I picked up a little gem the other day on the Bogleheads forum that I thought would be useful here. Brudude, an insurance agent who specializes in Guardian disability insurance, explained exactly what the disability retirement protection rider does. I quote:
The retirement protection sets up a trust account in your name in the event of a total disability in which retirement contributions are put into the account to be invested at your discretion. At age 65, the account is turned over to you to cash out or continue investing with. The minimum elimination period for this rider is 180 days and it has a modified own-occ definition of disability (cannot be working in another job) even if your base policy has a true own-occ definition. Residents can get $1,000/mo in retirement protection even if they have not started contributing to retirement accounts yet. The max benefits for retirement protection is around $4k/mo. The idea is that if you are totally disabled and can't work in any job, you are likely not going to be making any retirement contributions, so the rider fills that hole.
A couple of things to realize. First is that there is a trust account. The agent didn't think there were any significant expenses associated with that account, but I find that hard to believe. No one is going to run a trust for free. Now it is possible the insurance company will set it up and pay for it themselves, but it doesn't sound like that is mentioned anywhere. He said this in response to my question about it:
I am not sure what the expenses are for the trust account, would need to get that info from Guardian. There are no expenses or fees listed in any brochure or policy, so they may be waived because you have to be disabled to get the benefit in the first place. As far as I know you can invest in anything you want without restriction.
It is also not entirely clear how this trust account is taxed. It sounds to me like it is a fully taxed account. So now I'm going from using a 401K and backdoor Roth IRAs (in which my investments grow tax-free) to a taxable trust account with unknown expenses and unknown investments. Forgive me if I sound cynical, but I can just imagine this trust account being very similar to all the variable annuities I see out there with crappy, expensive mutual fund-like options and ridiculous account fees. I'd need to see a lot more details before I paid for this rider.
The second important thing to realize is that the definition of disability is different for your main disability payment and this retirement account contribution benefit. So if you go back to work as an urgent care doc after being disabled from being a hand surgeon, then you still get the disability benefit, but you miss out on $4K a month in retirement contributions. Seems kind of dumb to pay extra for that true specialty-specific own-occupation benefit when it doesn't apply to everything. Who wants to go back to work when your first $6K a month (remember taxes) doesn't count? Why the company would want to disincentivize you from going back to work is beyond me.
I think a far better way to address the issue of needing to save for retirement even if disabled is to just buy a bigger policy. If you've already got a maximum policy and feel you couldn't live on that and save for retirement, then perhaps you ought to take a closer look at your lifestyle.
But if you really would like this protection (and I recommend you get the full details on that investment account prior to purchase), keep in mind you can buy any insurance policy from any company and buy this rider as a stand-alone policy from Guardian. Other companies may also offer similar riders/policies now or in the future so always buy your disability insurance from an independent agent.
I learned from reading this article that the definition of disability is different for your main disability payment and this retirement account contribution benefit.
I will preface this by stating that I am not a fan of disability insurance to protect retirement contributions for many of the reasons outlined in the post. While today the definition of total disability for this type of coverage is different than what is available under personal policies, this was not true in the past for Guardian’s policy (which previously offered the same definition as their other policies), which included a true “Own-Occupaton” definition of total disability.
Since, in today’s marketplace, physicians have the ability to purchase up to $30,000 a month of traditional “Own-Occupation” disability insurance (by combining at least two carriers), unless a physician has “maxed out”, there is little need for this type of coverage.
In addition, should a physician desire, they can purchase up to 65% of their earned income (minus other coverage) from Lloyd’s of London. This is due to the replacement ratio relative to earned income being reduced to roughly 30-40% using traditional carriers.
Several carriers offer this type of coverage including Guardian, MetLife, Principal, and MassMutual. Most of these companies establish the trust at the time of claim. MetLife, being the exception, with the trust is established at the time of application.
Guardian will allow insureds under age 50 to purchase up to $4,170 per month. Those insureds ages 50 and over can purchase up to $4,630 per month. One can also purchase up to 15% of their earned income, up to these limits, without actual proof of the existence of a qualified plan.
Disability insurance benefits for policies paid with after-tax dollars are received income tax-free. Disability insurance benefits for policies paid with pre-tax dollars or are employer paid would be taxable. The trust reports taxable earnings each year by issuing a 1099 to the insured. However, upon written request, the trust will reimburse the insured for any taxes paid and can it also reimburse the insured for taxes due on employer paid benefits. If an annuity is selected, there is generally no taxation on the earnings. At distribution, there is no income tax on funds distributed by the trust for which taxes have been paid.
Under Guardian’s plan, the trustee is Berkshire Bank. For trust balances under $100,000, clients can select from one of over 200 mutual funds from Federated Investors (www.federatedinvestors.com) from their equity or fixed income categories. When the balance of the trust reaches $100,000, Berkshire Bank (the trustee) assigns a senior investment officer to personally manage the trust according to the claimant investment objectives and provides full access to the capital markets.
As far as fees go, in the Declaration of Trust document, it states that the Trustee may charge reasonable and customary administrative fees for maintaining the trust and investment management fees may be charged by investment management companies with which the trust assets are invested.
your bottom line conclusions are right on meaning either increase your own occ disability coverage or plan to reduce expenses after you become disabled. when one breaks down the cost of this coverage as you have done, it isnt as valuable as it first appears. I havent done the math but i believe it is higher than the typical 3% of amount covered.
Larry-
You’ve confirmed my fears. The trust is fully taxable (why in the world would I have to request the company reimburse my taxes?) It requires you to use crappy funds (who’s ever heard of Federated Investors? They use loaded mutual funds (5.5%), which I assume you actually pay, and high ERs (1.2% on the one I looked at.) Reasonable and customary fees, in my experience, are customary, but not reasonable.
Yuck. Maxing out regular disability coverage first is definitely the way to go.