Spokane Journal of Business

Rider provides hedge for disability insurance

Premiums will be refunded if policy is claim free

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Disability insurance with a return-of-premium rider is a type of insurance made to protect your income if you get sick or hurt and can’t work, but where you can get a 100 percent refund of all your premiums paid, typically at age 67, if you don’t have any claims. It’s peace of mind and protection if you need it, all your money back through a “forced savings account” if you don’t.

Having disability coverage is an important part of planning for your future financial security and risk management. After all, according to the Council for Disability Awareness, 25 percent—one out of four people—of workers in their 20s, 30s, or 40s will suffer a disability that keeps them out of work for at least 90 days, with an average disability lasting three to five years. 

But what if you’re one of the 75 percent who doesn’t get disabled? You have a higher chance of nothing happening. Why not just risk it?

Having an ROP rider on your policy can cancel out this concern.

When you contemplate everything you need your income for to pay the mortgage, utility bills, groceries, gas, car loans, credit cards, and health insurance premiums, not having disability insurance just doesn’t make sense.

Your income is actually your greatest asset of all and should be protected. Simply take your annual income and multiply it by the number of years you have till retirement and it’s a pretty big number. A 35-year-old person making $100,000 working for 30 years to age 65 will earn three million dollars, and that’s not even taking into account raises in income, and promotions.

Let’s face it. The savings rate in America is down, and a lot of people aren’t good at saving money. I had one client who was thrilled with his plan. He had some close calls to be sure, but never actually became disabled. Therefore, in his case, he received back $48,000, the full amount he had paid in. He ended up paying off some debts and paying cash to take his wife on an extended cruise in the Caribbean. He commented, he never would have seen this money had he been required to save it on his own.

How does it work? First, you get a disability insurance policy, either short term or long term to fit your needs for protection. Then you add the ROP rider for an extra premium.

What do these policies cost? Let’s look at an example.

A 35-year old-male, nontobacco user can get a long-term disability insurance policy with a top company for about $36 per month that will pay him $2,000 per month in tax-free disability benefits all the way to age 67. The maximum that could be paid out, assuming this person got totally disabled right after buying the policy, would be $768,000. Then we add the ROP rider for an additional $18 per month, bringing us up to a total of $54 per month. The total premiums paid for 32 years to age 67 would be $20,736. If there are no claims, that man would receive a full refund, or a return of premium, for that amount. 

From an IRS standpoint, the return of premium is also tax free because it’s considered to be a return of pure basis/principal without interest.

However, there’s what we call inferred interest. For example, if we only go with the plain vanilla policy, without adding the ROP rider, we’d only be putting out $36 per month. That means we could then invest the cost of the ROP rider, $18 per month on our own, right? The question then becomes, what rate of return would be required on the extra $18 per month, in order to have it equal the $20,736 in 32 years. The interest rate on this might be higher than you think. You would need a guaranteed, net after-tax return of 6 percent, which might have to be 8 percent before taxes, depending on your situation.

In cases in which the policy holder has a claim, the company simply deducts the amount of the claim from the premiums paid, and the insured gets back any premiums paid at the end of the policy—typically at age 67.

Those policies do have caveats, however. First, you need to apply for and get a policy, and pay for it and put it in force. Policies pay. Proposals don’t.

Be advised because the risks of getting disabled are so high, much higher than dying prematurely, companies are particular about underwriting, and they don’t just hand these out. In fact, according to the National Safety Council, you are 240 times more likely to become disabled from an accident than to suffer a fatal one.

Where there are over 1,000 companies selling life insurance, there are only about 11 selling disability insurance. It’s a seller’s market.

One other caveat is that you need to keep the policy to age 65 to get the full return of premium. Prior to that, there are vesting schedules in place to discourage people from getting a policy, then quitting early. In fact, for the first four to five years, there may not be any return of premium. 

This type of policy with a ROP rider is best designed for the person who recognizes they’re human and not invincible, and that the risk of getting disabled is a real part of life and that their income and all that it pays for is worth protecting during their working years until retirement. But it’s also for the person who’s optimistic about their odds of not getting disabled because they live safely, make good decisions, care about their health, and they are reasonably confident they will get all their money back with little to no claims. 

Todd Radwick, president of Radwick Financial Group LLC, of Winthrop Wash., is an insurance and financial adviser and 22-year industry veteran. He can be reached at 509-996-3425 or through his website at www.radwickfinancial.com todd@radwickfinancial.com

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