Make Disability Insurance work for you - get 50% of your premiums back for making no claims
Although nobody likes to think about it, the greatest financial risk that most working people face is the potential loss of their future income due to a medical disability. The statistics are sobering; a 40-year-old male has a 33% chance of experiencing a disability before the age of 65. High quality disability insurance mitigates this risk, yet the coverage provided through group plans is often insufficient. Many group plans only pay upon a severe disability, and limit benefits to a period of a few years. High-quality individual disability insurance has a far wider definition of disability, can move with you when you move jobs, and can pay higher benefits to age 65. Commensurate with its higher quality, individual disability insurance is more expensive than group coverage in absolute terms. However, when looking at the potential benefit per dollar of cost, a good individual disability policy represents far more value. This strategy shows how you can protect your income using the best disability policies - yet receive 50% of the premium back if you make minor or no claims.
Who is it for?
This strategy is designed for individuals who:
- are a key breadwinner for their household
- want to ensure that their income to age 65 is not jeopardized by their health
- want to earn a guaranteed return of approximately 26% before-tax to offset the cost of protecting their income
How does it work?
Insurance is usually considered a necessary evil – one hopes they never have to make a claim, but feels that the money they have paid is forfeited. This trade off changes to a “win-win” by utilizing a particular option on the policy. If you become disabled, the policy will replace your lost income. If you have had minimal or no disability claims, this option guarantees that 50% of the total premiums paid are refunded to you. The non-taxable refunds occur every 8 years, and again upon reaching age 65. We can easily calculate the effective cost of owning income protection using the strategy in the example below.
What’s an example?
Realizing that his biggest asset is his future income, a 45-year-old pharmacist earning $100,000 each year wants to acquire good but cost-efficient disability coverage. With his advisor, he determines that a monthly tax-free benefit of $4,300 will cost him $142/month. Adding the premium refund option increases the monthly cost to $208/month but guarantees him a refund of 50% of his premiums in 8 years if he makes minor or no claims. In this case, the first refund will be for $9,257. We can calculate the effective rate of return on the additional cost for this option. In the pharmacists’ tax bracket, the effective rate of return is over 25.3% before-tax or 13.58% after-tax – and is guaranteed.