Bri Conn, CFP®: [00:00:00] Welcome to Childfree Life by Design. Today, we’re talking about disability insurance and what it means for people are building a Childfree life on their own terms. I’m Bri Conn, here with Scott Barnes. In this episode, we’re covering the critical differences between short-term and long-term coverage, how different definitions of disability can make or break your policy, and how to structure your premiums so Uncle Sam doesn’t take a massive bite out of your benefits. If you’ve ever wondered how your lifestyle would survive if your ability to earn income was suddenly gone, this conversation will give you the clarity and tools to make intentional decisions that support the life you want.

Intro: From Childfree Insights, this is Childfree Life By Design, the go-to resource for building the Childfree life you want. Every episode gives you practical guidance, clear direction, and meaningful conversations to help you live intentionally and design a future on your terms. This podcast is for educational and entertainment purposes only. [00:01:00] Please consult your advisor before implementing any ideas heard on this podcast.

Bri Conn, CFP®: All right, Scott. So today we’re gonna be diving into disability insurance. This is a topic that we often talk about being super important because when you’re Childfree, maybe life insurance isn’t gonna be as important for you. However, disability insurance and that ability to protect your paycheck is incredibly important. You’re kind of the insurance guy on our team and have a good understanding of disability insurance and what all the nuances are. What’s the first thing that you want to share with people when it comes to disability insurance?

Scott Barnes, CFP®, TPCP®, CLTC: Yeah. Thank you, Bri. And what really is important is to think about this as we’re not just protecting you against an accident, it really is protection for your paycheck. It covers your living expenses, of course, when there’s an illness or an injury that prevents you from working. When we look at disability insurance, one of the things that really sort of surprises people is that disability is rare. According to the Social Security [00:02:00] Administration, more than one in four of today’s 20-year-olds will become disabled before reaching their retirement age. And a massive 90% of the claims are triggered by common illnesses like cancer, cardiovascular issues, long COVID, or mental health conditions. Not the stuff that you think about, like skydiving accidents or skiing accidents or things like that. So the majority of the claims that are filed are really for more common occurrences. It really does impact everybody that is out there, whether they’re Childfree or not. But for Childfree people, it is a very, very distinct thing that they need to have in place at all times.

Bri Conn, CFP®: ‘Cause those things can happen to anybody, and it’s not something where it discriminates based off of the activity you’re doing or the age you are, or anything like that. It’s everybody’s at risk. So I wanna first start with going through when we do a checkup, we ask people to provide copies of their insurance policies. And sometimes people will say, [00:03:00] “Yep, I’ve got disability insurance. I’m good to go.” And we’re looking at it and we’re going, “Oh, well, this is short-term disability insurance. Actually, we got some things to cover here.” So can you first dive into the difference between short-term disability and long-term disability?

Scott Barnes, CFP®, TPCP®, CLTC: So short-term disability is typically insurance that will kick in. Usually it’s anywhere from two weeks to four weeks after a condition happens. So if there’s an accident or you get sick, after two or four weeks that’s when short-term disability will kick in. And that coverage typically only covers usually up to three to six months sometimes a year, depending on the way the policy works, and that ends up replacing about 60% of your income in most circumstances. But it does kick in fairly quickly. Long-term disability, on the other hand, kicks in after that three to six months has occurred. So after that usual amount of time, that three to six months you’ll have disab- long-term disability insurance that will kick in. That could cover anywhere between 50% and 80% of your gross income, [00:04:00] and depending on how it’s structured, it could last just for five years, ten years, or even all the way to retirement age, so somewhere between 65 and 67. It really just depends on how the policy is structured and what type of policy it is.

Bri Conn, CFP®: And I like to look for policies on there too that last until retirement age, because the reality is you might have a disability that lasts that long. So that’s one thing too we’re often checking of, “Hey, how long is it going to last?” And then we’ll bring up in conversation too with somebody doing a checkup or even working with ongoing clients. When it comes to thinking about how relationship status or financial independence might impact whether or not you need disability insurance, what’s your reaction?

