Disability hits people unexpectedly. At age 27 in a sedentary job as a former Bay Area Tech CTO I never pictured myself filing for disability much less being found permanently disabled with no cure, no treatment, no effective medications. I had a sudden unexpected onset of a very rare severe neurological disorder that had no warning signs. Today I'm going to talk about how it's changed my FI/RE plans, things that no one expects going out on disability, and how it affects my financial investments going forward.
Note: For the sake of brevity in various examples I'm rounding numbers to two or three digits of precision. All investment rates assume a very risky equity asset allocation with a 7% real after inflation return and a 2% qualified dividend yield. All numbers are in today's dollars assuming 2018 tax rates/policies and assuming no future tax changes. I'm also assuming the reader has a base level of understanding of disability insurance. If you don't then both the Bogleheads and White Coat Investor website are a great resource to start reading up on this valuable coverage.
Pre-Disability Income & Assets & Expenses
- $350k total comp ($211k after tax take home pay)
- $100k taxable account
- $100k roth IRA account
- $100k 401k
Expenses
- $60k annual expenses including vacations/etc
Investing
- Investing $120k/year to be really FI.
Disability income
- $130k non-taxable LTD (mix of multiple IDI carriers and non-taxable group contributory "buy-up" insurance)
- $20k taxable group LTD (after SSDI offsets)
- $15k/total a month
- All to age 65. IDI policies are true own occ, group is an any occ policy after two years.
- $30k SSDI
- 85% of former take home pay covered by disability
Why I'm still saving aggressively even though I now have a secure income stream
Even though I'm found permanently disabled, you can never be certain the insurance company(s) will play nice in the future. Medical advances can be made for my condition (new drugs are being researched) and who knows what treatments look like in 5-10-15 years. If I just wildly spend this income I'll be in a poor position in the future if disability companies deny payments or I recover. My insurance company already played really nasty once (see below) and they could certainly try again! It just takes one out of context private investigator video taping you being "normal" for a few minutes for them to then hope to show a sympathetic judge.
My investing plan
My FI goal is $2.5m which I picture I'll achieve within 11 years. I'd be ok financially if my disability policies stopped paying/refused to pay at that point. I'd like to live a bit more relaxed than I have been living at that point.
Unfortunately tax-advantaged investment options are really limited for disabled people. There are ABLE accounts for those with an onset of disability on/before age 26, but mine onset shortly after. (There is a bill to extend it to age 46.) The only tax-advantage space I now have access to is roth/traditional IRAs. IRA contributions are only available from taxable insurance policies that report income on Box 1 W-2.
I'm planning on saving $120k a year into taxable and expect to hit $1m in taxable accounts in 4-5 years, $2.5m total across accounts in 11 years. I'm guessing I'd have $14m-$24m in taxable at age 65 (probably lower as I'll let off on the gas somewhat), $2.0m in my roth (before roth laddering), and $1.6m in pre-tax 401k/t-ira accounts (should I decide to not ladder). $2.2m pre-tax accounts at age 70.5 with RMDs of 3.64% being $80k/year.
Receiving SSDI plays hell with marginal rates while saving for retirement. With $20k group taxable income and $30k of SSDI, roughly $25k of roth conversions/future estimated qualified dividends from taxable investments in a year/etc will make 85% of the SSDI subject to tax, a marginal rate of 50%. With this factor it makes roth conversions very expensive until you have uncontrollable dividend income that makes SSDI fully (85%) taxable. After this "hump" my federal marginal rate appears to be around 23%. Realistically I won't get past this hump until 5 years on disability at my current savings rate.
On SSDI you have no choice to delay Social Security retirement until age 70.5. You transition over automatically to full retirement age. I don't know if there are any legal loopholes around that. (Ie could one legally stop SSDI in their 60s before full retirement age (perhaps make substantial gainful income), wait, then delay? I can't find any answers on that. Actuarial speaking it's better to keep SSDI as disabled people have shorter life spans than the expected age of death SSDI uses.).
In retirement I'm looking at $250k+ in qualified dividends alone. That makes my marginal tax rate (using taxcaster to make a sample 2018 return) in retirement 31% thanks to the net investment tax.
