The Critical Insurance Many High Earners Don’t Realize They’re Missing

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At her career’s height, Lacy was earning more than a million dollars per year (!) as an executive at a major bank. Then, one early morning, Lacy woke up and realized she was unable to hear anything in her left ear, experiencing something called sudden sensorineural hearing loss. She feared the worst: Her career, as she knew it, was over.

Fortunately, Lacy had purchased a valuable insurance policy a decade earlier. And you don’t have to be pulling down seven figures like Lacy to benefit in the same way.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• One in four 20-year-olds will have a disability before reaching retirement age (SSA.gov)

• Private long-term disability insurance (MassMutual)

• What qualifies as short-term disability? (ADP)

• Social Security Disability Insurance (SSA.gov)

• Average SSDI benefit payments (SSA.gov)

• Long-term disability insurance taxes (IRS)

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Katie:

Imagine this, you’re finally making a great income. Maybe it’s more money than you ever dreamed you would earn. Maybe you’re earning hundreds of thousands of dollars. You’ve got all your I’s dotted and your T’s crossed: automatic contributions to your retirement funds each month and solid health insurance, maybe some term life insurance, and you’ve got a bright lucrative career ahead of you. Of course, you’re probably going to start living a lifestyle that’s a little more fitting for someone in your position, as you should. Maybe you’ll move your family or your fleet of cats into a nicer home and you become accustomed to better food. You enjoy nice trips with your friends and family. You’ve really made it at this stage in your financial journey.

What could go wrong? As long as you stay the course, you’re pretty set, right? But this is the point in this journey where protecting your downside risk becomes paramount. We mentioned health insurance. We mentioned term life insurance. But if you are that high earner who isn’t yet rich, there’s one other thing that you should probably think about protecting your ability to continue earning that high income. The Social Security Administration reports that one in four 20 year olds will have a disability before they reach retirement age, making it the minority group that any person can join at any time.

Lacy:

Hi, my name is Lacy and I was diagnosed a few years ago with a rare condition called sudden sensorineural hearing loss. It affects about 60,000 people a year in the United States, and man, it changes your life. When I was diagnosed, I was earning over a million dollars a year in a very intense role at a major investment bank, a name you would know.

Katie:

Welcome back to the Money with Katie Show. I’m Katie Gatti Tassin, and today we are talking to Rich Gal Lacy about the insurance that she is really glad she didn’t skip. Since we recently panned whole life insurance on this show, we figured it was time to do a deep dive on expensive insurance that actually might be worthwhile.

Because Lacy had, by all accounts, a pretty stressful career. She was working 16 hours a day every day, and her job required her to be on all the time. So when she woke up one morning and she couldn’t hear anything out of her left ear, she knew pretty much immediately that her career, at least as she knew it was not going to last much longer.

Lacy:

I woke up on a Saturday morning a few years ago, no hearing at all on the left side, nothing in my left ear. It was just like it was dead. I didn’t feel stuffy. I didn’t feel like I had a head cold.

But I was supposed to fly the next day for work to go back to headquarters for a series of big meetings that week. So I was like, I got to get this figured out and thank goodness I had that travel. I went right into the walk-in clinic. I had a great doctor who immediately recognized what was going on, which was critical because for this condition, treatment has to start within 48 hours or you have almost no chance of recovering any of your hearing. That doctor, my hero, advised me that Monday morning, first thing, you need to go in to see an audiologist. You need to see the ENT right after have this confirmed start steroids. This is a big deal. Not that you can’t fly, but you have to be seen right now. Period.

Katie:

At first the seriousness of what was happening didn’t quite sink in, but soon she realized that her high flying career was completely incompatible with her new diagnosis.

Lacy:

By the end of the week, the impact of my new reality started to crystallize. I was attending these multi-day sessions, 40 people in the room. I wasn’t the only person on Zoom. Some people had gotten Covid, but I was struggling to follow the conversation. I had splitting headaches every day and I was absolutely exhausted, and this was not even my regular schedule. It was basically like a half load and I was all done.

Katie:

Oh, so it sounds like the reality set in pretty quickly that you were not going to be able to do this job anymore if this continued.

Lacy:

Exactly, exactly. The other thing was the treatments for this involved a four hour round trip, daily treatment for 40 days. So I had to go into a hyperbaric oxygen therapy tank and be pressurized and depressurized every day. And so how would I, my schedule was planned out weeks if not months in advance. How was I taking four hours a day out to do this? Maybe I’d get some hearing back, but maybe I wouldn’t. So definitely in the short term I needed to not work and I couldn’t do my regular schedule.

And then it was becoming really clear like, I’m not going to be able to do this job. I was really, really worried about you’re on point, you’re in senior management. I had hundreds of people relying on me. I had a $50 million budget. You missed something in a meeting. You didn’t hear something, you didn’t pick up on something. You didn’t follow up. Then you’re slipping. Oh, she’s slipping. Oh, well she’s got a lot on her plate. Let’s move one assignment to someone else.

And then they’re looking at your work at year end and they’re like, oh, well she didn’t do as much as she did last year and then your income is reflecting that. And so I could just see it writing on the wall that degrading, and as much as I love the place where I worked, they don’t have any obligation to me. They weren’t going to give me a pass. So then I needed to really think about my life in a different way.

Katie:

But Lacy was lucky because back in the early 2000s, she had purchased a private long-term disability insurance policy from a company called MassMutual. And while the last time we did a deep dive on someone with a really expensive insurance policy, it didn’t end so well. This one actually has a happy ending, if you could call it that.