Scott Barnes, CFP®, TPCP®, CLTC: It is all very much built on relationship status for a lot of reasons, but especially for single income, no kids, so the solo person that doesn’t have a partner, they need long-term disability insurance without a doubt. They need it. It’s a non-negotiable. You have to have it. Because if you lose your [00:05:00] income, what do you have to fall back on? If you’re toward the end of the period where you’re working and you’re close to retirement, that may not be a big deal. But if you’re 35, 40, and you’re not planning to retire till 50, that’s gonna be a huge gap there that needs to be taken care of, and having that disability insurance is super important. When you think about people that have a partner, so that dual income, no kids, the one thing you need to think about there is if you became disabled, would the partner be able to support you? And also, I mean, is their income enough? But also, are they gonna have to take time off to help care for you? That’s something that’s a real concern for a lot of people. So making sure that you do have adequate coverage in place, even if you are in a partnered situation, is super important because everything is gonna change when one of you becomes disabled. And that’s something that I don’t think a lot of people think of. They think, “Oh, well, my partner will be able to continue working and everything else, and we’ll be fine.” But you really wanna make sure that everybody has coverage in place, because if [00:06:00] something does happen, you need to be thinking about what will happen in that scenario and will my partner have to step in, possibly take off work to help care for me or the other way around. So definitely something to be thinking about. And something else that we, when we’re thinking about this from that perspective, is looking at the way you might fund a policy. So if you’re looking at a policy and you don’t have one through work, for example, maybe you forego short-term disability ’cause you could build up your own emergency fund that covers three to six months of expenses, but then have a long-term disability policy that kicks in later. So these are the types of things that we want to be thinking about when we’re looking at why you should have coverage and especially who should have coverage when you’re talking to Childfree people.

Bri Conn, CFP®: Yeah, and I wanna expand on that too, because I think what you’ve said is super helpful. And you, you made a comment about can the partner cover expenses? And it’s not just when we say expenses, Scott and I are in this day in and day out, so we’re, we’re talking about it all the time. But for listeners, it’s not just [00:07:00] your expenses today, it’s what expenses come with that disability. What medical expenses are you gonna have? Are you gonna have to travel to get care? Because that not only comes with now travel, like the medical expenses, but it also comes with additional travel expenses, potentially staying in hotels, having to order food out, all of those different things that you don’t necessarily think about as a day-to-day expense or something that might pop up when you need it. So we’ve talked about who needs it now. Let’s dive into kind of the little bit nerdy zone. What different definitions of disability and types of policies are there?

Scott Barnes, CFP®, TPCP®, CLTC: Sure. So when we look at the different types of disability coverage that’s out there, I’ll start with the most basic, and this is what the majority of traditional group disability policies are. So when you look at a policy that you might get through work, most of them are going to default to this definition. They may have other options, but this is where we’ll start. The first definition is what they call any occupation. So this [00:08:00] is the strictest and least consumer-friendly definition. If you can push buttons or sit, basically as a greeter at Walmart, you aren’t disabled in the eyes of the insurer. So if you can’t perform your job but you can go get a job somewhere else doing even very basic things that don’t require really much from you, you aren’t considered disabled. So if you can do any job, you are not considered disabled. So that’s the most restrictive type of definition there is. The next in that line would then be modified own occupation. So this is one that gets into what we like to consider as the better type of coverage. So own occupation generally being if you’re unable to work in your specific job then you’ll be able to qualify to start receiving disability benefits. But with modified own occupation, what that means is that if you choose not to work anywhere else, the– We’ll get into own occupation in a minute, just sole own occupation, but I want to point out the difference there. Modified own occupation is really built for [00:09:00] that situation where you can’t perform your own job, and then if something happens or if you do want to go back to work, you cannot go back to work and start doing something in a different field or for fun or for any other reason. If you do go and do any type of job, if under that modified own occupation definition, you can’t continue to receive disability benefits. So that’s a big difference with the way that any occupation works, and it’s also a big difference with the type of coverage that we’d recommend is own occupation. So this is the truest, best quality type of disability coverage that we recommend. If you cannot perform the specific duties of your job, you can get paid. And even if you decide to go work in a completely different industry or a different field, if you can’t perform the specifics of your job itself, even if you go to work somewhere else, you’re still going to get that disability check. So that’s a big difference and that’s why we recommend this type of coverage because it really truly is a game changer. And [00:10:00] depending on what type of job you do, you might have the ability to continue doing something. And to give you an example of that and how that works had a situation where had an orthopedic surgeon, she had a hand tremor, and she was unable to perform surgery anymore. Under her own occupation definition for her disability policy, she gets full benefits from her disability policy, really no questions asked. But then she also had the ability to go teach at the local college in their med school, and she could earn a living there. And she has chosen to do that, so she’s now working as a professor at a university. She’s still getting her disability payments ’cause she can’t perform her original job. But now she’s also receiving an income from being a professor at the college. So that’s really the best type of coverage that you can buy, is that own occupation coverage. But depending on who you are and what type of job you have, you may not be able to get that pure own occupation type of coverage. But it is something [00:11:00] that we recommend in most circumstances for most people to get if they can.