Tax effective wise I'm looking at roth contributions until 4 years in ($1m taxable account), then t-IRA contributions for 7 years (years 5-12) as a $6,000 t-ira at 40-50% marginal rate gives a $2,700-$3,000 tax refund as it reduces BOTH the taxable group insurance and the amount of taxable SSDI, then past 12 years back to roth contributions. I'd save an extra $21k with the 7 years of the planned t-ira contributions. I'll likely ladder my pre-tax account into my roth IRA at this point as I'd rather not deal with RMDs and 23% current marginal tax vs an expected 31% at retirement is a pretty huge savings.
There isn't much other insight I can offer as obviously trying to optimize a future expected $2m pre-tax account for age 65 when I'd expecting to have a 10-20m taxable account at age 65 won't realistically move the needle.
I'm looking into using a 529 plan for myself as while interest earned is tax deferred (earnings come out as ordinary income rates), withdrawals for totally and permanently disabled is an exception to the withdrawal penalties. I'd need to consult a CPA on it, but it may be a good way to shelter my bond/REITs allocation in taxable that mostly throw off ordinary income. Of course it won't be good for stocks as long term capital gains are very efficiently tax deferred already.
If the ABLE account age extension becomes law then I'll definitely max that out.
Things that went well
I planned really well with getting robust insurance policies and amounts.
I established a good group policy at the startup I was involved with. We covered the first 50k of premiums pre-tax so people can have some taxable income to be able to make IRA contributions (the insurance reports it on W1 box 1), then had mandatory post-tax deductions for the buy-up insurance making sure everyone is covered.
Glad to have two IDI carriers and a third separate group carrier. I was a huge target just being 27 years old but had all $15k been at one insurer instead of $5k split per carrier I'd be the giant claims target of the century.
Had a lot saved with a huge emergency fund to deal with my unexpected disability.
No loss of income as I met my elimination period while working still.
I'm really glad I hired professional legal help with my insurance claims.
Unexpected things about disability
I had a lot more medical expenses than expected. I hit my out of pocket max. The insurance company has paid $70k after discounts to my medical providers. My current medication for my neurological disorder is $15,000 a month.
Costs being disabled can skyrocket. I'm completely restricted from driving due to my disability. Uber costs for doctors appointments/treatments/testing/etc exceeded $1k a month a few times living in the Bay Area (Rush hour, specialists outside the city, etc.) It's hard for me to cook with my disability too - I had skyrocketing costs of food delivery/etc.
I had a 90 day elimination period with the IDI carrier I depended on the most. I filed my claim when I met the elimination period. It took them six months to approve it (with six months backpay.) I understood that it takes a while to approve a claim but when I took out a 90 day elimination period I did not expect to front six months of back pay.
The insurance company played nasty despite being formally represented with a legal team. They started to establish a bad pattern of bad faith by trying to delay the claim as much as possible. When my claim was submitted my legal team submitted everything they felt was appropriate as proof. Two months of silence passed and the insurance company suddenly stated we never sent in a medical records release (we absolutely did.) Immediately my legal team faxed them the signed authorization, another month of silence, then it was "unusable" - a supposed bad fax, while at the same time my doctors have been getting the records request! Unfortunately after that my legal team ended up sending everything overnight, signature required. No more easy faxes. That stopped that bullshit.
After that they then delayed an additional two months wanting the past three years of tax returns with the Bay Area startup I was formerly employed with as I was over a 5% equity owner. Of course the company, founders, and venture capitalists that funded us protested and it sat on a huge legal fight. This wasn't a personal business - this was a startup done at "arms lengths" with others. I'm really glad my co-founders worked with me and released the business returns they weren't obligated to... it was starting to head into unprecedented waters as a new case law that neither my attorney or I were excited to litigate on. This was unheard of in my attorney's career. The company was really grasping at straws to not pay a 27 year old disability to age 65.
They requested the previous 10 years of medical records going to age 17 fishing for pre-existing conditions as a post-claim underwriting practice as the claim was filed within the contestability period of the policy. Normally my attorney would push hard on limiting it to the pre-existing condition period (1-2 years depending on the policy.) but we are both confident that there is absolutely no pre-existing conditions or sign of this disability and so it'd be a red flag to push to limit the investigation. However trying to recall 10 years of doctor visits is ludicrous so we did not disclose anything before the pre-existing condition period. Making a disability insurance claim is like talking to the police - no need to assist the police or them in their investigation. You're not legally required to assist in their investigation other than what the contract stipulates.
