Do You Need Disability Insurance?
That might be a question for your financial advisor, but let’s dig into this important topic.
On this episode of “The John Chapman Show,” John talks with Robert Clark about disability insurance. John mentions that when he works with financial planning clients, life insurance and health insurance always come up. But disability insurance tends to get set aside for a variety of reasons, as John and Robert discuss.
They also talk about Robert’s history with the topic and how he got into the field, including some stories about his motocross experiences. And, they dive into the details you should know regarding how employee disability insurance works.
Welcome to the John Chapman show, where we talk about the path of a wealthy millennial, uncovering the truth about building and protecting your nest egg. Join us on this journey as we hear the stories of millennials and mentors alike to help you plan, manage, and protect your wealth. John is an employee of WorthPoint, LLC. All opinions expressed by John and podcast guests are solely their own opinion and do not necessarily reflect the opinions of WorthPoint. This podcast should not be relied upon for investment decisions and is for informational purposes only.
John Chapman (00:33):
Oh my gosh. Hey, we’re on air with Robert Clark. Wow. That was a debacle. I’m thoroughly impressed. God did not make me an audio engineer. Thank goodness for that. We’re actually recording. We’re live. And today we’re talking about disability insurance.
Robert Clark (00:53):
Uh, that’s not that. It doesn’t sound like that.
John Chapman (00:55):
That doesn’t spark audience curiosity. No, I know. This is supposed to be entertaining first. Educational second. There we go. Okay. So, before we get to disability insurance, we could talk about your life, you know, and do that whole story.
Robert Clarke (1:00) You know, disability insurance might be more exciting in that case.
John Chapman (1:05) All right. Um, we’re really excited to have you here. I appreciate it. For the audience. Um, we’re going to cover everything in wealth management and some of that is insurance and I think it’s easy to overlook disability insurance. I’m not sure why that is or if you feel like you’ve got some insight within the industry, but certainly speaking as a financial planner, when I say insurance, I’m first thinking life insurance and I’m second thinking health insurance. And so I feel like in the, uh, you know, there’s always a laundry list of action items for people to do and it just seems like disability gets easily combed over, especially maybe for like a corporate employee, you know, they’re going through their benefits, their, their annual, uh, review and they’re just clicking buttons. And so I wonder if in there, you know, disability’s an option that they are even aware of or not. So I guess that’s what we gotta we gotta hammer home for people. So it’s on the top of their mind.
Robert Clark (02:00):
Absolutely. Yeah. It’s a, it’s, it’s a tough one and it’s a hidden gem. I think the, the, the exact reason I hate using the term disability insurance is because there’s a stigma tied to it.
John Chapman (02:10)
Is there really?
Robert Clark (02:13)
One, I’m, I never think I’m going to become disabled. No one ever thinks they will. And two, you know, certain insurance companies have a lot of mascots in this space and the mascots tend to show up on TV commercials and that is the first thing we think of when we think disability insurance. So they’re like, yeah, if I break my arm, my world’s not going to fall apart.
John Chapman (02:33):
Yeah. Yeah. And I, maybe that’s part of it is that you don’t see it. You don’t see it in a day to day and may not be because it’s not top of mind. Like you see people pass away and so it’s easy to think about life insurance or things like that. People get sick, they need health insurance. So I wonder if it’s maybe outside of people’s view that they think forget about it. I don’t know.
Robert Clark (02:52):
Most disabilities that will take you down aren’t visible to the naked eye. You’re eating dinner next to these people. When you go out to eat at restaurants, you’re buying your groceries right next to these people. You’re standing behind them in line. You have no idea what they’re dealing with.
John Chapman (03:08):
Wow. That’s really interesting.
Robert Clarke (03:10)
That’s who disability insurance takes care of.
John Chapman (03:12)
Okay. We got to go, we’ve got to go deep on this, but before we talk actually ins and outs give us background. Why did you get into this industry to begin with?
Robert Clark (03:20):
Um, you know, I, the, the running joke in insurance insurances, I don’t think anyone purposely gets into this industry. I just happened to live four houses down from the owner that I work for today. My older sister married their youngest son, um, and they were looking for a somewhat, uh, outgoing or outside salesperson to, to just meet and educate. And, uh, I was, I was voted in to be that person coming from the motocross world. I was like, I do not want to be in insurance. That’s gotta be the most boring thing you can do. And I ended up taking the job kind of against my will. I just knew it was time to probably grow up. And I remember being in training at Peterson International and I’m just like understanding kind of where they fit and what the product that they’re selling does.