Lacy:

In this situation, I was well prepared. I had long-term disability coverage. I bought the policy in 2009 when I was working at a previous employer. There we were offered the opportunity to buy insurance, both life and long-term disability. We had limited coverage provided by the firm for both. I didn’t really need more life insurance. I was divorced. I had no kids. I had minimal debt other than the basic coverage provided by my employer. There was nobody who needed my life insurance.

The disability insurance offered through my firm would cover the first $250,000 of my income, and I had already signed up for that and everyone should, period. My boss at the time encouraged me to think about excess disability coverage over and above what was the basic offered by the firm because I was making just under $500,000 a year at the time.

I was single. My family wasn’t wealthy and could not have helped me financially if anything happened to me. And despite making good money, albeit in an expensive city like New York, my divorce had wiped out most of my savings and I was just starting to build back. If I was sick or injured or couldn’t work, I would be in real trouble, especially if I had large medical bills or had to hire someone to take care of me.

If I fell and hit my head, or was mugged and hit my head, or hit my head, what if something happened to my brain? What was I going to do? So I bought a long-term disability insurance policy that would provide $10,000 per month in after tax income should I have a qualifying disability? I went through a medical exam and the insurance company went through my entire medical history.

Katie:

Oh my goodness.

Lacy:

They insured me. Yeah, almost like a colonoscopy. They insured me, but they excluded any benefits related to my knee because I’d had a previous injury. So that’s something to know. So best to get this young before you have anything happen to you if you have income that requires it. The policy at that time costs just over $5,000 a year.

Katie:

Just over $5k a year for a policy that would give you $10,000 tax-free each month.

Lacy:

Correct. The policy I purchased had a rider that allowed me to increase coverage as my income increased. I did so once and I upped the benefit to $15,000 with an annual premium of $6,800. I could have increased it one more time to $20,000 when my income increased, but I just never got around to it. Yeah.

Katie:

A loaded statement, never got around to it. So you are doing $566 per month for the $15,000 per month.

Lacy:

Yeah, with your disability insurance, if you’re buying an excess policy, you can pay it monthly, but it costs you money because you’re financing it. So I would budget for that every year and save it in advance to make a one lump sum payment.

Katie:

So as you heard, Lacy’s employer did provide long-term disability insurance to her, but she knew that the policy wasn’t sufficient. Among other things, it came with stricter conditions. So for around $500 per month, she decided that she was going to privately ensure her future self from the exact sort of freak occurrence that ended up happening to her. That is to be sure a really steep insurance premium at $500 something dollars per month. But as we noted, the insurance part of this story does have a happy ending.

Lacy:

So the policy today pays me $15,933 because it also has a cost of living increase rider, which was part of my premium. I paid more for that rider, so they will increase the amount that they pay me every year. They reset it annually. The policies that I have will pay me until I’m 65 and my disability happened shortly after I turned 50.

Katie:

So together, Lacy’s policies, the one that her employer provided her and the supplemental coverage that she bought to make sure she would have enough income, will continue to pay her a total of $420,000 per year in tax-free income until she turns 65, which is admittedly a pretty anomalous outcome. That’s not really the norm with insurance.

But in this case, Lacy saw her preparedness pay off the cutoff age will always depend on the policy that you buy, and since she got the policy in 2009 and started using it in 2022, that means that she paid around $78,000 in premiums over 13 years, which is an excellent investment when you consider her eventual outcome. But obviously that would look like a pretty big waste if she didn’t, such as the challenge of insurance and deciding whether or not it’s worth it to pay for it still. I would say that the important thing here is that in relation to her income, these premiums were extremely affordable.

We’ll get right back to it after a quick break.

I was curious how and why Lacy had the inclination to purchase extra coverage in the first place.

Lacy:

I’m really fortunate that I had good advice from my boss and when I became a boss, I really tried to be what I called full service to my people. I’m like, are you saving money? Are you contributing to your 401(k)? Are you maxing out your match? All of those things.

But even more than a boss who nudged me towards the insurance broker, I had seen in my twenties mentors of mine who were in their thirties. I had more than one woman in my life who had a brain tumor. And the difference in quality of life for these women during one of the most challenging experiences of their lives was stark between someone who was really prepared and someone who was not dealing with cancer while losing her income was devastating. My friend lost her apartment, she lost everything and then she lost her life. And so imagine trying to deal with all of that and not having your regular income. She didn’t have a lot of savings and she was really alone in every sense at the end. And so that was terrifying. It had an impact on me and I definitely remembered that. So hearing that I could protect my income to the full amount that I was making seemed stupid not to do.

Katie:

Thank you for sharing that.

So what is private long-term disability insurance? Long-term disability insurance, especially the kind that Lacy purchased is like any other insurance policy. And as Lacy mentioned, it is pretty expensive. This is why it tends to be a good fit for high earners who have a lot to lose if they’re suddenly unable to perform at the high level that most highly paid intense jobs require. Doctors, for example, are a pretty classic candidate.

And what was true for Lacy, you might get some long-term disability insurance through your work, but Lacy mentioned the distinction between her employer’s policy and what they were offering and her family’s needs and how much they were spending caused her to want to go out and seek supplemental coverage.

Lacy:

The policy that I have through my job is capped at $20,000 per month. My family currently lives on less than that a month, but we wouldn’t be saving much money. I wouldn’t have been socking away money like was when I was getting bonuses at work. I was just over 50 when this happened. The policies I have pay me till 65, but inflation will eat away at what feels pretty generous in today’s dollars.