Unlike group(ERISA) policies, IDI policies have no clauses in the contract stating how long an insurance company can investigate. My attorney advises me that most claims take 45-90 days to investigate after a claim is submitted, so if you have a 90 day elimination period you better budget at least 180 days of expecting no payments from the date of disability.
While you can sue on a IDI policy after 60 days after you provided all proof of loss and your requirements as an insured if the IDI company doesn't pay. In practice that's not recommended at all. My attorney recommended keeping things polite and cordial, silently document all the delays, then use it as ammo if they deny, or the delays go past a year, or cause actual damages (foreclosures/late fees/etc.) It's a lot cheaper too... litigation is expensive and uncertain. You have to keep in mind it's not personal ; it's business. The insurance is a cold hearted calculated business.
I didn't have a final diagnosis until 3 months of accumulated benefits (6 months past onset of disability). When I made my claim I had a good enough diagnosis with objective evidence which my legal team felt was good enough to proceed. Looking back on a pure "human" basis it may have been better to file when my diagnosis was certain, not subject to change, etc. In real life it's not ideal to have the insurance company not know what exactly is going wrong. It's hard to say though if things would have been different had I waited.
Unless you have an accident or a clear cut disability (heart attack/stroke/etc), medical stuff moves slow. In reality most disabilities are chronic and worsen over time. On day one of your onset of disability you're probably thinking this won't last for weeks, or months. You probably won't want to make a claim on your policy until you've unquestionably satisfied the elimination period either or know you'll satisfy it in the future. After I had learned it's probably best until your diagnosis is very concrete, and not just probable (if you can swing it financially of course).
Ironically I had a good experience with the group contract. They don't want to lose my employer's future business (we're paying premiums close to an IDI contract would too, so they're getting a ton of money over a normal group contract.) They had a six month elimination period though and by that time my claim file was well built. They waived pre-existing conditions for the initial employees when we bought the policy, so not having a pre-existing investigation smoothed out the claim process a ton. As a normal employee though I would expect the claims process to be worse with group insurance than what I experienced with my IDI policies.
Going out on disability with a large benefit at age 27 will make everyone suspicious, especially with the policy amounts involved (learned that quickly - the guy I ended up going with I didn't disclose the amount involved until the retainer was signed.). I've ran through five attorneys that flat out told me "you're 27, you can't be disabled!" I found it incredibly hard as a young professional to find the legal help I needed. A few lawyers were like "come back when you're denied." I almost contemplated handling the claim on my own until I found an attorney that had handled my exact neurological condition before and other related neurological conditions with disability companies.
My advice
Get a good individual disability insurance (IDI) policy from one of the big 5 carriers as soon as possible. Don't wait - the littlest of health conditions can give you worse premiums, limited coverage (5-10 years instead of to age 65/67), exclusions, or outright declines. I'm too young to have experienced pre-ACA health insurance underwriting but my legal team tells me disability insurance underwriting is 10x worse than pre-ACA health insurance underwriting ever was.
Bogleheads and White Coat Investor websites are excellent resources for disability insurance information.
Get a policy from one of the "Big 5" companies - The Standard, Guardian/Berkshire, Principal, Ameritas/Union Central and Mass Mutual (+/- Ohio National.).
Get an independent agent. Any independent agent is fine if you have no health issues. If you have a host of health issues I recommend someone who has a ton of experience working with physicians who apply for IDI as they're more knowledgeable how to paint pre-existing conditions in the best light.
Group coverage isn't worth the paper it's printed on. Even with my IDI experience group insurance is that much worse. The benefit can end as early as 2 years when it switches over to the "any occupation" phase. Depending on state if you can be a Walmart greeter you get kicked off (some states like CA limit any occupation to be gainful - 80% of your pre-disability earnings.) ERISA gives discretionary authority to the insurance company on what the contract means. The TL;DR is a group contract is between the employer and the insurance company, NOT you and the insurance company. The employer signs away their rights to contest the policy and give "discretionary authority" to the insurance company to also manage the administration. ERISA derives from trust law so essentially the insurance company is also the "trustee" of the disability "plan" and has tremendous "discretion." Technically your group "insurance" is actually a "benefit plan" and technically a "trust" in the eyes of the law. You as a lowly employee are simply a beneficiary. Only if the trustee acts "Arbitrary and Capricious" will the courts act and intervene. This is a huge standard to overcome! Only 22 states so far have outlawed discretionary language and actually held these insurance companies for what they are - insurance! (Note: if your employer's plan is truly self funded then you're completely hosed. Self funded plans are incredibly hard to take to court vs a third party insurance company.)
