Preparing for the Unforeseen: Disability Insurance and Emergency Funds

Financial Planning for Uncertain Times

Gain a better understanding of disability insurance protections, unemployment insurance benefits and emergency funds and learn how to ensure you and your family safely navigate calamities, challenges or disasters in uncertain financial times.

Emergency Funds and Insurance

Working professionals, anyone with a family, a home or any net worth worry about the future. Layoffs, illness, accidents, catastrophes, national debt ceilings or the potential collapse of social security, it’s enough to cause sleepless nights for even the most accomplished or secure individual. And, life isn’t trending to be any easier for anyone.

While we can’t predict the future, we can prepare for calamity. We’re not talking about a bunker with canned goods and bottled water. It’s not doomsday prepping. We are talking about a few financial steps you can take which will see your family through any unforeseen disaster.

Outlining how you can prepare for layoffs and illness or injury that prevents you from working, we’ll offer guidance to get you started and perhaps a little motivation. We’ll also explore the differences between disability insurance, unemployment insurance and your emergency fund or rainy day fund and how you might use a strategy incorporating all three for an affordable sense of assurance for you and your family in the event of a crisis.

With recent discussions around the failing of the social security trust after 2035, these strategies might also be prudent for those nearing retirement, or those whose retirement saving strategies might be less than adequate.

Finally, we’ll explore how the expertise of a skilled financial planner can help. With their insights, you can find a solid grasp of your financial situation, understand your insurance coverages and create an invaluable emergency fund as you prepare for the future.

Disability Insurance

Disability insurance, as the name suggests, provides financial assurance if illness or non-work injury keeps you from working or results in excessive time off or job loss. The distinction between disability insurance and worker’s compensation insurance is important to point out as worker’s compensation benefits apply only to on-the-job injuries. Disability insurance covers qualifying injury or illness sustained outside of work. Directly work-related injuries are most often covered by worker’s compensation policies and not disability insurance.

Disability insurance policies provide a percentage of your income to you for a fixed period, or until you can return to work or secure another job. Employers may offer disability coverage as part of an employee benefits package, which is selected and administered by the employer, or you have the option for privately funded coverage which you can obtain and manage yourself. A few states require companies to provide short-term disability coverage to employees, either through a private carrier or state sponsored plan.

The two most common types of disability insurance available are short-term disability insurance and long-term. While both policy types may have specific limits or maximum benefits, short-term benefits cover temporary disabilities and provide income replacement of 60-70% of an employee’s disability income for a period of, often, up to six months. Long term disability extends this coverage somewhat, covering somewhere between 40-60% of pre-disability income.

Prices for disability insurance vary, based on policy terms, an individual’s age, health or occupation. In the case of employee provided coverage, the insurance may be wholly or partially subsidized by the employer. Major carriers offer various pricing structures, so if you are opting for privately funded or supplemental disability insurance, it’s wise to obtain quotes from several carriers, comparing coverage options, pricing, policy terms and features or riders.

Independent insurance agents, brokers and some financial advisors can help navigate pricing and policies to find coverage which will reasonably and adequately protect you and your family should you suffer a disabling event. Cost for disability coverage does vary for the reasons mentioned and for features provided. Disability insurance premiums generally range from 1% to 3% of an individual’s annual income.

The key advantage of privately funded disability insurance is portability. Employee coverage can change or be discontinued, for any reason, by an employer, leaving you with gaps or an absence of coverage. In the event you are fired or laid off, you may have the option to convert your plan to an individual policy but are again subject to the employer’s discretion and policy options. Private policies, by comparison, offer continuity and stability as coverage is maintained as long as premiums are paid.

Tax implications for both employee funded and privately sourced disability insurance will also vary. If an employer pays the disability insurance premium, in part or in full, the benefits received are generally considered taxable income. In contrast, if privately funded disability insurance premiums are paid with after-tax dollars, the benefits received in the event of a qualifying event are typically tax-free. Remember, this tax benefit relates directly to the dollars used to cover premiums; if you use pre-tax dollars like a flexible spending account or cafeteria plan, you may be liable for taxes on received benefits.

Disability insurance premiums may be deductible as a business expense on your state and federal income tax returns, reducing your overall taxable income. It is important to understand the specific terms and conditions of your policy coverage as well as regulations and laws guided taxable income in your state. A qualified accountant or financial advisor can provide more details as it pertains to federal and state tax codes for disability insurance premiums.

