According to Northwestern Mutual’s 2023 Planning & Progress Study, an estimated 37% of American adults work with a financial advisor. The rates certainly are even higher among entrepreneurs, educated professionals, and high wage earners.
Financial advisors play a critical role in helping their clients invest, manage risks, and protect their financial future. And that very much includes preparing for the possibility of a long-term disability. If you’re a financial advisor, you likely already have several clients in this exact situation.
Long-term disability insurance is a crucial part of making sure your clients successfully manage this risk and protect the lives they’ve built for themselves and their families. In this article, we’ll examine some key considerations when advising your clients.
Financial Advisors Can Help Their Clients Make Wise Decisions About Long-Term Disability Insurance
The numbers are staggering. According to 2020 probability estimates from the Social Security Administration (SSA), 1 in 4 Americans born in 2000 will become disabled before reaching normal retirement age.
And this is using the SSA’s rather strict definition of disability, which requires an individual to be totally disabled from any form of substantial gainful employment. The percentage of Americans who would qualify for long-term disability benefits under a private or group insurance plan at some point in their careers is even higher.
That’s especially true among educated and high-income professionals. These groups are more likely to have robust long-term disability insurance policies that offer stronger protections and a more lenient definition of disability, such as true own-occupation disability plans. This would potentially allow a claimant to continue to work in a different occupation without jeopardizing their long-term disability benefits.
But it’s a mistake to conclude that all long-term disability policies are created equal. Coverage, benefits, exemptions, and other key factors can vary dramatically from policy to policy, and the language is confusing on purpose.
As a financial advisor, you have a strong understanding of your client’s financial goals and needs. But if you don’t also have a strong understanding of how to read long-term disability plan documents or policies —or even what’s available—your clients could end up unprepared and underinsured if an injury or medical condition prevents them from continuing their career.
Important Ways Financial Advisors Can Help Protect Their Clients
Look For Own-Occupation (and Even Specialty-Specific) Coverage
In the past few years, we’ve noticed a worrying trend of young professionals choosing affordability over coverage when it comes to long-term disability insurance. This often leads to buying less coverage than they need, putting them and their families at risk.
Financial advisors should urge their clients never to settle for anything less than own-occupation coverage, particularly for clients that work in highly educated and/or high-income professions.
Own occupation coverage will pay benefits if the claimant is unable to perform the duties of their current job at the time they became disabled. As long as they remain unable to perform their own occupation, they receive benefits. This is in sharp contrast to “any occupation” plans, which only pay out if the claimant is totally disabled from any job to which they’re reasonably suited.
Consider the example of a surgeon who, after an injury, can no longer do any clinical work but might be able to take a lower-level hospital position. With an “any occupation” plan, they cannot receive any disability benefits and are forced to take a job—even one that’s significantly lower-paying and less fulfilling. With an “own occupation” plan, they get their full disability benefits and can choose whether they want to keep working in a different role without impacting their benefits.
In some cases, a “specialty specific” own occupation plan is an even better choice. A few long-term disability insurance companies offer these types of plans, and they make sense for professionals with highly specialized skills.
For example, consider a litigation attorney who specializes in taking cases to trial. If a cognitive disability prevents them from going in front of a jury, but they can still work full time as an attorney (just not in a courtroom, and at a much lower salary), they might not be considered disabled under a standard own occupation plan. However, they may be able to purchase a specialty-specific policy that defines trial work as part of the material and substantial duties of their job.
Encourage Clients to Get Coverage Early
A lot of workers and professionals don’t really start to think about the possibility of being disabled until later in their careers—perhaps after turning 40 or even 50.
As a financial advisor, you should encourage them not to take that risk. The best time to get robust long-term disability coverage is as soon as possible, early in a young professional’s career.
There are a couple of reasons for this. One is that they’re going to get the best available rates and underwriting, and potentially the fewest exclusions (such as pre-existing conditions), when they’re young, healthy, and at a relatively low risk of becoming disabled in the near-term future. Those cost savings and added protections persist as their careers continue.
And another, of course, is that disability can happen to anyone at any time. It’s not just something that middle-aged and older adults deal with. Young adults can get cancer. Young adults can be injured in car crashes. Young adults can start showing symptoms of degenerative conditions long before reaching retirement age.
When a person becomes disabled early in their career, and gets caught without good long-term disability coverage, the financial consequences are almost always devastating. Your client could be looking at decades of insufficient coverage or no coverage at all. It’s not worth the risk.
Help Them Choose Coverage That Will Grow with Them
As a financial advisor, you understand that your clients’ financial needs and goals change over the course of their lifetimes. How a person spends, saves, and invests depends on where they are in life and the lifestyle they want to maintain. Strategies and priorities for a person nearing retirement age are obviously different from when they were middle aged with young children, or as young professionals just embarking on their careers.
Your clients’ long-term disability insurance should grow with them, too. If coverage and benefits don’t keep pace with income and inflation, policyholders can quickly discover that they lack adequate financial protection.
Policy riders can help eliminate the hassle, expense, and risk of purchasing entirely new policies every few years while ensuring professionals maintain adequate coverage for their needs. For example:
Automatic increase benefit (AIB), which automatically increases coverage (and premiums) over time according to projected salary increases
Future increase option (FIO), an alternative to AIB that allows policyholders to voluntarily increase coverage at set intervals
The beauty of these riders is that you don’t need to purchase a new policy or resubmit medical information when coverage increases. So, even if your client develops new health issues that are likely to disable them in the future, it won’t jeopardize coverage.
Another important rider, especially for younger professionals, is a cost of living adjustment (COLA). Inflation can quickly eat away at the buying power of a fixed monthly benefit amount, particularly for policyholders who are disabled relatively early in their careers. A COLA rider allows benefits to rise over time according to a fixed or indexed rate, making it easier for disabled professionals to maintain the standard of living they worked hard to attain.
Watch for Decreases in Earnings
Disability isn’t always “all or nothing.” A worker with a degenerative condition, for example, might still be able to fulfill part of their job responsibilities or work part time—leading to a reduction in income.
If you have a client experiencing a decrease in earnings related to an injury or medical condition, urge them to review their disability policy. They may be entitled to partial or residual benefits, which can make up for a portion of the salary decline.
Not realizing that a client can file for residual benefits can be extremely costly, and not just because it’s leaving money on the table while a client is still working. Disability benefits are usually calculated based on a worker’s average pre-disability income over a period of time immediately preceding their application for benefits. By not filing for partial benefits, then applying for long-term disability benefits only after months (or years) of working at a reduced salary, the monthly benefit amount will likely be calculated based on the reduced earnings.
Need Help? Let’s Talk
Successful professionals often work with a team of wealth planning experts and legal professionals, and they are served best when those advisors are working together toward a common goal. If you’re a financial advisor, working closely with a long-term disability insurance attorney can help ensure you’re providing the best possible recommendations and support to your clients.
At Bryant Legal Group, we frequently work alongside financial advisors, financial planners, accountants, and other wealth management professionals to provide first-class service to our mutual clients.
If you’re interested in learning more about our services or exploring how we can work together, don’t hesitate to reach out. You can reach our Chicago offices any time by filling out a simple contact form or giving us a call at (312) 561-3010.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.
