77: Disability Safeguards and IBC: Waiver of Premium vs. True Disability Insurance

[00:00:00] Hello, everyone. This is John Montoya. And this is John Perrings. We are Infinite Banking Authorized Practitioners and hosts of The Fifth Edition.

[00:00:11] John Montoya: Episode 77, The Disability Waiver of Premium, Rider for IBC Policies. So in this episode, we're going to cover the why, the what, how does this rider compare to a standalone disability income insurance policy? And we're going to finish off the episode with how your IBC portfolio may be incomplete without a standalone DI policy. So John, let's get this episode going. Let's start with the why.

[00:00:41] John Perrings: Yeah. Let's talk about some statistics here. If we were to look at some statistics around disability we've got a bunch of notes here. 67% of American adults are overweight or obese. 30% of adults over the age of 20 [00:01:00] Suffer from high blood pressure. 10% of our adult population have type 2 diabetes.

[00:01:06] 41 million are classified as prediabetic. One in two will experience heart disease and cancer in their lifetime. One in three women will have a cancer diagnosis and one in eight women will have breast cancer. And these are some statistics, obviously, it may or may not happen to you, like this one in two will experience heart disease or cancer in their lifetime, if you're married and if that's your spouse what's your plan to get through that?

[00:01:35] And, another stat is 50% of all bankruptcies and more than 1. 5 million foreclosures per year occur as a result of medical expenses. And that comes from the book, Healthcare Dollars and Cents by Dr. Tad, Sitzkowski. And looking at these statistics from the protection component of what we're trying to do with life insurance I think we [00:02:00] really have to also look at what happens if we don't die, but something happens to our ability to work.

[00:02:05] And, we've talked about this in the past, your number one asset is your ability to earn an income. We need to be able to replace that If you die prematurely, we also should really be looking at how can we replace that if something happens to us and we cannot work, but we're still alive. And that's really what a disability insurance, the true disability insurance is for.

[00:02:28] And we have some riders that are built in. I shouldn't say they're built in because they do have an additional cost, but you can add them to a whole life insurance policy. And so I think, we're going to talk about some of the differences between, a disability waiver of premium versus a disability insurance policy.

[00:02:49] John Montoya: Yeah. And just to reiterate one of the statistics that you mentioned, one in two that's you or your spouse. And if you're new to the show, go check out episode [00:03:00] 55, cause you'll get to hear my spouse talk about her experience with stage four breast cancer. If you think it can't happen to you if you're married, it's not just you and going a little bit further to the impact that even just one disability claim that you have to make in your lifetime, the devastation is pretty horrendous.

[00:03:24] Like you mentioned, 50% of all bankruptcies and more than 1.5 million foreclosures per year are a result of medical expenses. And if you take a look at your entire financial picture, you want to make sure you're plugging holes. And for so many people, this is A hole it's a hole in their bucket.

[00:03:46] And the writer that we're going to talk about. With that you can choose to have with your whole life policy, while you do have to qualify for it it it does allow you to [00:04:00] basically have insurance on your insurance. That's always been the quick way to describe it, insurance on your insurance, just to guarantee that, if you do have a disability that your premium.

[00:04:14] Continues to get paid. So your plan continues to work, even if you cannot. So really important that you have this writer. One of the, I was having a conversation with my wife about this particular episode. And one of the things that she did want to have me share is from her experience.

[00:04:32] And she basically said, so assume that you have this disability and you survive. The diminished quality of life that you may have. And now assume that you don't have any disability income insurance to replace what you were making, and you have to go back to work. You can't afford to not work. While the Rider that we're going to discuss here in a minute is [00:05:00] really important to have on your IBC whole life policy.

[00:05:03] It does not protect you or it does not replace your actual income. So there are two different things that we're going to be discussing here. The, waiving of your premium if you have a disability event. But it's not the same as replacing your income if you can no longer work. So John let's let's get into the Rider Basics, the Disability Waiver of Premium Rider Basics.

