Among the types of insurances that are out there to protect you, your loved ones, and your ideal retirement, are disability insurance and health insurance. In this blog, we’re breaking down these two insurance types to help you understand their functions and how much coverage you might need.
Protecting Your Income With Disability Insurance
Most people have trouble living on their full salary — even when they’re healthy and have the ability to work to their fullest extent.
But what would happen to you and your family if you were to become sick or injured and could no longer work in the way you were able to before?
That’s where disability insurance comes in. Disability insurance can help you get some amount of income to help you and your family when you’re no longer able to work like you could before.
However, many people tend to not put much thought into their disability insurance, especially if they’re receiving coverage through their work. While it’s important to have disability coverage to protect your income, it’s equally as important to have a good understanding of the coverage you’re receiving. Remember, just because you sign your benefit statement and check the disability box doesn’t mean you’ll be covered the way that you might expect.
To get a better understanding of what your work policy offers you, look at your plan to find out:
Do I have long-term or short-term disability insurance?
How much of my salary does it cover and will it be enough?
Is the insurance covering any job or is it covering my specific job?
Even when clients have disability insurance through their work, we often recommend that they also look into getting their own coverage. For instance, if someone’s work policy is only covering half of their salary, it could be difficult to make life happen with just half of what they normally receive. But if they also have their own policy, they could leverage it to supplement the 50% coverage from the work policy.
Two Reason Why You Might Want Your Own Disability Insurance:
In addition to supplementing their work coverage, there are two other main reasons why people choose to get their own disability insurance:
If you’re getting disability insurance through your work, you’re usually not paying for it. That means that when you receive that money, you’ve never paid taxes on it — and you’ll have to. So not only will you be sick or hurt and receiving half of what you were earning before, but you’ll also have to pay taxes on that half amount that’s coming to you.
Therefore, it can be beneficial to get your own coverage as a way to make sure you get additional dollars in your pocket. With your own coverage, you’re using money that you’ve already paid taxes on, so when it comes back to you, it’s tax-free.
Own Occupation Vs. Regular Occupation
Another big difference with work-provided disability insurance is that it often comes with coverage for something called regular occupation rather than own occupation coverage.
With own occupation coverage, if you can no longer do the job you were doing at the time you were injured or got sick, then you’re covered. For example, if you're a nuclear scientist and you get sick or injured in a way where you can no longer be a nuclear scientist anymore, then you have disability coverage. This is because this type of coverage sees that if you can’t do a specific job, you need help with your bills regardless of any other type of work you may do afterwards.
On the other hand, regular occupation believes that if you can do any job, then you don’t need as much help with your bills. If you can no longer be a nuclear scientist, but can become a teacher, they will take the extra income you’re receiving into account and adjust your benefits accordingly — even though you’re likely not making as much as you were as a nuclear scientist.
When you buy insurance on your own, it usually comes with the option for you to have own occupation coverage, which is why this coverage tends to be more expensive, but better, than what you receive through your work’s insurance policy. It says that if your illness or injury stops you from doing your specific job then you’re covered - you won’t be forced into a different job.
Three Key Disability Insurance Terms
When you are looking at your current disability insurance, or perhaps buying more it’ important to understand these three key terms:Elimination Period
Your elimination period is like a time-based deductible. It’s the length of time that must pass before your benefits begin.
The benefit amount is how much the insurance company is going to pay out to you.
The benefit period is the period of time in which benefits are paid out. Your benefit period might be more short-term, like six months or two years, or it can be more long-term, like over 10 years. Sometimes policies will offer a benefit period that lasts until you hit full retirement age, which for younger people is 67 years old.
Retirement Health Insurance Options
The cost of healthcare is a major concern for many in retirement. It’s no surprise that as we age, we tend to need an increasing amount of healthcare. And while many people have health insurance through their work, this coverage is likely to change when you hit 65 or leave your job.
When you’re no longer working and don’t yet qualify for Medicare, you can get something called COBRA. COBRA is a way to continue your coverage for up to 18 months to help you remain covered until you’re able to enroll in Medicare.
COBRA might not get you covered through Medicare at age 65, which means you usually start looking at the Affordable Care Act, also known as ACA coverage or Obamacare.
Planning Around The Affordable Care Act
If you’re 60 years old, for example, and are not working, it’s hard to find regular health insurance. At the same time, you can’t get Medicare either because you’re under 65 years old. So where are you going to get insurance from? It could easily cost $1,000 monthly per person for insurance. That’s where the Affordable Care Act (ACA / Obamacare) can come in.
