it work?
When disabled, a benefit is paid from the insurance company into an irrevocable account in your name. You decide on how the money is invested based on your risk tolerance. When your individual disability payments stop at normal retirement age, you begin to withdraw monthly payments from this account.
Is this a qualified retirement plan like a 401K?
No, it is not. These plans are almost always set up with premiums paid by the insured. This makes benefit going into the Trust non-taxable; however, earnings on the Trust are taxable annually to the insured. Then withdrawals at retirement are non-taxable.
As one Financial advisor puts it, your need for income when disabled is Need A. Individual income protection and group LTD take care of this need. Need B is the need for income once you hit retirement age. Be sure you cover Need B as well, as your clients do not want to see a drop in income at retirement age.
Impaired Risk Coverage
What is it?
Disability insurance underwriting can be very tough on some health conditions. In many cases, Baker Birdwell has the markets to find protection for our “impaired risk clients.”
What happens if all of this doesn’t work?
There are times when someone has health history that simply makes it impossible to have any disability coverage issued. We take the time to review these cases with you and let you know what was done to try to get coverage issued, and if there is any circumstance in the future where coverage might be possible.
How does this work?
Whether we receive an inquiry or an application with health conditions that we know will pose an underwriting problem, or a health condition comes up from the underwriting process, we immediately let you know a potential problem exists.
With our traditional carriers, we negotiate to try to get multiple offers if they are going to place a rating or exclusion on coverage. We often can offer you a choice between ratings, exclusions or limited benefit period so you may choose what fits your specific need best.
With our impaired risk carriers, we look for several options ranging from exclusions to rating to policies that pay a reduced benefit for disability beginning in the first few years after the policy is in effect.
High Excess Limit Coverage and Specialized Protection for Athletes and Entertainers
What is this?
Most traditional disability carriers will not write coverage for athletes and entertainers (and a few other high risk occupations) due to poor claims experience over the years. They also have maximum benefit amounts they will issue of around $40,000/month from all individual and Group LTD policies on a person. This can leave a highly compensated earner with far too small a benefit.
What is the answer?
Baker Birdwell works with carriers who focus on these markets. We can write additional monthly benefits of $250,000 on top of traditional coverage.
For hard to write occupations, we write coverage specifically tailored to the person’s income and needs, and often match wording required by the individual’s contract.
Overhead Expense Protection (OE)
What is it?
Business owners have a entire set of separate financial obligations that their business must pay whether or not the owner is working. These are expenses like employee salaries, rent, insurance, utilities and more.
OE pays these bills so that the business continues to run. This way if the owner is able to return to work, they are coming back to a healthy business. If they are not able to return to work, they have a healthy business to sell instead of a fire sale.
What is meant by benefit factor?
There is a carryover effect with these policies. If you are reimbursed for expenses one month less than your total OE benefit, it carries forward. For example, if you have $20,000/month OE benefits and a 12 month benefit factor, each month you can be reimbursed up to $20,000. If you only filed for $19,000 each month for the 12 month period, you would still have $12,000 remaining to pay overhead expenses after 12 months.
Who buys OE?
Businesses with generally 4 or fewer owners, where one owner’s disability can seriously impact the other owners. This includes all kinds of businesses from physicians to florists and just about everything in between.
How does it work?
Each owner buys protection for their share of eligible overhead expenses. Payments may begin after 30, 60 or 90 days of disability. Benefits are payable for benefit factors of 12 up to 30 months. Most owners pick a 60 or 90 day elimination period with a 12 month benefit factor, assuming that after 12 months, they’ll know if they will ever be able to return to work.
Are owner’s salaries an eligible expense?
No, only employee salaries are. Owners protect their salaries with individual coverage.
How are premiums and benefits taxed?
Premiums are tax deductible as a business expense. Premiums are reimbursements for deductible business expenses so they aren’t taxable either!
Business Loan Protection
What is it?
Many small business owners borrow money for equipment, or to purchase a practice, and funding other vital areas of their business. Often, they are required to personally guarantee these loans. If they become disabled, will the business be able to cover the loan payments?