[00:05:29] John Perrings: Just real quick before we get into the basics, I just wanted to really hit home the idea of replacing income. If you think about all the income you're going to earn in your life, and if you get a rate of return on whatever that growth is going to be, we look at that compound curve that we expect to happen over the course of our life.

[00:05:49] That gets us all the way through to retirement, if that's what you're shooting for. And then you have to live on that income for the rest of your life. It has to last your entire life. None of us have a [00:06:00] God given right to that compound curve. And if anything happens today or tomorrow, before that compound curve happens, the compound curve doesn't happen.

[00:06:11] Obviously that's the case. And so if we're planning on that curve happening, and you don't have a way to replace that curve either you. And, or your family are going to have to change their lifestyle in some significant manner either now or in the future, because what you were able to get on the compound curve will have to be consumed today or if you weren't able to have much of a compound curve develop at this, at the point that anything happens everyone has to change right away.

[00:06:41] I think that's a good way to look at it. Some of the, talks that I'll have like on first consultations will be around that type of idea. And I think what we're saying is there, there are more than, there's more than one way that You know, that, that future income cannot happen.

[00:06:55] And so that's what we're diving into today. So as a Montoya mentioned, let's jump [00:07:00] into the rider, the basics of the disability waiver of premium rider that you can get in a life insurance policy. The first thing is it's optional and there is an There is an additional cost to it, right? So it's not a free rider, like what you would see in some cases with the accelerated death benefit riders for chronic and terminal illness.

[00:07:21] This is for disability where it's an optional rider that does have an additional cost to it, right? If at the time, if you elect to have it you have to be approved for it. So it's another approval that, that gets tacked on to. The underwriting process of your whole life insurance policy. And so if you're unable to work the way it works is if you're unable to work in your primary occupation due to a long term disability, it has to be confirmed by a doctor, right?

[00:07:51] The insurance company will waive the premium and. Depending on the carrier, some carriers will only waive the base premium, that which would [00:08:00] include a term rider. If you have one, some carriers will also waive the PUA portion of that premium and waive the entire thing. So that's something to look into.

[00:08:09] WAVE is the life insurance company's language, meaning they'll make the premium payments on your behalf, just so you understand what we're talking about here. So when Montoya said insuring your insurance, we're insuring that the premiums will be paid for this policy so that the policy will always grow to at least close to what it was supposed to, and if the PUA isn't covered in the waiver of premium, it's not going to be exactly what you originally, originally planned for in the illustration, but it'll at least be close.

[00:08:40] Each company will have its own particulars for how long they'll waive the required premium. For example if a disability happens after the age six, after age 60 the benefit would cover up to age 65. I'm just giving one example of one carrier. You'd want to obviously look at different different carriers and what [00:09:00] they can do.

[00:09:01] Or at least if you're looking at one carrier, just find out what the specifics are for them. So usually these waivers are not. The idea being if you're going to work most of the carriers consider that you're going to work to age 65, which is a kind of typical retirement age. And so anything past age 65, they won't start the waiver of premium.

[00:09:22] It'll drop off after that time. However, if you're disabled before age 60, or age 65. Again, there's some kind of fine points that happen in between age 60 and 65, but we'll just talk about the basics here. If you're disabled before that time, they'll pay those premiums all the way through the life of the policy.

[00:09:41] What's this last point here? We can be added to a policy as young as age five, by the way. And so it's great for juvenile policies to adults, as we mentioned, in their late fifties is really where. Where it starts and, as advisors, we have to balance the cost, once you get into your [00:10:00] mid to late fifties, we have to really look at the cost versus the benefit that you get from the disability waiver of premium rider.

[00:10:07] And so those are just conversations that you would want to have with your agent.

[00:10:11] John Montoya: Yeah, and generally speaking for as long as I've been in this industry and recommending this particular writer, it younger than age 50, it's essentially a no brainer you should have it. I've never had one person. Tell me, no, I'm not interested. It's that much of a no-brainer. I guess don't be the first person.