Bri Conn, CFP®: Thank you, Scott, for that helpful walkthrough because that’s something I find that so many people just simply don’t understand or don’t know to even look for when it comes to their policies. Can we dive a little bit deeper into some of the occupational classifications and then premium cost information as well?

Scott Barnes, CFP®, TPCP®, CLTC: Yeah, sure. And with disability assurance, the, it really is built around the type of job that you have. There’s different classifications that go from one up to six in the classifications, and it goes like 1A, 2A, 3A, 4A, 5A, and 6A. These class 5A or 6A are, these are the folks that are really knowledge type of workers, and they’re doing heavy cognitive work. So people like executives, CPAs, attorneys, software engineers, these are people that don’t really have any physical aspects to their job other than being at a desk. And these people will usually get the cheapest premiums that are available, and easy access to that [00:12:00] own occupation type of definition because their physical risk is really low. That next class, and this is probably where a lot of people will fit in, is that class 3A or 4A. That’s managerial, teachers, salespeople, non-invasive medical type of stuff. It’s moderate risk to the insurer and light field work, and this is ones that are gonna receive the general standard type of pricing that is out there. So this is, again, the majority of most folks will probably fit into this unless you are, a professional that all you do is you’re in office, and you never do anything out in the field. And then finally we have a class 1A and 2A in specialty. These are the folks that are folks like electricians, they’re chefs, and then of course specialty stuff like surgeons and chiropractors. It seems odd that you would have those two in the same bucket right there an electrician and a surgeon, but it really comes down to a couple things. For the electrician and the chefs, it’s usually heavy manual labor, high exposure to hazards, and extreme reliance on fine motor skills. [00:13:00] And that’s where the surgeons and the chiropractors and different things come in, is those fine motor skills. These classes, they generally are paying the highest premiums of anybody and they generally will face really caps to the amount of money that’s paid out, and how long the benefits will last. You’ll often see, especially with like electricians or plumbers or something along those lines, that the benefit might only be available for five years. They may not provide coverage up to age 65. So that’s just something that is just sort of built into the system. But for most people, I would imagine, that are listening to this podcast, I really think you’re probably gonna be fitting into those middle ranges, those 3A, 4A. But something I wanna definitely point out is that you wanna be working with a CFP professional and somebody that they trust as far as a insurance broker is concerned because every company’s a little bit different. Some will consider somebody a 3A, some will consider somebody a 4A, and you could really have a situation where if you don’t know the marketplace, then [00:14:00] that broker could end up saying that, “Hey, this company would consider it a 3A, but if you go over here, they’re gonna consider it 4A, and they’re gonna get a discount as compared to paying the 3A rates over at insurer A.” So that’s really one of those things that is a nuance. But again, work with your CFP professionals that are out there. Make sure that they’re working with an independent broker that can provide that access to all the different carriers that are out there because that’s really truly important for how that works. One additional area that I’ll point out as well is that if you are particularly like those surgeon situations that I mentioned before, that orthopedic surgeon. With her, she was one of those people that she made a lot of money. And when I look at that, I’m thinking more along the lines of like 600K a year is what she was making, if I recall correctly. For her, 60% of her benefit obviously is quite a bit more than the average. So, most of those policies that you see, the standard group policies that you get through work, [00:15:00] they’re gonna cap you at some level. Again, it’s 60%, but they may cap you at, say, $10,000 or $15,000 is the max monthly benefit you can get. So even if your income is $50,000 a month, which in that situation with the orthopedic surgeon she was making, she’s not gonna be able to get that full amount, unfortunately. So that’s the type of thing that you need to be thinking about. And what happens is that those types of clients need to layer different types of policies into their situation. So they might have a group policy at work. They might purchase an additional individual policy, and then they may have to purchase a specialty policy that gets them the full coverage they need. And those specialty insurers, again, that’s not super common because you have to be very high income to do this. Those specialty insurers are groups like Lloyd’s of London that you’ve probably heard of before, that will provide this additional coverage that goes beyond the normal limits of individual and group policies that are [00:16:00] out there.

