Long Term Disability and Financial Independence - Drop Coverage?

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Nathan Drake
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Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Wed Nov 06, 2019 10:43 pm

I currently am at lean FI with about 40x barebones annual expenses saved up.

For 2020 benefits enrollment, should I drop coverage?

It’s roughly $600 / year and would pay out at $6.25k / mo ($75k a year).

The expense isn’t that great, but I sort of feel it’s a bit wasteful given the circumstances. The coverage also has limitations on payouts if they are related to neurological disabilities, soft tissue, and skeletal/muscle related claims. Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

What are the bogleheads thoughts?

terran
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by terran » Wed Nov 06, 2019 11:40 pm

How would you feel about the SWR of your current portfolio plus other coverage (like SSDI)? Don't forget to consider that you might have some extra expense depending on the disability. If you think it's enough, drop the coverage, if not, keep it.

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Nathan Drake
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Wed Nov 06, 2019 11:46 pm

Current SWR is 2.5% if I quit my job, if something were to happen I think there would be a high enough margin to account for additional expenses for a period of time, worst case relying on parental support.

The coverage just doesn’t seem to be good enough and there’s so much fine print & exceptions that it seems like it may not even substantially pay out

Plano
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Plano » Thu Nov 07, 2019 1:04 am

You say you’re looking at 2020 benefit enrollment, so this must be a group LTD policy. For most group LTD, the benefit amount is subject to offsets. So while your gross benefit amount is $6250, the net is probably much less after state disability, SSDI, etc., if you also receive those benefits.

Find the Benefit Calculation page in the policy to work out your likely net benefit after all offsets. It’s a good exercise for people to go down the list of offsets, to figure out what their other sources of disability income could be if they become unable to work.
- You can use SSA’s quick calculator to estimate SSDI. The earliest you can get this benefit is 6 months after disability.
- If you live in any of the states that provide their own disability benefits (CA, NY, NJ, HI or PR, last I checked) you can also find estimates online. CA SDI can be substantial, but is limited to 52 weeks.
Is there a minimum benefit if your offsets exceed the gross benefit? Usually it’s 10%, so $625 in your case.

Notwithstanding, $50/month premium is dirt cheap! Your employer must be paying a portion of the premiums. I would look at the likely net benefit versus your age, health risks, and the nominal cost of this coverage. Most group LTD will have a slew of 24-month limitations, but will cover you to normal retirement age for the big things like cancer. That’s something to consider.

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Nathan Drake
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Thu Nov 07, 2019 1:19 am

Yes it’s a group policy with my employer. The payout would be offset by any compensation provided by my work (deferred bonuses, which in my case is RSUs which I’m not sure would apply), and government assistance. It doesn’t mention dividends, which in my case are over 20k per year (half of which is in retirement accounts and half taxable).

Age is mid 30s with no major health issues. Single and no dependents.

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Tamarind
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Tamarind » Thu Nov 07, 2019 6:19 am

I think I would drop it. Group policies tend to be so restricted that I wouldn't normally recommend someone do more than accept a "free" policy unless they thought they couldn't ever qualify for individual LTD. Who's the provider? Is there a level of coverage that is fully subsidized by the employer, even if it's a much lower benefit?

How much daylight is there between your leanFI and a FI number you would actually like to retire at? If you are 40x lean but only 10x regular, that implies a longer voluntary work life that you'd want to protect.

stan1
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by stan1 » Thu Nov 07, 2019 8:16 am

Since it is a group policy can you opt back in next year without a medical exam?

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Watty
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Watty » Thu Nov 07, 2019 8:27 am

Plano wrote:
Thu Nov 07, 2019 1:04 am
For most group LTD, the benefit amount is subject to offsets. So while your gross benefit amount is $6250, the net is probably much less after state disability, SSDI, etc., if you also receive those benefits.
My understanding is that if this is paid with pretax dollars then any benefit would then be taxable income.

If this is true in your case then be sure to consider the net after tax benefit that you might get.

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Stinky
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Stinky » Thu Nov 07, 2019 9:35 am

Plano wrote:
Thu Nov 07, 2019 1:04 am

$50/month premium is dirt cheap! Your employer must be paying a portion of the premiums. I would look at the likely net benefit versus your age, health risks, and the nominal cost of this coverage. Most group LTD will have a slew of 24-month limitations, but will cover you to normal retirement age for the big things like cancer. That’s something to consider.
Congratulations on accumulating 40x expenses in your 30s! Not many folks could say that.