[00:10:32] But I'm kidding. Yeah it's compared to the headaches that you're avoiding, it is such a minimal cost. So it's something that, you want to make sure you have on your policy for sure. And as far as the juvenile policies why would you add if you can, if you've got a five year old, a six year old, or, a juvenile that you're setting up a whole life policy for, why would you add that?

[00:10:58] If you're planning [00:11:00] for your child to continue to fund the premiums at a later date. They're going to be funding premiums and you never know one of the statistics that we haven't shared yet is that we have a one in three chance of experiencing some sort of long term injury or illness before age 60.

[00:11:19] One in three chance. So regardless of how young you are and we definitely see, especially in this day and age with COVID and everything else we see. Younger people with their health being compromised. And, there's, I won't go into that, this again is ensuring that what you want to have happen will happen for you financially that your, your loved ones are going to be taken care of because, you can still have your policy supported and the premium paid, at least the basic, if not all of it all of the premium, depending on the type of writer that [00:12:00] you get with your policy, but it's there for a reason.

[00:12:03] John Perrings: I wanted to just mention quickly, from a, for the, before we get into actual disability insurance, which again is different than a disability waiver premium. One of the things when we talk about term insurance, so some of the, you've heard us talk about supplemental term insurance and specifically convertible term insurance.

[00:12:23] There are cases where, people want to increase their immediate death benefit, but maybe don't have the cash flow to support with all all whole life. So sometimes we'll add on a supplemental convertible term insurance policy to increase the immediate death benefit with the idea that as your income increases over time, we can convert that.

[00:12:45] Supplemental convertible term insurance policy into your next whole life policy. Another scenario might be if you're, you just can't really afford to buy whole life at all right now. Like you just don't have the cashflow to [00:13:00] support it, but you want to protect, have some protection for your family. Both really valid reasons to buy some term insurance.

[00:13:06] If you and again, this depends on the carrier, but. If you buy convertible term insurance and add in the disability waiver of premium on your convertible term insurance, you if that disability happens, you have bought a, basically a super powered term insurance policy where you can then convert that term insurance into whole life.

[00:13:29] And now instead of the insurance company paying the term premium, they'll now start paying the whole life premium on your behalf. Which is going to be like 10 times higher. So now all of a sudden, you have something that. Starts to look more a real disability insurance policy if the idea was, if you bought it for term, but what I'm saying is you, if you buy this lower premium term insurance that you can convert and you add the disability waiver, all of a sudden, if that one thing does happen with that disability, you can convert that [00:14:00] and that turns into a massive premium compared to what you were paying on the term insurance that the insurance company then pays for you.

[00:14:06] So it's a great. It's a great thing to add on to your overall plan. If you are one of the many people who just don't have the cash flow to get your full human economic value from just whole life insurance.

[00:14:21] John Montoya: Yeah, that's a great point. And that is an automatic conversion to a whole life where the insurance company is going to be picking up the tab. So we're talking about, IBC whole life policies, but great point, John, that you can get this writer added to a convertible term policy. And, we always stress the importance of convertible term.

[00:14:42] Here you add in this option and you've got the automatic conversion and. It's a great way to get that death benefit coverage and ensure that if something does happen that you basically have the whole plan for the rest of your life funded. That's pretty [00:15:00] remarkable.

[00:15:01] John Perrings: Yup. Exactly.

[00:15:03] John Montoya: Let's talk about a standalone disability income insurance policy, because for a lot of people they may think that this rider accomplishes providing income. That's definitely been a misconception that I've come across over the years is. The belief that if you add the disability waiver of premium, it's somehow going to produce income for you.

[00:15:26] And that, that simply is not the case. In order to have income replacement, you need a separate standalone disability income insurance policy. Let's cover how this is different, John.