Bri Conn, CFP®: Yeah, checking to make sure that the amount of coverage that you have fits what you need, because there’s times where you’re right. With the surgeon example that you have, I’ve also seen other ones where, hey, their 60% would be 12, 15, 18,000. So not much over that $10,000 limit that some policies will provide, but still enough that if you’re not planning for that, that can make a big difference in your life should you become disabled.

Scott Barnes, CFP®, TPCP®, CLTC: Yeah, it certainly does.

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Bri Conn, CFP®: So Scott, with all those different things to look out for when it comes to the payout, I know sometimes policies can have additional riders that are built onto them. What are particular riders that one should watch out for and be aware of that might be on their policy?

Scott Barnes, CFP®, TPCP®, CLTC: One of the biggest ones or one of the ones that is super helpful to have is one that’s considered for residual or partial disability. So this is a rider that if you are not 100% disabled but you’re able to work, say, 20 hours a week, then it will still pay benefits for the other 20 hours a week that you’re unable to work. So that’s something that is very helpful to have, and that usually comes on a lot of those own occupation type of policies. And you can see it on the other even any occupation or modified own occupation policies. But it’s something that’s worth considering adding. It’s usually a relatively minor additional cost. And again, if it’s through a policy that [00:18:00] you got through work, it may automatically be included. So you just have to review the options that are on your exact policy that you might have through work. Another one that we often see or get questions about is anything regarding mental health. A lot of times, these companies will have a sort of a restriction on the amount of time that you can receive benefits under mental health issues or substance abuse type stuff. That could be like a maximum of just two years that they allow coverage for. So it’s just something to be aware of. There’s usually not a specific rider that you can purchase that will give you extended amounts for that. But it is something to be aware of when you’re looking at these policies, is that often there will be a limit to the amount of disability coverage that you can get for mental health situations.

Bri Conn, CFP®: And that’s so important to know, especially with all of the mental health issues that we’re seeing in our population today and just concerns over it people have. Knowing how that impacts your [00:19:00] disability policy is incredibly important. I want to turn now to taxes of disabilities, disability payouts, because that’s something that I’m often paying attention to and trying to ensure that our clients are aware of how are disability policies and that benefit going to be taxed should they ever need to have it paid out to them?

