1. ©2015, College for Financial Planning, all rights reserved. Session 4 Disability CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Plan Development Course

2. Start Recording This class is being recorded so you may review it at a future time. 4-2

3. Disability Statistics 1 in 4 of today's 20-year-olds will become disabled before they retire. 1 About 12% of the total population are disabled. 2 More than 50% of those disabled Americans are in their working years, from 18–64. 1 Social Security Administration Fact Sheet March 18, 2011. 2 CDA (Council for Disability Awareness) Personal Disability Quotient (PDQ) calculator 4-3

4. Female, Disability Statistics Female, 35, healthy lifestyle, not Overweight, non-smoker Has a 24% chance of becoming disabled for three months or longer during her working career 1 Has a 38% chance that disability would last five years or longer 1 The average disability lasts 82 months 1 If the same person used tobacco and was overweight, risk increases to 41% chance 2 1 Social Security Administration Fact Sheet March 18, 2011 2 CDA (Council for Disability Awareness) Personal Disability Quotient (PDQ) calculator 4-4

5. Male, Disability Statistics Male, age 35, healthy lifestyle, not overweight, non-smoker Has a 21% chance of becoming disabled for three months or longer during working career 1 Has a 38% chance that the disability would last five years or longer 1 The average disability lasts 82 months 1 If the same person used tobacco and was overweight, the risk increases to 45% 2 1 Social Security Administration Fact Sheet March 18, 2011 2 CDA (Council for Disability Awareness) Personal Disability Quotient (PDQ) calculator 4-5

6. If you were permanently disabled … What would the impact be short term? What would happen in 10 years? What would the impact be at 66 when any group coverage disappears? Besides financial issues, what other impacts would there be? Do you know anyone who has experienced this? 4-6

7. Disability Discussion Getting clients to create a “crisis budget” can be a good exercise and help them understand what problems they would have if they don’t take actions such as: Building emergency funds Purchasing disability coverage Buying life insurance Budget projections on what would increase and what would decrease frequently surprise people. The discussion engages the “slow thinking” part of the brain that makes better decisions. It creates client buy-in. Few people think: I will have to buy health insurance and it won’t be subsidized by my company. I will have higher deductibles and out-of-pocket expenses. I won’t be saving or receiving an employer match for retirement. 4-7

8. Both Sets of Clients Disability: In case of a disability, they don’t really know what would happen or how it would impact their lifestyle or retirement. Our clients would like to know what steps they should take and what is realistic to expect in case of a disability. They would like to feel secure in meeting their bills, addressing college, and having a secure retirement income. If that isn’t possible, what should they plan on? 4-8

9. Your Clients’ Current Coverage 4-9

10. Jim’s Disability: What would happen? Look at year 24: What is the percentage of shortage compared to target? What will happen if spouse retired in year 25? *1 st year numbers will not match exactly due to software rounding, timing, incorporation of short-term disability, etc. Plus, inflation of 2.5% was incorporated. 4-10

11. Lifestyle in Case of Disability I assumed: Reduced travel and entertainment No savings Taxes recalculated and reduced Added health insurance premium of $10,000 $5,000 misc. expenses In addition to basic lifestyle, examine: What will happen to goals if no savings? Could they afford college? What will retirement look like without additional savings and reduced Social Security benefit? 4-11

12. My Clients: David’s Disability Healthy and able to save for first four years. Can pay down some of debt but 401(k) loan is taxable. Not be able to acquire PLUS loans, so no funding for college. Retirement funds frozen at current levels with no additional contributions. In 10 years, would be tight but still okay. In 24 years, they would have to live on a 31% reduced budget! That would be a present value income of $32,720. Most likely difficult to keep their home. When Nancy stops working, they will have to live on Social Security … approximately 22 % of current budget – about $22,929 per year income. 4-12

13. Jim’s Disability: What would happen? What would your client’s picture be like? Learn to paint the picture so your client can see and own the problem. How could you write an issue introduction in your executive summary that helps the clients “see” the problem in a compelling way, making them want to solve it? 4-13

14. What if Anne is disabled? Surplus allows them to initially save some, but not as much as they need Unable to fund college or buy the cabin Reduced retirement funds Would you want to match policy to funding college or cabin or more retirement? Longer elimination or shorter duration to reduce costs? 4-14

15. Disability Taxation Employer-paid or pretax-paid premiums have taxable benefits Personally paid after-tax premiums have tax- free benefits Some employers will allow employees to take premiums as taxable income (a very cheap way to increase coverage 15%–30%) 4-15

16. Social Security Social Security covers if: Unable to perform ANY occupation Disability will last at least 12 months 5-month elimination period Has met required work credits within required time frame: o Generally you need 40 credits, 20 of which were earned in last 10 years ending with year you became disabled o Younger workers may require fewer credits Generally requires attorney to assist in getting qualified 4-16

17. Disability Definitions means if you can be a greeter at Wal-Mart, you will receive no benefits Any Occupation means you are unable to work in any reasonable alternative occupation Modified Own Occupation uses own occupation then switches to modified own occupation after a specified number of years Split Definition means unable to work in current occupation Own Occupation 4-17