[00:15:40] John Perrings: The, with the disability waiver of premium it could provide income. However, the income would come from the life insurance policy cash value. So that would either happen through partial surrenders or policy loans. So it's not a true income that [00:16:00] Montoya is talking about. A true income comes from a disability insurance policy.

[00:16:06] John Montoya: Yeah. Which means you're going to have to pay a separate premium. in order to have this separate income benefit. There are two types of disability insurance policies. Now there were those famous duck commercials. If you watch a lot of TV over the years you might be familiar with the Aflac commercials.

[00:16:28] That what their main product is short term disability, and that is if you can't work your primary occupation and the benefit. Can last up to two years. So anything where you're receiving a benefit for up to two years maximum, that's considered a short term disability. Anything that is two years or longer enters the realm of what's called long term disability income insurance.

[00:16:54] And that's where we're going to focus on here is the long term disability income insurance.

[00:16:59] [00:17:00] So some basics. To know when it comes to doing some research on long term disability income insurance is that if you buy a policy, meaning you buy an individual policy, you're not getting it through your workplace. Cause sometimes you may have an employer that offers a workplace benefit for income replacement.

[00:17:23] And it's really important to note that if you receive this benefit through work, that is going to be. Taxable income, should you have to file a claim in order to receive that benefit. So one of the benefits of buying this disability income product on your own is that you're going to pay the premium with after tax dollars, and you're going to then, if you go on claim, receive your benefits.

[00:17:55] Income tax free, and that's a really huge [00:18:00] distinction. Now one of the things that should be mentioned here is that because a standalone disability income insurance product is going to pay a tax free benefit, what will happen is that the companies, the life insurance companies that offer these products, they're going to offer a maximum of 60% as a benefit of whatever your gross pay is. So let's just have simple numbers here. If your income is a hundred thousand dollars gross, the max benefit you can receive is $60,000 tax free or $5,000 a month tax free. So when you're shopping for this type of policy, an easy way to think about it in your head is how much monthly benefit would you like to replace on a tax free basis? And then going from there, there's what's called an elimination period. It's also [00:19:00] called a waiting period. And basically, once you file a claim, the elimination period is the time that must pass. Before you start receiving a benefit. So the most common elimination periods are 90 and 180 days.

[00:19:17] It can go longer out to one year even. And the thing to think about there is you should have an emergency account, number one but depending on the size of your emergency account and your overall liquidity. This may be a way to help reduce the premium on your individual policy. So if you are highly liquid maybe you don't have to go with a three month elimination period.

[00:19:42] You can stretch it out to a year and that'll bring your overall cost of premium down. The rule of thumb is the longer the elimination period.

[00:19:51] So, keep that in mind. I'm going a step further there something called a benefit period [00:20:00] and with these policies benefits can be paid for as little as two years. Remember, this is a long term disability product, so at a minimum, there are going to be two years worth of benefits, but you can also choose to have a benefit period that will go out to age 65, 67, even out to age 70, really your retirement age.

[00:20:20] And it doesn't go longer than that because this is not a retirement plan. This is meant to replace your income. While you are actively working. So we've got a couple things already to keep in mind. How much monthly benefit would you like? How long would you like the elimination period to be? And how long would you like to receive benefits, your benefit period?

[00:20:45] So those are three of the main components, but we'll give you some common additional writers that you can add on to your DI policy. This first one I think is super important and I, [00:21:00] if you're going to shop for this type of policy, and my... Professional opinion, you got to make sure this is added on and it's the cost of living adjustment.

[00:21:10] The last thing you want to do is go on disability and receive the same static income year in, year out, because what's going to happen is you're going to lose purchasing power. So you want to make sure that you have that COLA or cost of living adjustment. And ideally most of the products are going to have somewhere close to a 3% cost of Living Adjustment, highly recommend that you add that on. Some additional riders that you can choose is the future income option. And that gives you the right to increase your monthly benefit. In the future without any further underwriting. So if let's say you're in your twenties or thirties and you anticipate that your income is going to increase you, you want to have this option because it's a way for you to[00:22:00] lock in a future benefit.

