Worth keeping supplemental disability insurance policy?

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Startled Cat
Posts: 505
Joined: Thu Apr 03, 2008 8:54 pm

Worth keeping supplemental disability insurance policy?

Post by Startled Cat » Sat Sep 28, 2019 12:14 pm

About a year and a half ago, I was offered a supplemental disability policy through my employer. For an annual premium of $1863, it provides a $7200/month disability benefit beyond what my group disability insurance provides. This offer led me to research disability insurance to try and understand what value it would provide me, if any. I learned about the concept of "own occupation" coverage, and learned that my group policy does not provide own occupation coverage beyond 2 years. I ended up purchasing the supplemental policy, largely because I was concerned about not having long-term own occupation coverage. I also figured it made sense to take the guaranteed-issue policy on offer while it was available to me, because I could always cancel it later if I changed my mind, but if I turned it down and then decided I wanted more or better disability insurance, it might be hard to get it on the open market (due to underwriting requirements and/or the fact that I'm already covered by a group policy).

Recently, the insurance company reached out and offered to increase my maximum benefit to $10,550 per month, for an additional premium of $973 per year (total $2837). I declined. It didn't seem like a particularly good deal to pay 52% more for a 46% higher benefit, and more importantly, I don't think I have a need for the extra coverage. I'll get one more opportunity to increase my coverage in a year, and if I decline that one as well, any increases would require going through an underwriting process.

Considering the coverage increase prompted me to wonder whether the supplemental policy really makes sense for me at all. I'm already covered up to $12,500/month by my group disability policy. This benefit would be tax-free (if I understand correctly), and I only have about $75k in annual expenses, so I think the group policy benefit would be plenty. It's true that the group policy is far from perfect, particularly in only providing own-occupation coverage for 2 years. But the only scenario I can think of where the own-occupation coverage becomes critical is the nightmare scenario where I end up disabled in a way that prevents me from doing my current job (white-collar knowledge work; no particular physical dexterity required), but still able to do some minimum-wage job. In this case, at least I'd have some nominal amount of wage income, and I'd have options like supplementing it with withdrawals from my retirement portfolio (risky) or moving to a lower-cost area. I'm not sure whether it's worth paying nearly $2000/year to insure against this specific, unlikely scenario.

One point in favor of keeping the supplemental disability policy is that these benefits are not adjusted for inflation, and if I ended up with a long period of total disability, even the $150k/year from the group policy might not be enough. I'm 34 years old, so I have to plan with a pretty long time horizon. But much of my budget goes to things like a mortgage and property taxes that aren't fully exposed to inflation. There's also the related point that if I became disabled, I might have additional medical expenses on top of what I spend now. This seems very hard to quantify. Also, considering that both policies normally stop paying benefits at age 65, I would need to budget for "retirement" savings as well as current spending.

And as much as I'm uncomfortable acknowledging it, I suspect I'm at a higher risk of becoming disabled than most people. I spend a lot of time bicycling on busy city streets. This outdoor exercise is very important to me, but it's undeniably dangerous. Part of me thinks I'm best off from an expected value perspective in loading up on as much disability insurance as I can. That said, a bicycle accident that leads to a disability wouldn't necessarily end my tech career. It depends a lot on the particulars of the hypothetical scenario.

Ultimately it feels like a fairly emotional decision. I suspect I should go ahead and cancel the supplemental policy because I probably have enough coverage without it, but I hestitate when I think about the possibility of becoming disabled soon after cancelling it, and how terrible it would feel to have actively given up the supplemental benefit that would help support me through the disability. That's why I wanted to ask for opinions and get some more objective advice. One possible compromise would be to keep the supplemental policy for a few more years as I continue to save money, and wait until my portfolio is in better shape to support a forced early retirement.

BogleMelon
Posts: 2389
Joined: Mon Feb 01, 2016 11:49 am

Re: Worth keeping supplemental disability insurance policy?

Post by BogleMelon » Sat Sep 28, 2019 3:10 pm

OP, this is a long post, I would suggest you trim it down a bit so you can get more responses.

Private disability insurance worth it until you become self-insured (i.e reaching financial independence). Questions for you:
- Is this supplement DI a private one? Meaning, if you quit your job or moved to a different company, will you be able to keep the policy?
- How is this policy compared to other companies you researched on your own? If you haven't done that, you may want to shop around.
- How is this insurance company doing financially? What is its rating? You don't want to pay a company premiums only to find it went out of business right before you need it, as you would have to shop around at an older age, and thus might be considered uninsurable because of a health issue that could develop at some point in the future.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

Topic Author
Startled Cat
Posts: 505
Joined: Thu Apr 03, 2008 8:54 pm

Re: Worth keeping supplemental disability insurance policy?

Post by Startled Cat » Sat Sep 28, 2019 3:36 pm

The supplemental policy is portable to other employers and non-cancellable until age 65. The insurer has an AM Best financial strength rating of "A+".

Premiums seemed in-line with other quotes I looked at, but I never went through the underwriting process to seriously consider other products.

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