This act helps people that don’t have access to insurance through work or COBRA get insurance and sometimes pay for the costs of healthcare. However, it’s important to understand that with this act, the government isn’t actually subsidizing your health insurance. Instead, they’re giving you what they call a “pre-refundable tax credit.” With this, they’re essentially saying that if your healthcare insurance costs $1,000 a month, they’ll help you on your taxes later with a pre-refundable tax credit. To do so, they give you that credit early, putting it towards your monthly health insurance costs, but at the end of the year when you do your taxes, if it turns out that you made too much money to earn the subsidy, you have to pay it back.
Right now, in 2020, if you're a couple and your income is less than roughly $68,000, you’ll get some of that subsidy. But if you’re above that $68,000 amount, you won’t get it. That’s why if you suddenly decide to take out $5,000 from your IRA in December to pay property taxes or pre-pay for a vacation next year, when it comes time to do your taxes, you might find out that taking that income means that you made $70,000 instead of $65,000, and that you lost your subsidy and have to pay it back - it might be possible to do your taxes and find out you have to pay back $15-$25,000!
That’s why it’s so important to understand that this act is not a subsidy. It’s not a guarantee until you do your tax forms and figure out your income and how much the government pre-paid you the prior year — and whether you need to pay it back.
This is also why we recommend that you talk to a good tax planner, someone who understands how the Affordable Care Act and its subsidies work, so you can make sure you’re not getting unexpected surprises come tax season.
The Ins and Outs of Medicare
We like to say that your 65th birthday will be the best birthday of your life. Why? Because that’s when you can get on Medicare and you won’t have to worry about company insurance plans or the Affordable Care Act subsidy income limits anymore.
Medicare will essentially pay 80% of whatever healthcare costs they cover, which are a lot. They don’t cover optometrists or dentists, but if you go to the doctor or hospital and get a medical bill, they’ll cover around 80% of your bill, leaving you on the hook for the last 20%.
To help pay for that extra 20%, many people also usually sign up for Medicare supplement insurance. With Medicare supplement coverage, you pay an ongoing premium for that extra coverage so that the insurance company will pay for that other 20% of your healthcare costs, instead of you.
Some people ask, “What does Medicare Supplement cover” or “I have to compare this companies coverage vs. another companies coverage.” The answer is ‘supplement covers what Medicare covers! - it just pays for that remaining 20% that Medicare covered, but didn’t pay.’
Medicare Advantage is another option that can help you pay the 20% of what you owe after Medicare pays 80% of your bills.
There is one big difference when it comes to insurance that’s advantage versus supplement. With the supplement plan, the insurance company won’t restrict you to stay in their health network for treatment and won’t make you pay extra if you go out of their network. It provides more freedom, but it can be more expensive. On the other hand, advantage is a cheaper option, but has limited networks and can cost you extra if you go outside of those networks, which can ultimately limit you when it comes to care depending on your needs and situation.
This limitation is usually based on location, too. So if you are someone that goes ‘up north’ in the summer or is a ‘snowbird’ in Florida or Arizona in the winter you may want to consider supplement because chances are pretty good that the doctors that are local to your cabin, or your winter home are out of the network that’s local to your main house.
Medicare Parts A, B, and D
Within Medicare, there are also several types of coverage called Medicare Part A, Part B, Part C, and Part D.
Medicare Part A covers your bills when you go to the hospital — and this part is free since people tend to go to the hospital a lot less than they go to the doctor.
Medicare Part B covers you when you go to the doctor and get a bill either from the doctor or are billed for tests they order. In 2020, Medicare Part B costs about $145 monthly per person. However, your premiums can change depending on your income, which is important to keep in mind when planning for retirement. When you’re in your early years of retirement and start receiving payouts from your pension or an employer stock plan, you might end up making your highest income — which could mean that you’ll have to pay more for your Medicare Part B premiums.
That’s why it’s essential that when you’re planning, you’re looking at your taxes and your income to not only determine the money you’ll need each month, but to also see how your income will impact you when it comes to paying for Medicare.
Medicare Part D is the drug coverage part of the plan, and it costs about $15 to $75 per month depending on the coverage you choose.
A little handy tip for Part D is that you can actually go to the Medicare website and plug in the prescription you’re using and it will tell you the best coverage for you. You can also change your coverage once a year. So if your prescriptions change, or the drug coverage that you signed up for changes, you can go back to the Medicare website and find out what’s the best coverage for you the following year.
That’s it for now!
Whether it’s disability or health insurance, it’s important to figure out what you have and what you need, and to get guidance from someone you trust and who has the knowledge and experience to help you see the blind spots you might miss so you don’t have unexpected surprises down the road. If you would like extra guidance for your insurance needs, feel free to contact us at Keil Financial Partners.
If you haven’t already, you can check out our blog posts on two other important types of insurance, life insurance and long-term care insurance, here.