Long Term Disability Planning for High Income Earners

I am Jamison Smith, a wealth advisor at EWA, and in this video I’m gonna explain how to properly structure your long-term disability insurance if you see a significant income increase. So for this example, let’s assume this is a physician, they’re on their first contract and the income increase is gonna come into play when they’re on their second contract.

So first contract, let’s say they’re making $400 ,000 a year after taxes, $20 ,000 a month is what’s coming into your bank account. And most of the time, if you’re in a private practice, you may not have group coverage, if you’re working for a hospital or a big health network, generally you’ll have 60% of your income is covered with a group long -term disability policy.

Problem is, a lot of times this is capped, so one specific hospital here in Pittsburgh, they do have 60% coverage when it’s capped at $12 ,500 a month. So meaning if 60% actually came out to be 15 ,000 a month of your income, they’re gonna stop you at 12 ,500.

Downside of these, it’s taxable, so after taxes, this comes out to be about $8 ,500 a month. Sometimes there’s limits on how long it will pay out and sometimes it’s not own -occupation -specific. So if you only rely on the group coverage, you’re used to making 20 ,000 a month, now you have 8 ,500 a month coming in.

If you’ve done proper planning and you’ve supplemented your disability insurance, let’s imagine you got a full $11 ,000 a month. If you’re disabled now, you’re almost full, you’re 19 ,500 a month of income.

So that is great planning to make sure that your income is protected. But let’s assume this contract’s for three years, three years go by, you’ve done a really good job. Hospital gives you your second contract, now you go for making $400 ,000 a year to a million dollars a year.

Million dollars of income after taxes, that comes out to be about $48 ,000 per month. And if you have all this coverage still in place, you’d still get that 19 ,500 a month of coverage. There’s a gap now of about $28 ,500 a month if you’re disabled.

So what do we do? How do we solve this problem? Most the logical thing to do, let’s go increase. There’s $11 ,000 a month, which is buy more and get up to a max. The problem is there’s only a few certain companies that will participate up to $20 ,000 a month.

Meaning we couldn’t go buy this full $28 ,000 a month of disability coverage. Some companies will go up to $20 ,000, but if this original $11 ,000 is not with one of those companies, let’s assume this is company A and you go to buy an additional $10 ,000 a month with company B, that won’t give you the full $20 ,000 unless company A is the main carrier.

So how to properly structure this, let’s assume same group coverage is $8 ,500. You would either have to, if company A will go up to 20, add on to this or you’d have to cancel this policy, doing new one with one of the three companies that will go up to 20 a month.

And that will get you the maximum benefit. And there are two companies that will go up to $35 ,000 a month. So on top of that 20, you could get another $15 ,000 with one of those two companies. Total income protected if you were disabled, income will bang you $43 ,500 a month.

So there is still a gap of about $4 ,500 a month, but this is the most strategic way to make sure that most of your income would be covered if you’re disabled. It’s important to make sure that using the right companies that things are structured appropriately based on how much a company will participate up to.

So on top of this though, there are, there is a company that would go above the $35 ,000 a month. But generally if your income is this high, a lot of times there is a lot of discretionary income on a monthly basis.

So maybe bills are $25 ,000 a month, you’re spending $10 ,000 and there’s still a $13 ,000 buffer a month. So depending on lifestyle and your goals and financial plan, you may not need it all covered, but there would be a way to get 100% of your income covered if you needed to above the $35 ,000 a month of long-term disability insurance.

Those are a few things to be aware of if you see a significant income jump, how to properly structure your disability insurance. If you have any specific questions, feel free to reach out and we’re happy to analyze your specific situation.