Max out coverage. Look, I'll be biased here as I made a claim and it helped me tremendously. Insuring just your current expenses isn't enough. For most disabilities you will likely reach your out of pocket max for your health insurance for a few years. What about cobra premiums? What about ACA premiums if you don't get SSDI/medicare in 24 months from your disability? What about if the company denies your claim in the future? What about at age 65/67 when the benefits stop? What about stuff health insurance doesn't cover? Home modifications? The only time you don't need coverage is when you're FI. You can possibly reduce coverage if you have built up substantial assets and 2-4% SWR on those assets will make up the rest. You can always reduce coverage in the future for less premiums.
You'll be glad to have maxed out the coverage if you became disabled, especially if you have to litigate.
The most cost effective for possible benefits received is to age 65 and 90 day elimination period. For an exec/sedentary position with all the optional riders it'll cost about 2-3% of gross income a year. IMO age 67 isn't worth the cost as it's really pricey as the insurance has to account both additional risk of being disabled if you're working at age 67 and the two extra years of payments (especially if a COLA rider is involved and inflation goes past the cap every year.)
Absolutely be sure to get true own-occupation coverage to age 65, residual riders (they even let you satisfy the elimination period early with sick days, I had a zero loss of income as the sick days I took satisfied the elimination period under the residual rider.) recovery benefits to age 65 (still get paid if you're no longer disabled but haven't been able to be rehired yet, what happens if you go out at age 27 but recover at age 55? Probably unemployable!), COLA if under age 45, and future purchase options.
If your career has a high income potential - software engineer, lawyer, doctor, executive, etc., then buy two policies at $5k/mo/each with $10k future option purchase pools. That will let in the future max both policies to $15k/mo each. Most insurance companies have a $30k "participation limit" where you can't have more than $30k/ di insurance on you. Another advantage of having multiple insurance companies is it greatly de-risks your claim. You'll face a lot more risk management if you ever make a claim on a $10k/mo policy than two $5k/mo policies at two different insurance companies. Should your insurance company go bankrupt you're a general creditor to the insurance company and should we have another AIG/Lehman Brothers, most states will only insure up to $300k of insurance reserves per policy but only if you're on claim and receiving benefits. Don't have benefits and your insurance company goes bankrupt? Well, now you gotta apply for a new policy with a new company at new rates and possibly face pre-existing conditions!
There is "DI Retirement" protection policies with Guardian and Principal. It insures the actual retirement contributions you have a history of making (401k, IRA, deferred comp plans), the policy is owned and paid into a trust you can't access to age 65/67 so it doesn't have to be disclosed to other IDI carriers as it's technically not a policy you own, and it will get most people to 100+% take home pay coverage up to the $150k-$200k salary range. (Note: Principal recently updated guidelines to not issue policies to people who they deem are "over-insured" so it's recommended to apply with them first, then apply 31 days to other carriers or apply once it's in force, per your agent.)
You can "double dip" on a group policy. If you have the above $30k/mo IDI policies in force and join an employer that provides you with $20k/mo group insurance you'd have $50k/mo of total coverage. Group policies only reduce for other group polices (including professional association policies) but purposely keep IDI coverage untouched.
Buy IDI insurance even if you're covered by a group. At the very least they'll issue a "supplemental" amount of coverage to cover the taxes you'd pay on the group insurance. Establishing a future purchase option on the contract is huge so you can get more coverage should you switch employers later on. (Note: if you have an offer in-hand and the new employer has group disability coverage, if you go 31 days of unemployed between your old job and the new job, you can contractually exercise the FPO and get full coverage based on the job offer and not have it reduced because of the job offer. Enjoy a nice break between jobs and get fully protected. That's the recommended way for people who have no inclination of joining startups or self employment where there are no disability benefits.)
Don't downsize your emergency fund because you have a disability policy. I was surprised my claim built up 6 months of benefits before being approved.
If you ever make a claim never ever talk to them on the phone. Always do it in writing.
If you ever make a claim hire a professional experienced legal team. A $10k/mo claim is worth $3 million at 4% SWR. Would you represent yourself over a contract claim worth millions of dollars?
I'm happy to answer any questions.
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