A few other less common disability insurance coverage options are also available, including:

  • High-Limit Coverages for individuals with high incomes
  • Own-occupation coverage protecting an individual’s ability to work in one’s specific occupation
  • Business Overhead Expense Insurance to cover ongoing business expenses for small businesses and the self-employed; and
  • Key Person Disability Insurance designed to protect businesses and organizations from the financial impacts of disabilities or incidents affecting key personnel.

When considering any type of disability insurance as a supplement to your disaster preparedness strategy, it’s wise to consult with a specialized disability insurance broker, a financial planner or investment manager who knows your financial situation and can advise on the types of coverage you might purchase to provide adequate protection for your specific needs and assets without overpaying.

Unemployment Insurance

Now, let’s get into unemployment insurance. Many of us got familiar with jobless benefits or unemployment insurance during the pandemic. Or, we may have, at a point in our career trajectory, contacted the unemployment insurance office in our home state. It is widely known and discussed how ridiculously inadequate unemployment benefits are in the context of personal expenses.

Before the pandemic (January 2020), weekly benefits were replacing less than half of average wages. In some states benefits topped out at less than $275 per week – equal to less than $7 an hour. According to research by the Economic Policy Institute domestic unemployment insurance benefits in the United States were among the shortest term and reached the least number of unemployed workers anywhere in the developed world. In the absence of federal standards, individual states also dictate a maximum benefit duration, 26 weeks in most states, which falls well below international norms. The National Employment Law Project found that, as of 2020, 10 states were providing fewer than 26 weeks of benefits with two states offering as few as 12 weeks. In several of those states, fewer than one in six workers were able to claim even that short span of benefits. Washington State, for example, maintains a maximum benefit (of this writing) of $999 per week, for a maximum duration of 26 weeks, with potential extensions triggered during periods of high unemployment. State-funded benefits in Oregon, for example, are available for up to 26 weeks with the maximum weekly benefit, as of this writing, being $783 per week.

Compare those benefits and duration potential against your mortgage, gas, groceries and other expenses and see how far that might get you today. Even with careful financial planning, budget adherence and a strictly ramen diet, the maximum benefit from Washington State won’t come close to meeting average monthly expenses without a supplement, considering the monthly mortgage payment for a “typical” Seattle home, according to a 2022 Redfin report, was $5,133, up from $3,525 in October of 2021 and well before the recent spate of interest rate hikes.

With the average length of a job search in 2023 taking anywhere from 5 to 7 months, twelve to twenty-six (or even twenty-eight) weeks of unemployment assistance benefits will assuredly deplete resources, tap your savings and stress your finances even in the best of unprepared scenarios. Private or supplemental unemployment relief insurance can be an option although coverage isn’t widely available and often requires very specific eligibility criteria. So, financial planning, preparedness and budget strategies all make good sense, with diligent and calculated savings for the creation and sustainable, inflationary maintenance of an emergency fund.

Emergency Funds

The Financial Industry Regulatory Authority (FINRA) estimates that just 46% of Americans have three months of living expenses set aside for a rainy-day or emergency fund. Setting aside resources to cover unexpected expenses or income disruptions is critical for continual peace of mind and the assurance that your family is protected from the unforeseen. A financial buffer or emergency fund supports you in the event of more than just job loss. Natural disasters, major home repairs and other calamities can also keep you from working, or can require significant out-of-pocket costs, which might otherwise need to be paid with credit cards, personal loans or other forms of high-interest debt. Emergency funds also help maintain your long range investment strategies, allowing you to meet expenses without having to liquidate or reallocate assets.

Building an emergency fund lets you avoid relying on credit cards, consumer credit or loans to cover immediate expenses like housing, utilities, groceries and transportation. Financial planning specialists recommend anywhere from three to six months of living expenses saved for an emergency fund. These expenses are, of course, unique and personal to your situation. Ideally, you’ll start with a financial plan, estimate your overall monthly expenses and create a budget. Get a big-picture perspective of your overall expenses. Identify in the plan where you can reduce spending to reallocate funds to emergency savings. Once you’ve detailed your expenses and budget, consider setting up automatic transfers from your checking account to your designated emergency fund account. Look for additional opportunities to fund this account, like the allocation of tax refunds and bonuses or reallocating discretionary income towards the fund.