18. Types of Plans Some policies do not attempt to define disability, but base benefit payments on the percentage of income loss due to the illness or injury. These are generally less costly than own occupation policies. Rules effectively prohibit individuals from doubling their income by collecting benefits and working full-time in a new occupation. Are beneficial to own in cases of progressive diseases. New carriers and supplemental policies have entered marketplace (i.e., you can now purchase a separate policy to cover specific debt or qualified plan contributions separate from base policy). 4-18

19. Group Coverage/Policies Usually offered without inflation increases Most provide modified own occupation or combination definition of disability to age 65 Often have a more stringent long-term definition of disability than an own occupation individual policy Don’t usually require underwriting 4-19

20. Disability Clauses/Riders if client can return to work part time, benefits will continue on pro rata basis Partial or Residual Benefit benefit increases with inflation Cost of Living Rider independent of insurability, client has options of purchasing additional coverage at specific dates in the future Future Insurability Rider premium waived in case of disability Waiver of Premium guaranteed renewable at predetermined premium Non-Cancellable price can increase for group but not for individual Guaranteed Renewable 4-20

21. Let’s Look at Offers 4-21

22. Quotes continued 4-22

23. Riders: Which to recommend? 4-23

24. Other Premium Options 4-24

25. How will you decide? How well will policy solve their disability gap? How much can they afford to pay for coverage? How will premium impact other goals? What will they agree to purchase? 4-25

26. When the problem can’t be solved with product… Sometimes, you can’t buy your way out of a problem. Clients will do nothing if they: o don’t really see/own the problem, or o see/own the problem but are not presented with a solution. It is better to illustrate solutions and address how clients have to change their goals/budget so they aren’t in poverty compared to not providing solutions. Plant the idea of creating a crisis budget and thinking ahead to what could be done to reduce lifestyle and solve the problem. o Downsize house in two years? o Could the child live at home and attend a less expensive school? o Cut budget now and increase savings now? o Have the spouse plan to change jobs? o Add waivers of premiums on loans, etc.? Sometimes it’s a plan that is needed, not more product! 4-26

27. For My Clients Issue: The disability of either one of you in the next five years would be catastrophic to your financial security. You just came through two years of tough times. Imagine if it had been permanent. The rule in planning is to cover catastrophic issues even if there isn’t significant probability. Disability is both catastrophic and has significant probability, with a little over 20% chance of one of you experiencing a disability before age 65. Without shoring up your position, you would most likely lose your home before retirement. Disability is your biggest threat to financial security. At retirement, you would have an income equivalent to a little under $23,000. Between now and retirement, Nancy will earn $539,280 without inflation adjustments and David will earn $2,160,000. This ability to earn is the golden goose you are insuring. 4-27

28. Recommendation 1. Purchase an individual policy to age 67 for maximum available per month with an inflation factor of 3% on David. 2. Purchase disability on Nancy with 70% coverage for a 10-year benefit period. 3. In addition, add disability coverage to your mortgage. 4. Create a “crisis budget” that could be implemented within six months in case of a permanent disability, because even after implementing these recommendations there would still be a problem if you don’t reduce expenses starting within the first couple of years. 4-28

29. Advantages & Disadvantages Be able to pay off your debts Keep your home Partially support college but Autumn may need to live at home in order to end up with minimal debt Have a modest but secure lifestyle in retirement Compared to amount protected, it’s cheaper than homeowners insurance. (You pay $1,270 to protect $244,000 residence. Your income potential is 11 times the value of the house. Luckily, you don’t need to pay 11 times your homeowners premium!) Have to undergo underwriting process and may not qualify Funds used to pay premiums could go to other goals, but with potentially high consequences Cost is $2,800 (pending health and underwriting and mortgage insurer’s rates). In five years, costs could drop to around $1,400 if plan is on track. 4-29

30. Disability Details with Coverage Shows mortgage rider reducing need at end of first year. At age 65, they would only have 58% of their income need. Good news is that in first years, if they lived within plan, they could pay off credit card debt, dropping expenses almost by $8,000. By cutting lifestyle more, they could pay off current student loans. Paying back more student loans would be difficult and impact retirement security. Daughter would need to take on more college expenses. Give up funding her car at graduation. Key is reducing spending and saving more in the first 10 years, especially for retirement. Other income is proposed personal coverage that won’t be entered under personal insurance until in force. 4-30

31. If Client Elects NOT to Cover Risk Next to lawsuits on investment losses, this is next common area. Ask client to sign liability release form if client declines recommendation to purchase disability. Send confirmation letter recommending strategies to follow if disability occurs. 4-31

32. Your Recommendations Paint the picture for the clients; give them information so they can make an informed decision. Recommendation may include making a plan for reducing lifestyle in case of a serious medical problem or life-altering circumstances so the clients aren’t faced with financial and other crises at the same time. 4-32

33. Next Class Survivor Needs – Life Insurance pp. 51–54 Complete plan development box on p. 54 4-33

34. ©2015, College for Financial Planning, all rights reserved. Session 4 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Plan Development Course