Scott Barnes, CFP®, TPCP®, CLTC: That’s a great question. The easiest way to think about this is if you get a policy through work, if your company is paying for it, it’s gonna be taxed when you receive benefits from that. So if you have, say, a $5,000 a month benefit that will be paid out, if they’re paying for that coverage for you, that $5,000 is gonna be just like you receiving a check in the mail from your employer for ordinary work. So you will pay ordinary income taxes on that benefit. If you are paying the premium on those policies, then that amount is fully tax-free. So if you pay the premium, that means that you will receive those benefits tax-free. And [00:20:00] that’s a big difference between the two. So in that situation, let’s say that we have somebody that’s getting $10,000 a month of benefit. Well, if that person is having that paid for by work, they’re gonna end up paying taxes on that, and that could be 20, 30% that they’re paying, so they’re only really netting 7 or 8,000. Whereas if you have a policy that you purchased on your own, that $10,000 will be actually $10,000 in a check. So that’s a big difference between the two. So that’s definitely something to be watchful of, and that might be an additional reason that when you are looking at policies and the options that you may receive through like an employer-sponsored type of disability plan, if there are buy-up options to purchase additional coverage that may be worth considering. And that sort of leads into this other area that we were gonna talk about is where can you get this type of coverage? Employer-sponsored plans are really the ones that are the most common and ones that most people see. Again, most of the [00:21:00] time the company will pay for them. They’ll usually provide a benefit of about 60% in most circumstances, and they may offer that option to purchase additional coverage, like up to 70% or 80% that you could pay on your own. Anything you pay on your own will be received tax-free, but again, that base 60%, if they’re paying for it, then you’re gonna end up paying taxes on that amount. You also see a lot of times there are ways to get coverage. Let’s say that you don’t work for an employer that provides disability insurance. You may be able to get it through like professional associations or freelancer unions. So these are ones that you could be a solo business owner or a contract worker. These can get you into group rates, but they’re not gonna be as usually as robust as some of the group plans that are provided out there through a normal employer, but they are still very reasonable to get. And because the way they’re structured, you may end up being able to get those at a very reasonable rate because they’re able to offer group rates. And that’s always a plus if you can get [00:22:00] group rates through one of these professional associations or freelancers unions. And then of course you have private pay type of disability insurance. These are through independent insurance brokers, and this is the best way to design like a really custom type of disability plan for yourself and go for that own occupation type of definition. One thing I’ll point out here is that especially on the employer-sponsored plans, again, the majority of them will probably have that any occupation definition. But a lot of the ones, and especially I’ve seen this over the past couple of years, something that’s a little bit more prominent or more common that I’ve seen when I’m reviewing disability insurance policies from clients that we work with is that it’ll have a own occupation definition for two years. So for the first two years, its own occupation, and then if they continue to have a disability after two years, then it will go back to the any occupation. So you may have some limited coverage through your group plan as own occupation but ultimately you probably will end up on a group plan on the any occupation type of [00:23:00] definition.

Bri Conn, CFP®: That’s really helpful for people and if they can’t figure out on the policies, I know I’ve gotten questions from people before of, “Hey, it doesn’t say on there.” I say, “Go talk to HR, and if you can get in contact with the company who’s actually providing that group policy.” I just want people to have clarity before anything happens. We have covered a lot today, and I think we’ve done a really good deep dive. I hope, listeners, that you have found this episode to be super helpful. If at any point you ever have questions you can always schedule a Childfree Wealth Checkup with one of our team members. You can pick Scott to work with on there if you would like by going to childfreewealth.com and clicking the Schedule a Checkup and provide that disability insurance policy information, and that’s something we can go through and look at. To wrap this episode up, I think the main takeaways that I’ve got for listeners are your income is really your freedom. Making sure that it’s protected is going to be an incredibly important thing to ensure you can continue to live an amazing Childfree life. Be sure to check the fine print on your policy so that way you know what type of disability insurance [00:24:00] policy you have. And understand, are you paying enough or too much for your, your disability policy? And then lastly, understand how your plan is taxed, so you’re not surprised by a tiny check when you need it most. That’s all for this episode of Childfree Life by Design. Remember, intentionally choosing to invest in moments of joy is just as important as investing in your future. Until next time, happy designing.

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