[00:22:02] Without having to go through the whole process of getting underwritten. And just so you know, on that note, getting underwritten for a DI policy. If you're familiar with, you already have your life insurance policies and you had an exam you're going to need an exam for a DI policy.

[00:22:19] But the one main sticking point that, that really distinguishes underwriting from a life insurance policy compared to a DI policy is that you're going to have to. Verify all your income sources. They are not going to just take your word for it that you make a certain amount of money each year.

[00:22:40] They want to see it. Tax returns they're going to come through it and they're going to make sure that All their risks on their side, and remember, you're transferring the risk over to them. They're going to do their job, and if you're thinking that you can just state an application or state an income on an application and call it a day, [00:23:00] the DI underwriting is probably More rigorous than a life insurance application and underwriting.

[00:23:08] So just be prepared for that and make sure that you are well organized going into the application process. An optional DI Rider that I'll mention here is the partial disability. What we've been focusing in on here with the standalone DI policy is that that you, if you have a claim, you're completely out of work.

[00:23:28] That, that doesn't always happen. You could maybe your doctor says that you can work part time and in. In that event, if you have one of these policies, but you don't have a partial disability rider there's not going to be any benefit because you can work part time. One of the options you may want to consider is including a partial disability.

[00:23:51] Rider to your plan. And it's really easy to as an advisor to just check a box and you can see what, what that would do to the [00:24:00] premium and if it's within your budget, again it's something to consider. Decision time after covering these details, what are you thinking?

[00:24:09] Is the disability waiver of Rider is that type of Rider, going to cover you? Is it going to replace your income? Or should you have a standalone DI policy? And hopefully you're, we're making a case here that. At a bare minimum, you should get a quote. You should consider this because we actually say yes to both.

[00:24:31] And here's why. Number one the DI waiver rider guarantees your policy will continue uninterrupted, even if you can't work your primary job. But like I always ask my potential clients, look, if if you couldn't work. Would your employer continue to fund your 401k on your behalf? And the answer everyone says is no.

[00:24:53] Okay. You want this rider on your IBC whole life policy. But going a step further, is it going to replace your [00:25:00] income? No, it definitely is not. So hopefully this is starting to sound like a no brainer that you should be considering this.

[00:25:07] John Perrings: Yeah the disability waiver of premium rider like we were saying earlier, it really only covers the premium of the policy. So it's not going to replace the earning power, so to speak which was really. Again, your best asset is your ability to earn an income. So if if you have a one in three chance of, missing a minimum of one of two years worth of work due to an injury or illness like you have to look at how are you going to protect yourself and your family against that. And, just going back to the kind of comparisons of disability versus life insurance. A lot of people, when they learn about infinite banking, they some of them will come in and say, you know what I really don't care about the death benefit. I don't have a family.

[00:25:56] I don't have kids. I'm not married. So you'll talk to some of those people and [00:26:00] then you'll even talk to some people that do have fa a family, wife, and kids, or husband and kids, and And they still don't care about the death benefit, which I always find interesting, but The thing about disability is, so like maybe the death benefit is not important to you because you just, you're gone.

[00:26:17] So you're like, I don't even have to worry about this problem. I'm not even here to worry about it. With a disability, guess what? You do have to worry about it. So even if you're single, even if you don't care about, protecting your future income for your family Do you care about being able to, pay the bills and eat?

[00:26:33] Those are some of the things you're protecting yourself against with disability. And this one is about you as well as your family. It's almost harder than dying because you're still there. You still have to eat, you still have expenses. So in some ways, disability insurance can be considered even more important than a life insurance death benefit.

[00:26:55] Of course I think they're equally important because we're just talking about here and now [00:27:00] versus, what happens in the future. So we need both of those periods of time covered, but in a lot of ways, it could be considered even more important than a life insurance death benefit.