Your emergency fund should be accessible and liquid. While a savings account can have a significantly lower yield than other investments, the funds are immediately available, generally low-risk and, if saved in a bank or other established financial institution, protected by the Federal Deposit Insurance Corporation (FDIC). Other options for relatively liquid assets with slightly higher interest rates, include certificates of deposit (CDs) or in some cases timed U.S. Treasury bills. A skilled financial planner can help you time the CDs or Treasury bills in a “laddered” approach and might have additional ideas for low-risk, liquid asset allocations. Consulting with a planner to maximize your disaster planning efforts, resource and investment management is a prudent idea.

Prepare with a Financial Planner

We know that unemployment or job loss insurance can be inadequate. We also know that in uncertain times with volatile job markets we need some protection for potential job loss and disaster. Disability insurance works to protect us if we’re injured and unable to work, but how do we coordinate this and create a sufficient emergency fund? We can budget, plan and allocate on our own. We can also enlist the help and support of a qualified financial planner.

Financial planners are a terrific resource for more than just investment management. When it comes to planning, budgets and resource allocation, a skilled planner provides perspective. They can also uncover opportunities for saving, guiding you in building financial strategies that support a rainy day fund while maintaining the quality of life you value and enjoy.

Many financial planners, in addition to operating as fiduciaries, are also licensed to sell insurance in their home states. Insurance licensure and insights into insurance policy structures, premiums and requirements lend you a unique advantage when shopping for disability insurance policies or other insurance coverage. With knowledge of your personal assets and obligations, a skilled financial planner and advisor will ensure you have adequate coverage for your specific financial situation without paying out too much in premiums. It’s a fine balance at times, seeing that your insurance will protect you fully when the time comes. You can’t always count on an insurance broker as they often receive commission for selling particular policies regardless of whether they’re a fit for you. When you can, it makes sense to consult the expertise and insights of your financial planner when shopping for policies. Their insights may prove invaluable.

Experience Disaster Financial Preparedness

“Those who fail to prepare,” as the old saying goes, “prepare to fail.” As professionals, providers, caregivers, employers or parents, our business and families count on us to plan accordingly. We simply can’t fail. Planning for emergencies with a safety net fund will ensure that, even with state unemployment benefits, you can weather any layoff or downturn in the job market. Adequate disability insurance benefits will also provide a degree of assurance in the event of injury or accident.

It doesn’t take a whole lot of effort to ensure you’re protected for a rainy day. It does get a whole lot easier enlisting the objective insights of a financial planning professional. In any event, while we don’t know what the future holds, we can sleep better knowing that we can and are prepared for the unexpected, protecting our loved ones with a little budgeting, planning and preparedness.

 

The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.

What You Need To Know About Health Insurance Plans

There are many health insurance plans, structures, terms, and costs that are often as clear as mud. Below, I have provided you with the most important parts of each plan, relative costs, as well as other important information to help you navigate some of the complexities of the health insurance world.

Health Maintenance Organization (HMO)

HMO plans charge a monthly premium in exchange for access to a network of healthcare providers. In addition to the premium, a copayment ranging from $5-$50 is usually required in order to receive a particular service or see a doctor. 

In order for the HMO plan to cover all or the majority of the costs, the policyholder must go to hospitals and clinics that belong to the HMO network. If the policyholder seeks any care from doctors or facilities that do not belong to the network, the HMO usually will not pay for those services, leaving the insured with possibly high out-of-pocket costs. Some exceptions may be made in the case of emergencies or when the HMO network does not, or cannot, provide certain services.

In-network services are cheaper because the insurance provider has previously negotiated prices and contracted certain service providers in exchange for a flow of patients.

In order to keep medical care costs to a minimum for it’s insured, it is in the best interest of the HMO plan to encourage preventative healthcare and regular doctor visits in order to catch health problems before they become more complex and therefore more expensive.

The majority of HMOs will require policyholders to choose a primary care provider (PCP) upon enrolling in the program. The PCP will be the first contact for the policyholder and will act as the gatekeeper into the network. If the PCP can’t manage a particular health problem or concern, a referral will be made to a specialty doctor that also belongs to the same HMO.