My employer’s policy is self-funded, meaning that they pay the claims and hire someone to administer it. They do not want to pay this amount of money over this more than a decade period. It is a lot of money. I may be the first person that they have ever had that’s at my level who left their job as claiming benefits and doesn’t have a terminal illness. They really have been very challenged at dealing with me. The insurance company they work through has been super challenging to deal with. They initially approved my claim, but when I didn’t want to have an implant in my skull, which wasn’t even scientifically shown to help my condition and would’ve cost me $50,000, they denied my claim.

I had to appeal, which was a process that took over eight months and during which they did not pay me a single dollar because my claim was denied. My employer also had the right to terminate me if I did not return to work. So you’re in double jeopardy there without having my excess policy which kept paying, I would’ve had to liquidate assets and tap into savings and it was kind of a nightmare. Thankfully my employer was pretty reasonable and they put me on a long-term leave unpaid leave so that I didn’t lose all of my RSUs, my stock, I didn’t lose my insurance, but it was dicey and super stressful there for a while. Scary.

Katie:

So when you say that they put you on an unpaid leave, this is because, in your situation, had you been terminated this long-term disability policy that you were kind of going back and forth with and appealing, would that have been then canceled had you been terminated?

Lacy:

It wouldn’t have been. They would’ve waited for the outcome of the appeal and then reinstated me. But what I said to them is, given that this process has been so messy and there have been clerical errors at every turn, I can’t even imagine what is going to cost the firm to try and unwind determination and canceling my stock and canceling all of that stuff and putting it back. You’re going to spend more time dealing with unwinding it and putting everything back so you cancel my stock. I have some that’s vesting and what if the market’s moving and I wanted to sell it? Are you making me whole on that stock?

But you now have to give me back like, really, why don’t you just click the box and put me on an unpaid leave? And that’s what they did. It made sense to them, but I explained it logically. I persuaded them. And I also explained that the difference between what I was paying for my health insurance premiums and the portion that they gave employees at my level, like the difference in COBRA was $8,000 a year to them, if that makes sense. That difference of what they contributed towards my health insurance and was $8,000. Like I’m sorry if you took my stock away and I would’ve sold it and the stock went down, you’ve got a potentially unlimited amount of liability. I think $8,000 of insurance for that was worth it to them.

Katie:

Your options through your employer are probably somewhat automatic and limited, but you do have a lot more leeway when you’re going out and purchasing a private policy. You can choose benefit length like a number of years or up to an age limit. You can choose the insurance company who’s going to underwrite it and they’ll consider factors like your age, the benefit period, the disability definitions, so what counts the elimination period, which is how much time passes before they start paying you, your gender, your health, your monthly benefit amount and your occupation. Much like any insurance, you pay your premiums every single month and then assuming you’re in good standing if you need to and something happens, you just file a claim, you wait for approval and then you get paid a percentage of wages after the elimination period is over, which is usually somewhere in the 30 to 90 day range, but it can be up to two years and you’ll get those payments until the end of the coverage period that you buy.

The payments are usually monthly and you’re typically going to be paid anywhere from 40 to 65% of your pre disability earnings and with a cap. Because high incomes are often either paid in part with equity or highly variable, unlike a standard W-2 job, the way the insurance company determines what your pre disability income is can vary. Lacy had to provide her most recent tax return and a few months of pay stubs, but only her cash compensation, so not the RSUs that she received as part of her pay qualified as income that could be replaced by the policy.

And when it comes to the types of disabilities that claimants often face, Lacy’s case is pretty instructive. Things like brain injuries, burns cancer, kidney disease, heart attacks, stroke, heart disease, mental health issues, musculoskeletal disorders, all of that can qualify, but you always want to make sure you understand the policy’s definition of an illness before you purchase it because that’s not a comprehensive list. And certain exclusions for preexisting conditions can apply.

And alright, while we’re on the subject, what doesn’t count? Pregnancy doesn’t count though complications do. And then things like injuries related to committing a felony or active participation in violence or intentional self-inflicted injury disabilities that begin while you are incarcerated, injuries from war. And here’s the thing, usually the stuff that’s excluded from insurance policies feels a little absurd to me. Like the time I bought an umbrella policy specifically because I wanted to make sure if there were ever an accident in our home with our dog that we would be protected. And then I got the policy paperwork and it was like, yeah, German shepherds are explicitly excluded from this coverage. So I was sort of pleasantly surprised when I read the exclusions that are typical for long-term disability that they seemed, I don’t know, at least a little bit reasonable, but there were other concerns that felt top of mind to me.

For example, I often wonder what happens to people who are unable to work in America because of a health condition when their employer is the one who provides their healthcare. There is no worst time to lose your health insurance than at the exact moment you are also losing your income. So it’s an uniquely American shit sandwich that you would be dealing with. And if you’re like Lacy and your disability payments are extremely high, you might not really be stressed about having to provide your own healthcare, your own health insurance. But I was still curious what happened to her and how she handled it.

Lacy:

So the rollover impact to the rest of your benefits depends on where you work. I worked at one of the largest Fortune 500 companies that we have in the country. And for them, they continue to have you on the payroll or on staff for 24 months following when you go on long-term disability. So two years. Okay, so your insurance continues, everything continues as normal if it’s coded correctly in the systems, but let’s assume that the place works and you end up writing a check to them or they take it out of your bank account if you give them that information because there’s no paycheck for them to deduct it from. So you’re writing a check to them and then that continues for 24 months and then you’re offered COBRA. And COBRA in certain circumstances can be extended beyond the typical 18 months for a disability insurance or for a disability claim situation, it can be extended up to 36 months. But again, I think that’s by employer situation. I don’t think there’s a law there, not that I’m aware of.