That being said, I would keep the coverage, at least for a little while longer. I'd be concerned about something like cancer, stroke, catastrophic car accident.

You can afford the minimal cost.
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furwut
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by furwut » Thu Nov 07, 2019 9:53 am

I can’t say whether it’s a good policy or not but group policies often are cheaper then what one can get individually. Statistically you are far more likely to suffer a income disrupting disability then a pre-mature death. Personally I’d get all the cheap group disability insurance offered.

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Nathan Drake
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Thu Nov 07, 2019 11:17 am

stan1 wrote:
Thu Nov 07, 2019 8:16 am
Since it is a group policy can you opt back in next year without a medical exam?
No, we are transitioning plans and this is the only time to get grandfathered in

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Nathan Drake
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Thu Nov 07, 2019 11:23 am

Tamarind wrote:
Thu Nov 07, 2019 6:19 am
I think I would drop it. Group policies tend to be so restricted that I wouldn't normally recommend someone do more than accept a "free" policy unless they thought they couldn't ever qualify for individual LTD. Who's the provider? Is there a level of coverage that is fully subsidized by the employer, even if it's a much lower benefit?

How much daylight is there between your leanFI and a FI number you would actually like to retire at? If you are 40x lean but only 10x regular, that implies a longer voluntary work life that you'd want to protect.
The provider is MetLife

I should note that I get short term disability for up to 12 weeks fully paid for by my employer. Payout is the same. There is no reduced coverage for LTD fully paid for by employer.

I would say I could get fully FI in 5 years, and fat FI in 10 years if I don’t decide to RE. This is highly dependent on market activity at this point.

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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Dottie57 » Thu Nov 07, 2019 11:42 am

Plano wrote:
Thu Nov 07, 2019 1:04 am
You say you’re looking at 2020 benefit enrollment, so this must be a group LTD policy. For most group LTD, the benefit amount is subject to offsets. So while your gross benefit amount is $6250, the net is probably much less after state disability, SSDI, etc., if you also receive those benefits.

Find the Benefit Calculation page in the policy to work out your likely net benefit after all offsets. It’s a good exercise for people to go down the list of offsets, to figure out what their other sources of disability income could be if they become unable to work.
- You can use SSA’s quick calculator to estimate SSDI. The earliest you can get this benefit is 6 months after disability.
- If you live in any of the states that provide their own disability benefits (CA, NY, NJ, HI or PR, last I checked) you can also find estimates online. CA SDI can be substantial, but is limited to 52 weeks.
Is there a minimum benefit if your offsets exceed the gross benefit? Usually it’s 10%, so $625 in your case.

Notwithstanding, $50/month premium is dirt cheap! Your employer must be paying a portion of the premiums. I would look at the likely net benefit versus your age, health risks, and the nominal cost of this coverage. Most group LTD will have a slew of 24-month limitations, but will cover you to normal retirement age for the big things like cancer. That’s something to consider.
I kept LTD for my entire working. Necver had to use it. Hallelujah!

Generally purchasing it through work is a great idea. And dirt cheap.

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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Dottie57 » Thu Nov 07, 2019 11:44 am

Nathan Drake wrote:
Thu Nov 07, 2019 1:19 am
Yes it’s a group policy with my employer. The payout would be offset by any compensation provided by my work (deferred bonuses, which in my case is RSUs which I’m not sure would apply), and government assistance. It doesn’t mention dividends, which in my case are over 20k per year (half of which is in retirement accounts and half taxable).

Age is mid 30s with no major health issues. Single and no dependents.
Hmm. My manager at first job was very healthy until diagnosed with ALS. Health status can change in the blink of an eye.

Broken Man 1999
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Broken Man 1999 » Thu Nov 07, 2019 12:20 pm

Nathan Drake wrote:
Wed Nov 06, 2019 10:43 pm
I currently am at lean FI with about 40x barebones annual expenses saved up.

For 2020 benefits enrollment, should I drop coverage?

It’s roughly $600 / year and would pay out at $6.25k / mo ($75k a year).

The expense isn’t that great, but I sort of feel it’s a bit wasteful given the circumstances. The coverage also has limitations on payouts if they are related to neurological disabilities, soft tissue, and skeletal/muscle related claims. Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

What are the bogleheads thoughts?
Could you clarify what this statement means?

Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Nathan Drake
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Thu Nov 07, 2019 12:51 pm

Broken Man 1999 wrote:
Thu Nov 07, 2019 12:20 pm
Nathan Drake wrote:
Wed Nov 06, 2019 10:43 pm
I currently am at lean FI with about 40x barebones annual expenses saved up.

For 2020 benefits enrollment, should I drop coverage?

It’s roughly $600 / year and would pay out at $6.25k / mo ($75k a year).

The expense isn’t that great, but I sort of feel it’s a bit wasteful given the circumstances. The coverage also has limitations on payouts if they are related to neurological disabilities, soft tissue, and skeletal/muscle related claims. Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

What are the bogleheads thoughts?
Could you clarify what this statement means?

Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

Broken Man 1999
The max payout for neurological issues, soft tissue, or skeletal muscular disabilities is only 24 months.

So I assume if I have an accident that causes severe back pain for the rest of my life I would only be entitled to 2 years disability pay...and NOT payouts until retirement age of 65

Broken Man 1999
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Broken Man 1999 » Thu Nov 07, 2019 1:05 pm

Nathan Drake wrote:
Thu Nov 07, 2019 12:51 pm
Broken Man 1999 wrote:
Thu Nov 07, 2019 12:20 pm
Nathan Drake wrote:
Wed Nov 06, 2019 10:43 pm
I currently am at lean FI with about 40x barebones annual expenses saved up.

For 2020 benefits enrollment, should I drop coverage?

It’s roughly $600 / year and would pay out at $6.25k / mo ($75k a year).

The expense isn’t that great, but I sort of feel it’s a bit wasteful given the circumstances. The coverage also has limitations on payouts if they are related to neurological disabilities, soft tissue, and skeletal/muscle related claims. Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

What are the bogleheads thoughts?
Could you clarify what this statement means?

Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

Broken Man 1999
The max payout for neurological issues, soft tissue, or skeletal muscular disabilities is only 24 months.

So I assume if I have an accident that causes severe back pain for the rest of my life I would only be entitled to 2 years disability pay...and NOT payouts until retirement age of 65
Ah, I see.

Well, I needed a LTD policy when I was disabled in 1999 at the age of 45. Mine was a MetLife policy (via employer) that paid until I reached 65 years of age. The LTD portion was a tad bit over $4,000/month, plus I had SSDI. I paid my LTD premiums after taxes, so the LTD benefits were tax free. Obviously I am biased, but $50/month seems pretty cheap. The LTD policy and SSDI allowed my family to continue our lifestyle. Our daughters were in college, so it was a time of some elevated spending.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Nathan Drake
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Sat Nov 09, 2019 12:39 pm

I should add that if I Opt Out of LTD, I won’t be able to continue health insurance coverage with my employer should I have a long term disability...

Not sure if that changes the analysis a bit.

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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by tj » Sat Nov 09, 2019 2:04 pm

Nathan Drake wrote:
Sat Nov 09, 2019 12:39 pm
I should add that if I Opt Out of LTD, I won’t be able to continue health insurance coverage with my employer should I have a long term disability...

Not sure if that changes the analysis a bit.

It seems pretty foolish to abandon health insurance considering how crappy a lot of the ACA plans are?

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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by bhsince87 » Sat Nov 09, 2019 3:04 pm

Nathan Drake wrote:
Thu Nov 07, 2019 11:23 am

I would say I could get fully FI in 5 years, and fat FI in 10 years if I don’t decide to RE. This is highly dependent on market activity at this point.
IMO, if you are basing your plans on projected future income, then you should protect that income. In other words, don't drop disability coverage until you actually retire.

Also note that there is a look back period for Social Security Disability protection. Can't find the details right now, but I have notes that in my case, I will only be covered for the first 5 years following early retirement, unless I add some sort of additional employment income along the way.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by willthrill81 » Sat Nov 09, 2019 3:13 pm

tj wrote:
Sat Nov 09, 2019 2:04 pm
Nathan Drake wrote:
Sat Nov 09, 2019 12:39 pm
I should add that if I Opt Out of LTD, I won’t be able to continue health insurance coverage with my employer should I have a long term disability...