[00:27:10] John Montoya: Yeah, especially when you consider that you have a higher likelihood of having a disability claim than you are of dying prematurely. So this is definitely an adult conversation that we’re having and if you’re not ready to put on your big boy pants, you should start thinking about it. Because nobody wants to be poor. No one wants to be destitute. Nobody really wants to rely on our government for sustenance. So you've got to take ownership and agency for your life and put this on your priority list.

[00:27:51] Cause as I mentioned, everyone's got a bucket, including you, and you got to figure out where the holes are. And [00:28:00] just having the disability waiver premium on your whole life policy, isn't going to cut it. You gotta look at all the holes in your bucket. So we're going to finish up here on one more reason why you should consider having a s tandalone disability insurance policy. And this really relates to having your IBC policies, because think about it this way. Let's say you have one or more IBC whole life policies, and now you can't work. Okay, you've got your DI or I'm sorry your disability waiver of premium on the whole life policy.

[00:28:42] So you're covered there. Your basic premium at a minimum is being met, but what about the banking process that hopefully you are practicing and have become familiar with. You take out loans. You want to be an honest banker, right? You're, you want to pay those [00:29:00] loans back, rinse and repeat.

[00:29:02] to finance your life. How can you do that if you have no income replacement? How are you still going to take loans and then repay those loans? If your source of income is gone. So really having this separate disability insurance policy to make sure that you always have an income coming in is also going to allow you to be an honest banker for the rest of your life.

[00:29:32] And it's something that, intuitively, I hope that makes sense because you got to factor in all the different scenarios here and no source of income. With a disability event, you're going to become a dishonest banker before too long.

[00:29:48] John Perrings: Yeah, there's no way to stop it because you're now in a position where there's no inflows for you to cover the outflows. And so you'll end up having to be a [00:30:00] dishonest banker. A hundred percent.

[00:30:02] John Montoya: And I have one more note I'll share from my spouse. And she wanted me to share this in regards to pursuing a standalone DI insurance policy from her experience. And here's what she shared with me. Should you encounter an injury or illness, the cost of healthcare and in particular medication can be incredibly expensive and having a separate D.I. policy can help you offset the cost. I mentioned it before we hit record the healthcare costs, the inflation on healthcare costs far surpasses the regular inflation, CPI that we're all familiar with. And if you don't have that income coming in and you're injured or sick and you got to pay for all this medication.

[00:30:48] It isn't cheap. I see all the medications that my wife has to take and the shots as well. I told you previously, John, the, one of the bottles that she has to [00:31:00] pay for, it's a 500 bottle that she goes through every six days. And that's just one of the, one of the treatments that she has ongoing.

[00:31:10] And there perhaps is nothing more that will bankrupt you faster than medical costs and having no way to pay for it. It's it can be a financial nightmare and one that you can easily avoid. By taking the steps to prevent it. So that's really what we're discussing here.

[00:31:33] John Perrings: And just to tack on to your your thoughts about the, normal inflation rate, the consumer price index that everyone normally talks about when we talk about inflation, it doesn't actually take into account all the basic necessities that we talk about. It doesn't actually account for food and energy.

[00:31:52] If we talk about healthcare, energy, food, and possibly education, these are all inflating at much, much higher rates than [00:32:00] what the CPI tells us. And those are all going to be the things that, your basic requirements to get by.

[00:32:06] So it's super important to be able to account for that. If anything happens to your ability to earn an income. All right great talk, John. Thank you. I think this is a good stopping point if you have any questions or you want to get in touch with us and talk about how some of these ideas could apply to your life specifically, you can head over to TheFifthEdition.Com and you can book a free, no obligation consultation with us right there for 30 minutes.

[00:32:34] Or if you're one of those people that likes to do all the learning they can do by doing all their research online. We have a course just for you. You can get that at the top of our website at TheFifthEdition.Com. John, great talk. Super important. I'm glad we covered it today.

[00:32:49] John Montoya: Absolutely. Thank you everyone. Take care.

[00:32:52]