Katie:

And so you would still be within that or maybe just now exiting the 24 month period?

Lacy:

Yeah, so I’m over the 24 months and I’m on COBRA now. Gotcha. Okay. Yeah, we had Cadillac really great insurance. So I haven’t looked in a healthcare marketplace, but absolutely if my insurance wasn’t as good, if my coverage wasn’t as good as it is. And at my level we paid so much for our insurance at a senior level, they make you bear more of the cost because you’re more able to pay, which I agree with, but the difference between COBRA and what I was paying already isn’t material.

Katie:

So what’s interesting to me about this I think is that for people who maybe go through this same experience, the same process, but maybe they are not an excessively high earner, maybe they’re above average, but a little bit more like what I would call reasonable high earner. You have this long-term disability, you can’t do the same job that you were doing before. At the very least, you theoretically probably need more medical care more regularly than you did before by the very nature of the fact that now you have a disability.

And so is it fair to say that after that period, whether it’s a couple years and then once the COBRA runs out, whatever that’s up to your employer, then you really are just kind of now on your own with finding a market-based plan that works for you. I think that to me jumps out as a reason to get this type of insurance and factor in the, you might not be spending a thousand dollars a month on healthcare now, but you could be.

Lacy:

Absolutely. There have been discussions at my dinner table of should my husband go try to find a government job? That is the one place that we have an outsized risk to our financial health. And so trying to self-fund this effectively early retirement is scary. So having the policy that covered a larger portion of my pre-disability income is really important for me to feel comfortable that I’m able to save at a rate that’s similar to what I was doing before and those savings can grow from here on, so hopefully will protect us against inflation and the healthcare costs that we know will just continue to rise.

Katie:

So your employer may continue to pay its portion of your health insurance costs if you are on long-term disability. But if it’s a permanent disability or you are out for longer than six months, your employer is probably going to drop that health insurance coverage and you are going to be required to find your own. Everyone say it with me. Yay. Corporate nanny state.

But the point is, it is important to read the fine print on this one and if you already feel like the insurance that you’re getting through your workplace, the long-term disability that they be providing you through a W-2 employer, if it’s already a little bit tight on income that can replace your spending, it might be worth buying more simply so you would have money to pay for your own health insurance later. Okay, we will continue this right after a quick break.

So as with most things, insurance, the devil is always in the details and Lacy said there were a few critical considerations that made her specific policy a winner.

Lacy:

The number one being own occupation. So—own—own occupation means that if I am unable to do the work that I was doing on the day I was disabled, I’m entitled to receive benefits. So this is critical. Of course I can work, I could do all kinds of work right now, I can’t do the job that I was doing before sun sensory neuro hearing loss happened to me and I can’t make the money I was making. So without the own occupation clause, the insurance company could say, go get a job as a store clerk and you’re going to make $18 an hour and you’re good. Right? And so the own occupation policy has saved my bacon, let’s put it that way.

Katie:

And that own occupation clause extends for the duration now of the payout. Correct? Is there any point where that falls off?

Lacy:

Nope. No. So own occupation insurance protects you for the rest of your working life, which is defined to end at 65.

So there’s no time. It’s all about what you were doing on the day of the disability. And let me tell you through my appeal, which was successful, I had to pay for a vocational expert to do an assessment of what those tasks and responsibilities were, what the components were of my job and detail it in 13 page report to the insurance company. The other two key features of my excess policy are cola cost of living adjustments. So that increases the payments that I receive with inflation, the rates assessed and adjusted annually.

And so that gives me some measure of protection, but that is capped at 3%. So last year and the year before where it was more than 3%, but at least it’s adjusting something, but my policy through work doesn’t have that and so it’s not going to adjust. And then the other was the ability to increase coverage. And so being able to buy up your policy to a larger benefit is really important. This policy also had, so you didn’t have to have another exam, they didn’t go through your medical history again. So if I’d had some kind of health incident in between when I first got the policy and now which as you get older stuff happens, not having that all re-examined and more exclusions added is important.

Katie:

Okay. So to put a finer point on this own versus any occupation coverage is critical because own occupation coverage means that you are covered under your long-term disability policy for as long as you can’t do your own specific job as opposed to being unable to work your job but potentially capable of doing a different job that is completely different and far less lucrative. So almost definitely going to be a critical component here is own occupation coverage.

Another thing that Lacy was grateful for was that she used post-tax dollars to pay her premiums and this meant that her benefits were tax free.

Lacy:

So another critical part of your disability insurance is making sure that you’re paying your premiums with post-tax dollars. Now if you have an excess policy and you’re writing a check to them, that’s how it’s going to be. It’s going to be post-tax. But if it’s a benefit through your employer, you want to verify that it’s being charged as post-tax dollars because if you’re paying with pre-tax dollars, your benefits are taxable. If you’re paying with post-tax dollars, your benefits are not taxable. For me, $420,000 a year without tax is significantly different than what that would be if tax was being withheld or charged. Really, really important.

And I think most really large employers have this figured out, but when I first bought this policy, I worked at a firm that had 300 people and they originally charged it pre-tax and then figured it out and had to back all of it out and recharge it all. So if you’re either self-employed or and are running this through your payroll system or you work at a smaller company regardless, just double check, ask the question. That’s a material difference.

Katie:

So we’ve already alluded to this that you can have employer provided benefits and that’s true. We’ve really spent a lot of time here talking about private long-term disability coverage that you go out and seek for yourself, but you might already have some version of long-term and short-term disability policies with your employer. You might not even be aware of it.

