A No-Brainer Planning Tool for Clients Starting a Family

Advisors and clients could use disability insurance for more reasons than they might realize.

(Bigstock photo)

(Bigstock photo)

Melissa Cox, a financial planner at Dallas, Texas-based Fetterman Investments, was glad she had short-term disability insurance when she took maternity leave. Her policy replaced 60 percent of her gross income, like most policies available through U.S. employers. “The continuation of income led to a lot less stress,” she said.

Cox makes sure her clients are doing the same, leveraging an insurance that is sometimes made short shrift by wealth managers.

For many, narrowing gaps in pay, rather than fully replacing lost income, is good enough. But Cox tells clients that disability insurance is a great tool for offsetting the costs of having children and especially important if a family doesn’t have a rainy-day savings fund.

The Family and Medical Leave Act (FMLA), which provides for a workplace sabbatical of up to 12 weeks without risk of being fired, has been a godsend to young parents. The ability to avoid worrying about a job loss during maternity is a key stress reliever. But FMLA doesn’t address the temporary loss of income that can ensue in most states. Only eight states and the District of Columbia have mandated policies requiring paid leave, covering less than 20 percent of the U.S. population.

Michelle Petrowski, an Anthem, Ariz.-based advisor, adds that while disability insurance can play a crucial role in terms of risk management, advisors need to know the respective roles of short-term and long-term disability policies. Long-term disability policies have an “elimination period” which means they won’t make payments for the first 60 or 90 days of disability. As a result, they aren’t great help when providing financial support during maternity leave.

Short-term disability policies tend to have shorter elimination periods, making them better suited for the maternity leave strategy. They provide up to six weeks of payments (and a few weeks more for births that have complications or involve twins or triplets).

The Chances of Using a Policy

More than 25 percent of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age of 67, according to the Social Security Administration (SSA). The Council for Disability Awareness (CDA) reported in March 2020 that only 40 percent of U.S. households have enough money saved to avoid experiencing poverty after going three months without income.

For the typical client that works with a financial advisor, counting on Social Security Disability Insurance (SSDI) simply fails to generate enough income to support obligations such as mortgages or college tuition. SSDI payments range on average between $800 and $1,800 per month, with an average monthly payment of $1,277 in 2021, according to the Social Security Administration.

Income replacement is a key concern for clients, even if they don’t always bring it up with their advisor. In a 2008 survey by the Council on Disability Awareness, 74 percent of respondents were either somewhat concerned or very concerned about how they would pay their living expenses if they had to miss work for six months or longer due to disability. And 91 percent of respondents don’t understand how SSDI works and its limited form of income replacement.

Group or Individual? The Answer Is Both

Group disability insurance is a tremendously valuable benefit to employees and part of what attracts them to certain companies, said John Ryan, founder and CEO of Ryan Insurance Strategy Consultants, which has been working with financial advisors since the late 1970’s.

Wealth managers aren’t just recognizing that for their clients, but also themselves. “Group disability insurance is the future, and trade associations like the National Association of Personal Financial Advisors or the Financial Planning Association are increasingly moving to offer access to group lower-cost disability insurance to members and employees,” Ryan said.

Still, clients may greatly benefit from buying individual policies while they are available, even if they have group disability insurance through work. “That combination is the best of both worlds,” Ryan adds, as a group policy often covers up to 60 percent of lost income (lower when post-tax benefits are calculated) and “the individual policy gives the extra levels of coverage.”

Ryan suggests that “most group plans don’t account for staff that earn bonuses or commissions,” which is another area of coverage that individual disability insurance provides.

Although, the outlook for individually bought disability insurance, which as noted can be more costly to administer and underwrite “may be going away” in coming years, Ryan said. Individual disability policies often require cumbersome applications, deep dives on medical records, and time needed for underwriters to spend time with prospective insured clients, to be sure they are worth the risk. Group policies don’t require that level of scrutiny.

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