Not sure if that changes the analysis a bit.
It seems pretty foolish to abandon health insurance considering how crappy a lot of the ACA plans are?
So what's your solution for healthcare insurance for early retirees?

Given that the OP's LTD plan seems to have poor coverage and that the OP is already at 40x, I'd say that it's pretty safe to drop the LTD plan, but I certainly wouldn't fault him for retaining it a while longer either.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by JAZZISCOOL » Sat Nov 09, 2019 3:14 pm

IMO, it makes sense to keep the LTD policy while you are still at this job. It sounds pretty reasonable as others have noted.

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Nathan Drake
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Nathan Drake » Sat Nov 09, 2019 3:58 pm

Thanks all

I’ve decided to keep the coverage. While I’m
currently working towards full or fat FIRE I think it’s prudent to have coverage since an extended illness could not only influence my income but also health coverage, which is a risk I’d like to mitigate.

An extended illness without income or cheaper health coverage could significantly increase my SWR risk.

Broken Man 1999
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Broken Man 1999 » Sat Nov 09, 2019 4:40 pm

Nathan Drake wrote:
Sat Nov 09, 2019 12:39 pm
I should add that if I Opt Out of LTD, I won’t be able to continue health insurance coverage with my employer should I have a long term disability...

Not sure if that changes the analysis a bit.
It might. Sometimes qualifying for LTD benefits also can trigger other benefits from the company.

From April of 1999 (age 45) until I went off LTD at age 65 in 2018 MegaCorp paid 100% of health insurance for family, and being on LTD allowed me to keep the company provided life insurance. I actually collected $120,000 from the company GUL policy. Nice thing is I didn't have to die to collect 50% of my life insurance. :D

Somewhere back in the day when AIDS was a death sentence, some policies were
such that policy holders could collect payments if they were unable to do some ADLs (activities of daily living). My company life insurance policy was one such policy.

I would be extremely diligent to fully understand your LTD policy. Know it inside and out.

Often times posters disparage employer offered LTD plans, but there were and might still be some decent plans out there.

Some plans don't pay if you are able to work in different positions than your position held at time of disability. My LTD plan paid if I was unable to do my specific job. That is very important. I was a salary + commissioned account team member. Sales teams are typically well compensated. That was the reason I left my previous technical support position. I got tired of cleaning up account manager messes. So, obviously being able to perform other jobs would have led to less compensation had I been forced into another job I might have been able to hold.

My MetLife auto insurance was discounted because I had another insurance product with them, my LTD policy. So, because MetLife paid me $4000+/month, they charged me less for my auto insurance. Welcome to Bizzaro World!

OP, check your LTD plan thoroughly. Find out how the interplay of company benefits other than LTD play out if you are disabled.

Broken Man 1999

Ah, once again I am late. Well, even though you are keeping your LTD policy, I would still make an effort to know what you actually have.
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Stinky
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Stinky » Sat Nov 09, 2019 5:02 pm

Nathan Drake wrote:
Sat Nov 09, 2019 3:58 pm
Thanks all

I’ve decided to keep the coverage. While I’m
currently working towards full or fat FIRE I think it’s prudent to have coverage since an extended illness could not only influence my income but also health coverage, which is a risk I’d like to mitigate.

An extended illness without income or cheaper health coverage could significantly increase my SWR risk.
You're making the right call.

I was just about to post back about your loss of company health insurance if you got disabled and didn't have LTD. While your long-term disability is not likely to happen, it would be pretty devastating to you financially if it did, and the loss of health insurance would be a big deal.

Thanks for seeking the input of the folks on the Board.
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Re: Long Term Disability and Financial Independence - Drop Coverage?

Post by Trader Joe » Sat Nov 09, 2019 5:28 pm

Nathan Drake wrote:
Wed Nov 06, 2019 10:43 pm
I currently am at lean FI with about 40x barebones annual expenses saved up.

For 2020 benefits enrollment, should I drop coverage?

It’s roughly $600 / year and would pay out at $6.25k / mo ($75k a year).

The expense isn’t that great, but I sort of feel it’s a bit wasteful given the circumstances. The coverage also has limitations on payouts if they are related to neurological disabilities, soft tissue, and skeletal/muscle related claims. Max term for payout is only 2 years and not until age 65, and that seems to be for the vast majority of LTD claims.

What are the bogleheads thoughts?
I would never pay for long-term disability.

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