The thing is, these do often cap out at a level that might be much lower than a salary like someone like Lacy’s would have required. For example, just out of curiosity, I went and I checked my own employer policy. So Henah and I would get 60% of our annual salary excluding bonuses and commissions or $12,000 monthly, whichever is lower. So another way to interpret that is the maximum amount that one could receive with this policy that we are covered by at work is $144,000 per year. That’s assuming that that is lower than 60% of your salary.

It would pay for 24 months. So you’ve got two years of coverage here and it’s not totally obvious from the paperwork that I am looking at now, what disabilities would be covered. And I think that that highlights another important element of the types of professionals who can become invaluable when you are navigating situations like these.

Lacy:

So when this first happened, other than panic and shed some tears, I realized I needed to do two things very quickly. I needed to hire a disability specialist attorney and I needed to get a therapist because I needed to make sure I had support in both camps for whatever this journey was going to be. I wanted a specialist disability attorney to guide me through the process and make sure that I was completing forms and interviews in the right way with correct answers and things that wouldn’t trigger or be red flags as this went through. And if I was denied benefits, I would have someone who had been with me along the journey and could work on an appeal pretty easily. My appeal and the documentation that my attorney submitted was over 1,200 pages.

Katie:

Oh my gosh. So with a disability specialist attorney, is this someone that charges by the hour or they get a percentage of benefits? How does that typically work?

Lacy:

They will do it either way. And so before my claim was denied, I paid them on an hourly basis and then once my claim was denied, I had the option to continue that way or to move to a percentage that they would receive if the appeal was successful.

There’s a few nationwide disability specialist attorneys. I interviewed people from three different places and the one I went with, I have referred business to, surprising to me how many people need this, but I’ve referred business to them, they’re absolutely fantastic and we’re really good at talking me off the ledge and making sure that when I was upset and feeling attacked, they made sure that the I had were from a place of calm and rational and professional and not emotional. And so just having that barrier, they stepped in between the insurance company and me so that I wasn’t telling the claims adjuster where to go.

Katie:

It sounds like having that guide through the process, even if you hadn’t needed to appeal, it still strikes me that having someone that is familiar with the jargon, the language to your point about red flags, just kind of simplifying and streamlining because I can imagine it is a pretty—no insurance company is eager to fulfill and accept a claim, so you don’t want to make any mistakes when you are going through that initial application filing.

Lacy:

The other thing that the attorney told me is we have the biggest problems with people who are in your situation. You have worked really hard to get where you are, you’re top of your field. You’re used to saying, yes, I’ll figure it out, no problem, I can do it. And especially he did not say this, but especially as a woman, you are like, I can do it. There’s nothing wrong with me. I’m totally fine. I can figure it out. I’ll do everything. I’ll take care of everything, right? Yep.

And this is not a case where that is what you want to do. You want to be very realistic, you want to accept your situation and you want to communicate your limitations. And what he said is that people like me in my situation have a very hard time doing that. The female lawyer he assigned in his firm was an absolute dream to work with and I was glad to work with a woman. I’ll just throw that in. But they said this is one of the reasons why, because you’re going to want to actually tell in these forms what is really going on with you and not make light of it. Not I’m fine, because you’re not fine.

Katie:

And on the note of short-term disability, which apart from the timelines we’re talking about, works pretty similarly from a pre-tax and post-tax perspective and paying for the premiums and then filing claims. You may have been on short-term disability already if you’ve had a baby in our great nation, which is one giant paid leave shirk under God, but short-term disability provides some income replacement on a weekly basis while employees are out of work on a disability claim. And it typically covers off the job accidents and illnesses that workers’ comp wouldn’t like pregnancy, which is hopefully an off the job accident.

Some states like California, Hawaii, New Jersey, New York and Rhode Island actually require short-term disability policies for workers. And there are a few different types that vary based on who is paying for it and how. But the wages that you’ll be paid typically range from 40 to 70% of your income, and usually it’s going to take several days to begin.

So apart from pregnancy, what else qualifies as a short-term disability? Think accidents, injuries, illnesses, the benefits usually last a number of weeks and most policies max out around a year. So for example, I was curious, again, I pulled up my own employer policy and saw that it pays for a maximum of 26 weeks or roughly six months. Just to give you a sense for the difference we’re talking about when we say short-term versus long-term.

So we’ve covered high-end private policies for long-term disability. We have talked through the types of coverage that you might have at your job already from your employer, but what about the type you can get from the government SSDI or Social security Disability Insurance is a thing and it’s great that it exists, but it’s both not a sure thing and also not a lot of income. The qualification requirements are pretty similar to how the regular rules of social security work.

And by that I mean it’s all about credits. You must have worked and paid social security taxes for a certain number of years. So typically you need to have earned at least 20 credits in the last 10 years. Though younger workers may qualify with fewer since you typically earn four credits per year, this generally means that you would’ve had to have been working for five of the last 10 years, but whatever your age, you must have earned the required number of work credits within a certain period ending with the time that your disability begins. So if you qualify now, but then you stop working, you’re not earning wages that are being considered for social security, you may not continue to meet the disability requirement in the future.

So when I say it’s not a lot of income, I mean it is not a lot of income. In January, 2024, the average SSDI benefit payment was just under $1,700 per month. And in order to get it, you cannot do work that you previously did. You cannot adjust to other work due to a medical condition. If you are able to earn even a modest amount of money on your own, think like $1,500 a month, you are probably not going to qualify for this. So all that to say it is good to know it exists, but this is in no way a replacement for getting your own policy if you fit the bill described. And I would also add, it kind of flies in the face of this colloquial wisdom or knowledge or fear that people are living on government largess, all these people on disability are taking advantage of government money. You’re really not going to get much money on disability payments. That’s not true.