Robert Clark (04:12):
And I’m thinking, wow, my dad was diagnosed with cancer and he lived with cancer forever. And I remember him not working. Um, and I had to ask my mom if we ever used disability insurance cause now I guess I’m selling it and met with my mom. And she was like, oh my goodness. She’s like, that is the only reason we have the house that you were raised in.
John Chapman (04:35)
Super heavy. It kind of gives me chills hearing that.
Robert Clark (04:40)
And so I’m like, we’re here seven years later. And, from that moment on I was like, you know what, there’s a mission because I remember every single one of those years of focusing on his recovery and never once was it, shoot, you need to go find a job because we’re, we’re falling apart over here.
John Chapman (05:00):
That’s amazing how the, while your dad was going through that and while you were a young person, not that you needed to know at the time, but all of that was happening behind the place, behind the scenes. Excuse me. And then, then you just fall into this career path and then it’s such a real life example. That’s a really amazing story.
Robert Clark (05:20)
I’m convinced nothing happens on accident.
John Chapman (05:24)
Yeah. Amen. Yeah, you’re right. Wow. That’s pretty powerful. And so it actually, it’s cool to have somebody that’s in the industry that can speak from personal experience too, because you’re more of a, what’s a, oh, I’m going to forget it. You’re more of a missionary mercenary, you know, you’re not hired in to help, but you actually have lived this, you know that. Yeah. Yup. Absolutely true. Yeah. Uh, we need to pause though. Um, motocross, how did that work? Tell me about the motocross background.
Robert Clark (05:49):
Yeah. So, we’re in Southern California. I grew up in a part of SoCal called Valencia, and it’s kind of a motocross capital of Southern California. I mean other than like Temecula and you have some of those areas. So when we moved there and I saw every kid riding, you know, a little dirt bike up and down the street while they’re learning how to walk, I’m like, that is too cool. I need to ride a motorcycle. And so, you know, I’ve always been into cars and things like that. And so from as early as I can remember, I was like, I want a motorcycle. I love it. My mom, my mom hated it.
John Chapman (06:15)
Of course every mom would. Yep. Do you still ride?
Robert Clark (06:19)
Um, I have a bike. I ride probably once a year, so yeah. Just enough to own it. Yeah.
John Chapman (06:39):
Yeah. Good for you. Okay. So now you’re actually in the career, you’re at Peterson International. Give us an understanding of like, uh, where does Peterson fit in to the, you know, marketplace in terms of who they’re providing services to?
Robert Clark (06:53):
Yup, absolutely. So, there’s, there’s many layers to disability insurance. Disability insurance is kind of a niche. Peterson International is a niche of the niche. So we are what is known as a Lloyd’s of London cover holder. That basically means all of our policies are backed by Lloyd’s of London. They need to be because they’re really one off and kind of high profile cases, but we have the power of the pen to write those cases in the United States. Now, who are most of our end users? They are highly professional individuals who have very unique needs when it comes to protecting their income. And that would be athletes, celebrities, high income professionals. So equity partners in law firms, surgeons, dentists, you name it, anyone kind of in that higher income segment or just really unique forms of compensation, like executives of publicly traded corporations. Yeah. Restricted stock unit compensation, things like that. When, when it’s just not your bread and butter income. Yeah, that’s where we step in.
John Chapman (08:12):
So let’s maybe go from bottom up. Let’s just, let’s start with a regular corporate employee. Maybe maybe a small business, sort of a corporate employee might be easiest. And then let’s work our way up to the highly compensated individual for a second. So let’s say that, um, you know, $100,000 a year in salary and you’re going through your annual enrollment and you’re going through your benefits. What’s the cookie cutter that most employees at a large firm, you know, are going to have access to? How much of their paycheck is the disability insurance going to cover? And what are the, uh, what are the, the switches that have to be flipped to qualify for disability insurance?