For employers, HMOs are cheap in the long-term and represent the majority of healthcare plans offered through the workplace today. Policyholders generally know exactly how much they will have to pay out-of-pocket, and where to go to receive healthcare services. Also, in order for a doctor or a healthcare facility to belong to an HMO, strict quality standards must be met and maintained otherwise these providers risk losing the contract with the HMO.

Preferred Provider Organizations (PPO)

A PPO is a plan that combines the somewhat older tradition of Fee-For-

Service with certain aspects of an HMO.

Both PPOs and HMOs:

  • Have an established network of healthcare providers and facilities
  • Require a copayment for each visit

The major differences between the two?

  • PPOs are more flexible
  • Monthly premiums are more expensive with a PPO
  • PPOs usually don’t require a referral from PCP to see a specialist

Most PPOs cover preventive care which usually includes visits to the doctor, well-baby care, immunizations, and mammograms. The higher monthly premiums are due to the fact that unlike HMOs (whose more restricted network allows for a contract with lower costs), PPOs have a comparatively less restricted network. Costs are therefore less predictable and result in higher monthly premiums.

For employers, employer-sponsored PPO plans therefore tend to be more expensive than HMOs for the same reason.

In a PPO, the policyholder can seek specialty care services without having to see the PCP first to receive a referral. Some PPOs may have you choose a preferred PCP but it is not an absolute requirement like with an HMO and the PPO prefers that you see in-network providers (hence the name of the plan).

However, you can use out of network providers and still receive some health insurance coverage. Some people like this option because even if their doctor is not a part of the network, it means they may not have to change doctors to join a PPO.

As you can see, a PPO offers a higher degree of flexibility to the consumer and allows patients to avoid the hassle of making multiple appointments for the purpose of receiving a referral to a specialist provider. A drawback for some, may be higher associated costs.

Always perform due diligence and check to make sure if your insurance will be accepted or not at a given healthcare provider or facility so that you are fully aware of your expected costs.

 

Point of Service (POS)

A POS plan is yet another plan that shares some of the qualities of HMOs and PPOs. Like an HMO plan, you may be required to designate a primary care physician who will then make referrals to network specialists when needed. Seeking care from doctors that are not part of the POS network will result in higher out-of-pocket costs for the consumer. Depending upon the plan, PCP healthcare services don’t have a deductible and preventive care benefits are usually included.

 

Exclusive Provider Organization (EPO)

An EPO is also very similar to an HMO or PPO as well and is a health plan that offers a large, national network of doctors and hospitals for you to choose from. This net is exclusive, so seeing out-of-network providers will result in you having to cover the costs. Like a PPO, you don’t have to see your PCP prior to seeking a specialist, just make sure that the specialist belongs to the network

EPOs are often considered to be a hybrid plan between an HMO and a PPO as they offer more flexibility than an HMO (since you don’t need a referral to see a specialist) but are generally cheaper than a PPO.

Catastrophic Plan

Catastrophic health insurance has changed over the years. Today it is a plan that provides a narrow range of healthcare services but enough to meet the minimum coverage mandate stipulated by the Affordable Care Act (ACA). Like the name sounds, the idea behind the plan is to protect plan participants in moments of dire healthcare needs.

Catastrophic plans have lower monthly premiums but high deductibles as well as high out-of-pocket expenses until reaching the plan’s annual deductible, at which point the plan pays for costs.

To be eligible, an individual must be under age 30 or be any age with a “general hardship exemption” and unable to afford the more traditional health plans.

These plans may cover a limited number of primary care visits per year but all “essential health” components such as hospitalization, emergency care, and prescriptions, among others, are covered.

Policyholders may be presented with a copay requirement for care as catastrophic plans can be arranged in an HMO or PPO structure. This plan is best for young and otherwise uninsured individuals.

Cadillac plan

First of all, there is no actual plan for sale that is called a ‘Cadillac plan.’ Rather, a Cadillac plan, also known as a “gold-plated” plan, refers to any expensive healthcare plan. The term was born out of the focus that journalists and politicians have placed on the issue of healthcare costs. Any plan could be considered a Cadillac plan based on cost, regardless of its structure type. In fact, many typical employee-sponsored plans would be considered to be gold-plated.