So let’s go back to Lacy. What has Lacy been up to? Because when you go from working 16 hours a day to permanently leaving your career behind practically overnight, I kind of figured that was a pretty big adjustment. So I wanted to ask her what she’s doing now to fill her time.

Lacy:

I’m at a different pace. There are some things that I can’t do that I used to do. I used to go see a lot of live music. It’s not super pleasant for me. I used to go to a lot of restaurants. That’s not super pleasant to me. I really like eating outdoors because you don’t have the sound bouncing around where you can’t hear anything. But I got really into something that had been just the beginning of a hobby before I started. And when I tell you I went down a rabbit hole, I went down a rabbit hole, I went back to school at my local community college, which has been amazing. And now I’m in the process of starting a business to make that hobby a profession with several of my classmates. And so I’m really excited about that and I feel like we can do some important work with this hobby.

Katie:

And this is actually a really important detail. Lacy and her lawyers had to send letters to her insurance companies to inform them of her plans to return to another type of work.

Lacy:

First off, I needed to inform and I had an obligation to inform both companies that I was intending to work. My lawyer said that lots of people don’t even tell them until they’ve been working like six months and they’re scrambling. So I wanted to make sure that before I even contemplated going back to a job that I communicated with them and we communicated with the insurance companies. So we did that. One company has sent me a set of forms to fill out about what the duties are and we’ll do a vocational analysis of that and I’ll need to provide whatever information they want. The other company sent me a gobbledygook letter about what percentage of earnings and clauses and actually did not accurately communicate the information in the policy. You’d be surprised to know which one, but the most important thing that I need to be aware of is your benefits change.

This has been consistent across the policies I’ve seen. If you make over 80% of what they call your pre disability indexed income, so they’ve looked at all of your financial records at the time of the disability and typically for the two years. So those were another set of documentation I had to send in. And they will tell you, this is the amount of money that you made. If I make more than 80% of that number, then my disability payments cease completely cease.

Thankfully, the timing of my illness could not have been better. I had my highest earning year of my entire career the prior year, and there’s not a realm of possibility in which I would make that again. So it’s less of a concern for me, but it’s something to be aware of. And depending on what your policy says, some insurance companies will start impacting your benefit if you make 20% of your pre-disability income. So they might offset as that amount increases over your original look. You said it earlier, the insurance companies, they’re not signing up to pay out your claim.

Katie:

And it doesn’t matter that the work is completely different, right? It’s just income from any source that you are—

Lacy:

Correct.

Katie:

Deriving, that is, I guess now the benchmarks either 20% or somewhere between there and 80% that becomes ground. It’s 80%.

Lacy:

It really starts to get Yeah. Yeah. I do have to be really clear and maintain documentation about what is different about the job. And for me, the challenge is one, I can’t do a 14 to 16 hour day back to back to back to back to back. So that’s just not happening. So the duration is not something I can do. And then the components of trying to follow conversations going on, that’s not a thing for me anymore. It’s not the same at all, and it’s not the same kind of business at all. So if somebody were trying to do something, it’s something to think about whether putting your benefits at risk is something that you want to do. It’s really hard to sit on your hands if you’ve been a high achieving, high earning person. It’s been a time to just reexamine how I was living my life and spend some more times more time on relationships with people in my life versus the people at work.

Katie:

Now that you’ve been through all of this, you know what, you’re in this position now. Is there anything you would’ve done differently?

Lacy:

I’d say there’s two things. One, I would’ve upped my benefit one more time. Not that I’m not comfortable and fine, but there was additional benefit available to me had I not let that self-care item of, Hey, you’re making more money, adjust your insurance fall to the bottom of my priorities continuously. So that’s one.

And then two, I’ve had a friend from work where this same thing happened and she said, I can’t believe that you told me exactly what I needed to do, exactly what I needed to get the clauses, everything, and I never got to it. And so I think that the people in my life who I care about, I need to just go back around and say, Hey, pop this up to the top of your list and get it dealt with and then do that until they tell me that they have, whether you work for a large company or you’re self-employed, doctor, dentist, lawyer, anything that’s using hands brain, you need to make sure that you’re covered because anything could happen. Hopefully, you never, ever, ever need your benefits, but God forbid you do.

Katie:

Now, I still had a few questions. So I called up Katy Song, my fee-only CFP, to ask her, and just a little disclaimer, Katy Song does work for Domain Money, which is a sponsor of this show.

So you are intimately familiar with my financial situation and I am thinking about getting a private long-term disability policy. And so when I say those words to you, I’m curious, what do you think about that?

Katy:

So I think that for anybody and a primary earner in a family, it’s critical. It’s really important.

Katie:

Critical.

Katy:

The lowest hanging fruit of the people who need it are the ones who can get it through work. So I feel like you’re a W-2 and it’s one of the employee benefits that’s offered to you, take it, sign up for the maximum amount. Statistically there’s a 30% chance of anybody over the age of 40 not being able to work for up to 18 months, and we’re not talking about I broke a leg and I can’t return to office. It’s like, oh my God, they found a brain tumor. I have to go through radiation. I can’t think straight. I need to take some time off. So if you can get it through work, sign up for the maximum. If you are self-employed and you are the primary provider of income for your family, that’s where it gets to. The independent policy is super important.

Katie:

If you are covered at work already, if you already have a policy at work, do you think that it’s overkill to get a private policy?

Katy:

Yes. Usually at work the default is 60% of your income. An insurance company, even if you were going to get an in independent policy, is never going to insure you for more than 70% of your income because they do not want to incentivize you to gleefully stay out of work.