Robert Clark (8:51):
Yup. Absolutely. So, most employees get access to a group long-term disability policy. Um, they generally cover 60% of that person’s income. Um, sometimes it’s a taxable benefit, sometimes it’s a tax-free benefit. Those are a couple of different levers. Um, and there’s always going to be a monthly benefit cap that can either be $5,000 a month, $10,000 a month. So, um, that’s where we see a, a supplemental need for certain high income individuals. But for your, uh, employee that’s earning $100,000 a year, there’s no unique forms of compensation in that, it’s, you know, salary only or maybe salary and a bonus, the group LTD contract is going to serve well for that person. It’s very low cost. They do not need to prove themselves medically to qualify. So it’s, you know, underwritten based on the group.
John Chapman (09:48):
So let’s talk about taxes and then let’s talk about the setting of the cap. So who’s in charge of determining whether the, the, the premiums are being paid pre-tax or after-tax?
Robert Clark (09:57)
That would be up to the employer’s discretion.
John Chapman (10:01)
Okay. So it’s the employer negotiating with the benefits group on what the long-term disability is?
Robert Clark (10:06)
John Chapman (10:10)
Okay, got it. So the employees, that’s not their decision. They just get what they get?
Robert Clark (10:15):
Sometimes the employer can pass on that option to the employee, but you know, if you have 50 to 100 employees, and you know, and I say that caliber because usually their benefit admin system isn’t quite big company scale, but they’re starting to get to that point. You’ve just given out, you know, 50 to 100 different options to come back. So when you’re setting up payroll and you have John who wants tax free and you have Beth who wants taxable.
John Chapman (10:45):
Sure. Like it’s a lot to handle. Yeah. But let’s say rule of thumbs on that. So, uh, you know, if you are paying the premiums with pre-tax dollars, then your benefits are taxable and vice versa.
Robert Clark (10:58)
John Chapman (11:00)
With after tax-dollars, then it’s tax free.
Robert Clark (11:03)
John Chapman (11:04)
What’s more common for just large corporations?
Robert Clark (11:08):
Um, that’s an interesting question. Um, I see tax-free is more common, but that’s because I’m in the individual space. So most of the companies that I get to work with really invest into their disability insurance programs. And so they’re willing to go post-tax for tax-free benefits.
John Chapman (11:22):
Yeah. That makes sense. Um, all right, so then, um, the cap, so that sounds like that’s, that’s based on, you know, the probably negotiated costs for what the premium is of what’s your, you know, 60% up to a dollar amount cap.
Robert Clark (11:38)
John Chapman (11:39)
So is there any rule of thumb as you think about there are any standards for just to get a regular corporate employee?
Robert Clark (11:54):
So, the caps are usually set from the group LTD insurance carrier. So they’re looking at everyone’s income in the company. They’re finding kind of like a median number. That makes sense. But what’s interesting is the higher that cap is, the more, um, the more volatile the rate for that long-term disability insurance will be. Because if you have someone with a high income going on claim, that’s, that’s a large loss compared to the rest of the employees. Um, if, if you are an employee and you’re looking at your group LTD and you’re thinking, okay, how do I know if this is enough? How do I know how much it covers? There’s a really easy rule of thumb that is if you have a 60% income replacement plan on your group LTD, you take the monthly benefit, you double it and add a zero. And that’s how much income it covers.
John Chapman (12:45)
So walk us through a real life example of that.
Robert Clark (12:50)
So if the group LTD cap is 60% to $10,000 a month, you would double the $10,000 to $20,000 and you add a zero to make it $200,000. That means a $10,000 a month benefit cap covers up to $200,000 of income.
John Chapman (13:00)
Yeah, I love it.
Robert Clark (13:02)
Do you? I mean, I love that we’re getting nitty gritty.
John Chapman (13:08):
I want the framework. I want that rule of thumb.
Robert Clark (13:13)
I thought we were supposed to be entertaining first. I don’t feel like this is that.
John Chapman (13:18)
Anyone who didn’t want to listen has already dropped off. Let’s go. Now we’ve talked about kind of your bread and butter for just a corporate employee. So let’s talk about the fun stuff. So people that are highly compensated. Define for me a dollar amount of income where it starts to get where you really need a specialized policy.
Robert Clark (13:31):
Yeah. I would say that most disability insurance carriers become heavily maxed out around $500,000 of earnings.