Technically, a high-cost plan is one whose combined annual employer and employee premiums exceed $11,200 for an individual or $30,150 for a family- these indices are adjusted periodically to account for inflation and rising costs. A ‘Cadillac plan’ is one that has high monthly premiums with low deductibles which is essentially the opposite of catastrophic plans.

Even though the Cadillac makes reference to the luxury car maker, these plans are not reserved for the rich and famous. Many employees have what are technically considered Cadillac plans. Also, many small businesses that have a small number of employees may also have these gold-plated plans since the smaller number of employees means a smaller pool of money with which the company can use to bargain for lower premiums so the name is misleading.


Proposed Tax on Cadillac Plans Set For 2022

Cadillac plans were in the eye of the Obama administration as a possible factor in increasing healthcare costs as well as providing excessive tax advantages for employers. According to The Tax Policy Center (TPC), an excise tax of 40% will be applied starting 2022 (originally set to take place in 2018, but delayed by Congress) to high-cost health plans that exceed the aforementioned high-cost thresholds. The tax would kick in to effect on every dollar that exceeds the annual premium limits not on the entire cost of the plan.

The ‘Cadillac Tax’ is intended to generate more tax revenue to help finance the Affordable Care Act, reduce healthcare spending, and thereby make more expensive plans less appealing. However, the TPC projects that the costs of the tax will be passed along to workers with either a change in wages and/or a change in health plans in the form of less coverage for the same cost or simply charging more expensive premiums.

 

High Deductible Health Plan (HDHP)

HDHPs come with lower monthly premiums compared to cadillac plans. However, the policyholder has to pay higher out-of-pocket costs, known as the deductible, before the insurance company starts to pay its share. HDHPs can be combined with a Health Savings Account, but not all HDHPs are eligible for one.

The IRS defines an HDHP as a plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,650 for an individual or $13,300 for a family.

Health Savings Accounts (HSA)

A Health Savings Account (HSA) can help patients with HDHPs pay for medical expenses. HSA are treated similar to a bank account and you can contribute money to the account in a similar way to the way you contribute to a retirement account. Plus HSAs have some further unique benefits.

In order to be eligible to use an HSA, you must have a qualified HDHP through work or a spouse. Not all HDHP plans will qualify you for HSA use and the IRS publishes a list of ‘qualifying’ medical and dental expenses that can be recorded as deductions.

Additional eligibility requirements include:

  • You can’t be covered by any other insurance plan, including Medicare Parts A and B
  • You can’t have used VA medical benefits in the past 90 days if you plan to contribute to an HSA
  • You can’t be claimed as a dependent on another person’s tax return
  • You must be covered by the qualified HDHP on the first day of the month

Benefits of HSAs include:

  • Ownership of the account (you can keep the account even if you change jobs, etc.)
  • Money within the HSA can be invested so that the value can grow
  • Unused money in the account can be rolled over yearly and interest earned on the principle is not subject to federal taxes
    • Currently California and New Jersey do not provide state tax deductions
    • Tennessee and New Hampshire requires taxpayers to report dividend and interest earnings. Exact amounts differ depending on tax filing status
    • Residents living in states that have no income tax don’t receive additional state tax deduction benefit
  • Tax free distributions on qualified medical expenses
  • After age 65, use HSA like a retirement account. No tax penalties on non-qualified expenses
  • A Way to save for future health related expenses
  • Triple tax advantage
    • Contributions are tax deductible
    • HSA assets grow tax free
    • Funds can be used tax free for qualifying medical expense or after age 65

For 2019, the HSA contribution limit for an individual is $3,500 and $7,000 for a family. Those over 55 years of age can contribute an additional $1,000.

Some HSA plans may not allow you to invest the funds. If this is the case, you can rollover the funds in that HSA into another HSA that does allow for investment of funds once per year.

Health Plan Cost Analysis

According to ValuePenguin, a consumer spending research agency, average monthly premiums for a 21 year old are:

  • HMO: $230
  • POS: $244
  • PPO: $251
  • EPO: $254

Premiums usually only increase with age and will vary from state to state.

Plans can be further divided into tiers- catastrophic, bronze, silver, gold, and platinum. The catastrophic tier offers the least amount of coverage whereas the platinum offers the most.

Average monthly premiums by tier for a 21 year old look like:

  • Catastrophic: $167
  • Bronze: $201
  • Silver: $247
  • Gold: $291
  • Platinum: $363


The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.