Katie:

Would a private policy close gap or would they look at you and go, no, you already have X dollars of coverage, so we are not going to cover you? Or will they allow you to buy a policy that would ensure more of your income?

Katy:

So an insurance company is always going to want to sell a policy. So the incentive is there to figure out like, okay, does this make sense for you? So that does happen from time to time. Let’s say that you are an attorney, it’s usually highly paid executives, and if they work for a smaller company and the smaller company doesn’t have great long-term disability benefits, where getting an add-on policy can bridge the gap. But again, if you make, let’s just say $20,000 a month and your work coverage is going to cover you for 10,000 and you’re like, crap, there’s a $10,000 gap there, that’s when an independent policy can really bridge the gap.

But I would encourage most people to look at it, not just in covering my income generation, but what are you actually spending? But let’s talk really briefly about who doesn’t need it. So if you are not the primary earner and you are self-employed, but your partner or your spouse has benefits through work and they’re the primary earner, normally it doesn’t make sense to spend money on a monthly premium to cover ancillary income that isn’t necessary to live your life.

Katie:

I hear you. That was kind of what I was curious about because I was like, well, I do save most of my income. My savings rate is pretty high. So if I’m going to go out and get a policy like this, should I be trying to just get enough insurance to replace the income that I’m spending or should I be trying to fully replace my income? And it sounds like you’re saying you’re looking more at the amount you need to spend versus paying to insure yourself to fully replace the amount of income, which it doesn’t sound like that would actually be possible based on the 60%, 70% rates.

Katy:

But I mean, if you think about an insurance company is going to want to sell you the biggest policy possible, what I’m trying to encourage people to do is to not buy more policy than they need. So let’s say that you make $10 grand a month, but you spend five grand a month. And so an insurance company is going to be like, oh, okay, I’ll insure you 70% or $7,000 a month, so they’re going to charge you X for the premium. And you’re like, oh, well, but I actually only need $5,000 and my premium would be $60 bucks lower a month. So I’d rather you opt for the right amount of coverage and pay less in premiums than do what the insurance company wants you to do.

Katie:

Gotcha. Okay. That makes sense. Thank you. Are there any hacks for getting a policy like this or is it kind of just shopping around for car insurance or the other types of insurance that people are probably familiar with getting? Anything that people should be aware of if they do pursue the private policy?

Katy:

I think that one I would recommend for people to do is to consider things like associations or unions that they might be a part of. So if you think about it this way, when you get coverage through work, the reason it’s so inexpensive is because you’ve got pooled risk. Insurance companies like to pool risk and not have individual risk. So if you were able to join a freelance writer’s union or part of the Financial Planners Association, a lot of times those unions or associations will have long-term disability policies that you can do from the group.

Katie:

What about coverage or claim watch outs? I’m thinking about my car insurance example. Again, I would probably tell someone, oh, you have a new car that would actually cost a lot to replace if you get hit, you should have collision and comprehensive coverage on that vehicle. But if you are someone that has a pretty cheap old car that if you got in an accident you would just get a new one and you wouldn’t pay to fix cosmetic stuff, I might say, ah, this is a pretty expensive part of the policy. Maybe you don’t need it. Maybe you can skip it. I actually am not sure, Katy, if you would agree with that advice. But I am curious, are there any analogous situations that you would point to here of tips for coverage and claim watch outs? In the LTD space,

Katy:

There are some driving factors. So one is the elimination period. So how long will you self-fund before the long-term disability policy kicks in? So is it 90 days? Is it a hundred days? Is it a whole year? So how much emergency fund do you have on hand to cover you if you’re not able to work? So the elimination period will have a really big impact on what your premium is.

The analogous thing to do, I decline collision because my Blue Book value is less than $10,000. That’s my rule of thumb.

Katie:

Oh, under $10k. Okay, great. Thank you.

Katy:

Yeah. So if you’re a Toyota Highlander from 2004 is worth less than $10,000, don’t have collision because you’re going to end up paying more for that part of the premium than they’re ever going to pay you out for the car if it gets totaled.

So this kind of comes back to who are the people who don’t need coverage in the first place. So if you’re not a super high earner and your partner has the benefits and the primary earning capability or that’s what they’re bringing to the financial side of their relationship, then you probably don’t need an LTD policy at all. So elimination period, that’s one of the big drivers.

The second big driver is the benefit amount. This gets back to am I really trying to replace income or am I trying to make sure that I’m covering what my nut is on a monthly basis? So if I’m spending $5,000 a month, that’s what my nut is and I want to make sure that I can cover that.

The third is how long is the benefit period going to be? So statistically you’re not going to need more 18 months to three years worth of income. So why would you pay five years, 10 years up to the age of 65, which that tends to be the default. So again, think about the insurance company want really long-term policies that are expensive, they make the most money.

So you really have to dial into what meets your needs. So elimination period, which is how much cash do I have on hand to self-insure, and how long will that last? 90 days is pretty typical. That’s like the shortest, usually short-term disability, it’s through the state is viable for that short-term period of time, and then that benefit amount and then the benefit period. So don’t get lulled into like, oh, of course I need it to the age of 67 or 65. When social security kicks in, you really are not going to need it for more than five years. So I usually want my clients to make sure that they don’t need it for longer than that period of time.

Katie:

I assume that that’s informed by statistics that show just the average length of time that someone has a permanent disability that is going to permanently inhibit them from doing the type of work that they were doing before, and how maybe comparatively unlikely it is that something would happen that would keep you alive for a very long time, but completely unable to earn income.