John Chapman (13:40):
Okay. All right. So, I mean, any corporate executives, like you said, any, um, you know, equity owners in a small business or attorneys or something like that, surgeons or doctors like they likely will have income that surpasses that. So that’s when it sounds like someone, like you guys would get involved. So maybe if you can think of a case that you’ve been on recently where, you know, describe the individual where they were working, what type of regular income they had and you know, how did, uh, how did you guys fit into this as a solution? Not that you had to be the perfect solution per se, but like how would you guys get involved?
Robert Clark (14:12):
Yeah, I mean, um, I have so many different case studies. I, uh, you know, it’s, it’s hard to even say one that might be relevant because they’re all so unique.
John Chapman (14:20)
Maybe two different ones.
Robert Clark (14:24)
Yeah. Yeah. We had one equity partner that had $1.3 million of distributions from the last taxable year. Her, her coverage in force was I believe $35,000 a month. That was what she already had, through the employer, through the law firm. And so that covers $700,000 of income. So now there’s a deficit. She needs another $35,000 a month. We go in, we look at that plan. You know, people shouldn’t buy disability insurance just because they can qualify for more. There has to be a need, right? So in this case, someone’s taking home $70,000 a month of compensation. What realistically, and especially with the financial advisors point of view, we have to think of, okay, what plans are we contributing to? What, what are the expenses, right? What’s, you know, the mortgage or the rent and all those type of expenses. And then what other qualified non-qualified things are we contributing to. What are really the key goals at hand? Because that’s, you know, any deficit that we find there, that’s the exposure.
John Chapman (15:42):
That sounds like a planning conversation. That makes me excited. Yeah. Yeah. That’s cool. Yeah. So it’s not a one size fits all and it’s not just a hammer and a nail. So it sounds like this can get really specialized.
Robert Clark (15:53):
Yes. Yeah, absolutely. Because you know, and, and like to speak to another side of it, we’ve, we deal with a lot of high-income surgeons, but their exposure after we, you know, really sit down and get to know what they’re after, their exposure isn’t necessarily their personal income. Maybe there’s other partners in the practice and, um, their income can be covered or subsidized or their workload can be taken care of and they still earn a distribution. But hey, what happens about taking care of some of the employees and assistance that they have in that office if they were to be out on disability? Um, what happens to all of the overhead expenses? Right. I had one case that we were brought in afterwards. A surgeon had been disabled for about six months. He returned to work and the, uh, remaining partners had to pass him a bill for $210,000.
John Chapman (16:49)
Robert Clark (16:50)
I don’t, you know, and, and I realize that most people in this position have a few million set aside and you know, they can pay the bill. It’s not a matter of wiping them out and they’re claiming bankruptcy, it just changes the course of their financial targets.
John Chapman (17:09):
Yes. Yeah, that’s really, that’s a really interesting case. And a good example. Uh, talk to me a little bit about the underwriting process, because I imagine again that can get really unique and like I need some basic working definition of what disability means and maybe there’s, you know, different types there. So I guess first is just to find out how the insurance company is going to define being disabled and then what the underwriting process is like.
Robert Clark (17:36):
We are digging into all of the fun aspects. So what an underwriter is looking for when they look at someone a potential purchaser of disability insurance, they’re looking for one, earned income. So is the income reliant on that person’s ability to work, right? If they’re a silent partner in a business that is not compensation that can be protected by a disability insurance contract. Cause it doesn’t matter if that person shows up to work or not. So that’s, that’s the first and foremost. Two, you know, are they an executive or are they an underwater welder? So we need to underwrite certain aspects of what’s their risk as far as their daily occupation. And then three is of course, their, their actual current health, what preexisting health concerns may they have been dealing with. Um, you know, or, or what family issues have occurred in the past. Like, you know, my dad passing away of cancer, I have to mark it out on most insurance applications then yeah. For the policies that I bought. Um, and so those are things that underwriters look at.
John Chapman (18:55):
Yeah. That’s interesting. Um, at what point after somebody has had a high-income, let’s say, you know, you go from the big law firm and I’m in New York city and then you moved here to California and you’re in LA and now you’re, now you get promoted or you buy in, you become a partner somewhere and you’re an equity owner and your, your income jumps up significantly. You know, are there, how immediate is it that somebody needs to fill this gap need?
Robert Clark (19:23):
From, from their eyes or from the planner’s eyes?