Business loan protection is a rider that expands OE coverage. OE benefits are payable for 30 months at most and usually are payable for 12 months. The Loan protection rider matches the loan payment schedule, in fact, the owner can even assign the benefits to the lender.
Who buys the Loan Protection rider?
Business owners who have ever had to personally guarantee a loan to their business. These loan payments may be the largest expense for their business. If they are disabled, the business must pay the loans or else the owner would be personally liable.
Is there anyone who cannot qualify?
There are a few types of loans that cannot be covered, like lines of credit and interest only loans. Also, family loans cannot be covered. A parent who finances a child’s purchase of their business could easily forgive the loan if that child becomes disabled. Because of this, family loans cannot be insured.
Key Person Disability
What is It?
Often there will be an employee who is critical to the business’ success. Should a key employee become disabled, it can be very costly and disruptive. Key Person disability minimizes the disruption this can cause.
How is a key employee defined?
They must not own more than 50% of the business, been employed for more than a year, and be critical to the success of the business.
How Does it work?
A business can purchase coverage of roughly three times the key person’s earnings. Coverage may be purchase in lump sums up to $500,000 or combination of lump sum and monthly payments to a maximum of $750,000. Benefits are generally non-taxable and can be used however, the business sees fit.
Disability Buy Out
What is It?
Business owners work hard to build their businesses. Should a business owner become permanently disabled, this coverage helps fund the purchase of their interest.
It helps to lesson the stress of a difficult situation by funding the purchase for maximum financial return and minimizing taxes.
How does it work?
The carrier reviews the business’ financial to determine the amount of coverage that can be issued. Benefit may be paid in a lumpsum, a stream of monthly payments, or a combination of the two.
Who Buys This Coverage?
Businesses with 10 owners or fewer and with a value of $10 million or less. Each owner must own at least 5% of the business.
Business owners may think to buy life insurance to cover this need, but often funding for disability is overlooked, even if they have a buy / sell agreement that addresses the event of disability.
Informal Business Valuations and Buy-Sell Agreement Reviews
What is this?
This is a complimentary service provided to give business owners valuable information about their business to assist in both current plans as well as business succession planning.
What businesses are not good candidates?
Any firm with a Buy-Sell Agreement is a good candidate for review. For valuations, companies with less than $500,000 annual revenue, business with negative book values that aren’t profitable, and real estate and financial service firms are not good candidates.
How does it work?
Buy-Sell Reviews: Most businesses have a buy-sell agreement as part of their organizing papers. Many business owners are not aware of just what they are committed to if a partner dies or becomes disabled. These reviews are performed by attorneys who will make suggestions as to possible changes that should be made. They are available to discuss this with the business owner as well as their attorney or CPA.
Informal Business Valuations: Business owners are often too busy building their business to have a real grasp of what their company is worth. Firms that do formal valuations charge high fees. These informal valuations give the owner a realistic idea of their company’s worth based on several different formulas. These valuations are done by CPAs who are available to discuss this as well.
Guaranteed Standard Issue (GSI) Plans
What are GSI Plans?
For groups meeting certain guidelines, individual policies are issued without medical underwriting (other than an actively at work requirement). This eliminates any issues with having someone especially important to an employer turned down for coverage.
Why work with Baker Birdwell on GSI?
Because we will get offers of coverage from multiple carriers, you know that you are getting a competitive offer satisfying needs for due diligence. We work with employers of all sizes in designing the best fit for their employees.
Who are good candidates for GSI?
- Small employers who have Group LTD (often with low maximum benefits) and several highly compensated employees with high amounts of incentive compensation through bonuses and K1 income. Generally, the premium needs to be paid by the employer.
- Large employers with highly compensated employees with high amounts of incentive compensation through bonuses and K1 income. Plans may be voluntary or employer paid.
Why work with GSI?
- Carriers are very aggressive in this marketplace. Rates are discounted (up to 35% in some cases); premiums are gender neutral (greatly reducing costs for females); and no one is declined for coverage.
- GSI can be written with groups of as few as 3 participants. Monthly benefits vary with each group but can be written up to $250,000 of monthly benefit.