Katy:

Yeah, so I guess the statistic that I was referring to, the 18 months is not a permanent disability saying you’re out of work for an average of 18 months over the age of 40, that probability is around 30%. I have a similar story of a client who was an FX trader and he was on the beach in Stinson Beach and ended up getting medevaced because he had a heart attack. It turns out he had to have a quadruple bypass, like young, super healthy guy. Three young kids. Had a quadruple bypass at Stanford Medical Center. They saved his life. Fantastic goes on disability. There’s no way a doctor’s going to say, I want you back into an FX trading floor. So he was on long-term disability.

But this gets to one of the things we should discuss, which is what kind of occupation is your policy going to cover? So own occupation is very specific. It’s like, okay, if I can’t be a trader or an FX trader because that is what my career has been, then I will be covered. Any occ means essentially, he could be the janitor at JP Morgan or whatever bank he was working at and still have a viable income stream. So sometimes the insurance company would be like, okay, you go be the janitor, we’ll cover the difference in your pay. But in this instance, he had an own occ, but of course, insurance companies don’t want to pay until eternity until you hit social security. So they’re going to try to settle, and this happens all the time. They’re going to try to say, okay, we will settle for X million of dollars because they will figure out, okay, at some point he most likely could do a job, but he has an own occ policy, and technically they would have to be paying him that salary until 67. So they’re going to try to settle with him, which they did an undisclosed amount. You can’t really talk about it, but he took the settlement because they were fighting back and forth saying that he could do something, and he was saying, no, I can’t.

Katie:

And was his policy, if you recall, through work?

Katy:

Yes.

Katie:

It was his work policy?

Katy:

Yes, absolutely.

Katie:

Gotcha. And so he took a settlement and I assume decided that it’s better to just get this upfront payment, be done with it, not have to go back and forth with them anymore. But this is really illuminating because I think what I was feeling after we did this interview was, well, I do have coverage at work, but I’m getting the impression that sometimes those policies can be less than stellar or that the partners with these companies might not be as accommodating as a private policy that you can go out and pay for yourself. That certainly seemed to be the situation with our interviewee this week, but it feels like what I’m hearing you say is that if you’re covered at work and it’s enough to meet your needs as far as your consumption habits and lifestyle expenses, that it’s not a critical thing that you need to go out and get some sort of supplementary private policy that it really is just those who are self-employed and primary earners for whom this is absolutely critical.

Katy:

I think that’s a really good summary. I mean, I think that doing research on LTD, there are certain occupations that tend to have these independent policies, like really high paid executives, really high paid attorneys, pilots, people who potentially only have 50% to 60% coverage through work. They are the primary earners. They’re used to spending $20, $30, $40, $50,000 a month. And if they were to self-insure millions and millions of dollars. So when you’re looking at the opportunity cost of self-insuring at that rate on a monthly basis, it makes a lot more sense to pay for an independent policy that can close the gap.

Katie:

I see. Whereas someone who is maybe well along on their journey to financial independence, maybe part of a two income household is spending an amount that is reasonable to, particularly if they’re pretty far along on their financial journey already, then you would look at that and go, yeah, but if something were to happen and you have this, even if this policy at work is not fantastic, you are close enough with your investments that you can pay to support your consumption habits such that it would not make a ton of sense to spend many hundreds dollars a month on your private policy supplementary.

Katy:

Yeah. So it all comes down to that decision like, am I going to self-insure or am I going to risk mitigate and buy an insurance policy? The same thing comes with life insurance. The possibility of death. We’re all going to die. We know that the probability of you dying within a term policy, it’s slim. Of course, there are terrifying sad stories of people actually dying within their 20 or 30 year term policy. But the reason, I mean, the insurance companies are like the house. They’re gambling, they’re always going to win. Insurance companies are smart and they’re smart investors. They know how to price these policies. The same thing comes with these disability policies. They tend to want to scare people into over insuring. You will have the tail case where it has really benefited the person. I did have a client, and it was super sad story.

She worked at Salesforce. She was a VP there, great long-term disability. 70% of her total compensation, not just her base pay. She was at an event, she collapsed. It turned out she had a brain tumor. It wasn’t operable, there were no treatments to it. She had two young kids. So she had about an 18 month time on the planet remaining, and Salesforce was amazing and her coverage was great. She actually ended up making more money with her disability policy because she didn’t have to pay into her retirement anymore. She didn’t have to pay for health benefits anymore. So the last 18 months of her life, she really enjoyed it. She spent tons of times with her kids. That’s a very sad story, but that’s where those kind of policies are life-changing.

Katie:

Okay. So to summarize Katy’s advice:

This is critical insurance for self-employed primary earners. If you’ve got coverage at work that you feel comfortable with and the payment amounts right, the amount that you would get in benefits if you were to file a claim is sufficient for you and it’s going to meet your lifestyle needs. It is less critical that you get some sort of supplementary private policy. If you do choose to buy your own policy, things like a longer elimination period or a shorter benefit length can help you keep your premiums reasonable. And lastly, the cost benefit analysis that you’re going to want to run here is sort of similar to the rest of insurance analysis that we talk about on this show. Whether or not your lifestyle is conducive to self-insuring, which is to put it simply investing enough that your own savings and investments could support you and you wouldn’t really need an insurance policy to fill the gaps.

So in conclusion, if the most valuable asset you own is your ability to earn income, you might consider getting a quote for a private long-term disability policy. And a big thanks today to Lacy for sharing her story with the show and to Katy for weighing in from the CFP side of things.

That is all for this week. We’ll see you next week for a conversation about what it takes to calculate a truly comprehensive FI timeline. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Scott Wilson.