John Chapman (19:26):
Yeah. Well, I guess how, how, how, how often do you guys get involved? Um, you know, when somebody is highly compensated. After how many tax returns or so forth does it take for somebody to really say like, I should probably get this?
Robert Clark (19:38):
I mean, arguably John, no one ever says it. You know, we’re just not thinking about this now. If it’s a firm that already has invested into their income protection program and, and that’s something that’s already in place, then that new equity partner can usually jump onto their programs within a month to three months. Um, but if it’s just Joe who happened to land a new gig and he got promoted and now his salary is double of what he used to earn, not once is Joe saying, man, I really need to protect this income.
John Chapman (20:10)
Not a lot of inbound phone calls that you get. Right?
Robert Clark (20:15)
No, no. And, and, and usually that’s, that’s a pretty telltale sign. If someone is asking for disability insurance, they’re calling to see if they can get it, it’s too late. The reason they’re calling around for that is because they’ve got the bad news. And so, and that’s what I try and prevent. No one likes talking disability insurance, but I have to give everyone the right of refusal.
John Chapman (20:48):
That’s a great point.
Robert Clark (20:50)
Yeah. That’s the only way it comes up.
John Chapman (20:58)
So if, uh, who, who else, uh, you know, part of whose responsibility is this or whose shoulder is a follow on? I imagine like all the financial advisors out there, this is incumbent upon them. Um, but, uh, you know, HR too, but like, who do you usually see that’s banging the drum on your behalf to educate people?
Robert Clark (21:20)
Yeah, it’s whoever is the fiduciary at the end of the day. So some, some lean more on their planners for these recommendations and some don’t have any financial advisors. And so a lot of those programs are really pushed through human resources, um, or, or other benefits teams provided from an employer’s standpoint. Um, as far as who I hear it coming from the most, I definitely hear it from the advisor community. However, it’s usually a, Hey, do you want disability insurance? No. Okay. We won’t talk about that. Here’s the soft no.
John Chapman (21:50)
That’s true. Very true.
Robert Clark (21:56):
But yeah, we need more disability insurance fans. If you want to join the disability insurance team, we’re accepting applications.
John Chapman (22:02):
That’s cool. Um, all right, well, we, we’ve actually covered quite a bit in a short period of time, but, um, is there anything else that you feel like, um, a story that you’d like to share or maybe just some items that you feel like haven’t been talked about yet today that, that might be important for people to hear?
Robert Clark (22:21):
Yeah. You know, I, for me it always comes back to my experience because I feel like the, the experience that I grew up with as a kid with my dad battling cancer, with being in and out of work, um, it was so straining on our family, but all the, so my mom, my sister and I, we were such a team focused on getting my dad healthy and enjoying the moments that he was back to normal for that little bit. And I think had we been worried about money at the same time? Our attention would not have been on my dad. It would have been on how do I get by till tomorrow or next month? And so I, you know, I, I get it. Some people go without disability insurance cause you know, whatever they, they think it’ll never happen to them.
Robert Clark (23:17):
Whatever the case is, buying disability insurance is not a money move. Buying disability insurance is a family move because it allows you, it is your tool to be focused on family health and wellbeing. Should you ever need it and not money.
John Chapman (23:29)
Let’s preach it, man. Yeah. Um, that’s great. Appreciate you sharing all of that.
Robert Clark (23:35)
I love talking about it. I love educating people; that is my first and foremost, so I appreciate the opportunity.
John Chapman (23:40)
Where can people find out more about you or follow your stuff?
Robert Clark (23:50)
Um, I try to be on LinkedIn. Um, some weeks it gets away from me, but you can search me. Robert Clark, um, tagline is the hardworking millennial. I think I might have to change that though. I’m getting kinda tired of it. Uh, I’m on Instagram as the income advisor because I talk about income and protection. Uh, yeah, those are probably the best ways to find me.
John Chapman (24:25)
Robert, thanks for being here man. It’s fun.
Robert Clark (24: 30)
Always a pleasure. John.
Thanks for tuning in to the John Chapman Show. Be sure to subscribe on iTunes, Stitcher, or Spotify. We encourage your questions, comments and feedback. For additional information, check out the John Chapman Show.com or look for John on LinkedIn and Twitter. See you next week.
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