The Hidden Value of Social Security Disability Insurance: Why It’s Important During Benefits Enrollment
Carol Harnett: Hello and welcome to the Financial Health and Income Network radio program. My name is Carol Harnett, and I am the president of the Council for Disability Awareness, a non-profit organization dedicated to helping working Americans understand their employee benefits and insurance options, as well as ways to make certain they still have an income stream if they’re temporarily out of work due to an injury or illness.
Today on our podcast, I’m pleased to be joined by Jennifer Fitzgerald and Mary Beth Storjohann. Jennifer is the CEO and co-founder of Policygenius, which is a company with a simple mission: to get people the insurance coverage they need and make them feel good about it, which I just love.
And [our other guest,] Mary Beth Storjohann, is the founder of Workable Wealth, which is a business specializing in financial planning for Gen Y or the Millennials, depending on what you like to call them.
She works as a writer, speaker, and a financial coach with individuals and couples in their 20s and 30s across the country to help them make educated decisions with their money. Mary Beth is also a paid spokesperson for the Council for Disability Awareness. We’re really pleased to be working with her and particularly in helping us reach out to the Gen Y generation.
So all of our companies really are based on the concept of providing unbiased advice to consumers about how to navigate the insurance and the benefits process. All three of us interestingly enough– because our topic today is specifically on freelancers and entrepreneurs and how they might want to start thinking about their benefits– fall into one or both of those categories, so we’ll be able to provide some personal perspective.
You can hear the full podcast or if you’d rather read than listen, we captured the transcript from the conversation below.
Welcome to the show Jennifer and Mary Beth.
Jennifer Fitzgerald: [00:02:23] Thanks so much for having us.
Mary Beth Storjohann: [00:02:25] Thank you Carol.
Carol Harnett: [00:02:27] You’re very welcome. Let’s get started as I have a question that’s for both of you, but I’m going to put it to Mary Beth first. When you think about– particularly as being somebody who’s in this space, Mary Beth, how should entrepreneurs and freelancers think about protecting their health, their income, and their savings?
Mary Beth Storjohann: [00:02:51] I think the first thing as a freelancer/ entrepreneur, you have to understand that there is no big brother and no employer looking out for you; you alone are responsible for taking care of and educating yourself in those areas in terms of risk protection – that’s one of the biggest things I see.
It’s actually really an overlooked topic. People think, “oh, no.” When I mention it to a lot of my clients, it’s like a deer in headlights, “I hadn’t thought about that.” So I think the biggest thing is recognizing that you are responsible for taking action in these areas.
And then from there you really need to step back and take a look at your lifestyle and your family. What would happen to your family’s lifestyle, to your income, in the case of a sickness or death or injury? Consider what your current goals are for yourself or your current situation and for the future.
What if something happened to you? Where would those goals end up? If you want to send your kid to college, would you still be able to do that? If you wanted to buy that new home? Those are all things to think about when it comes to protecting your health and income and savings. It is basically just figuring out if it is worth the risk of not having the protection or is this something that you should take action to buy some products that are out there to protect yourself.
Carol Harnett: [00:04:02] Great. Now, Jennifer, I’m going to follow-up the same question to you. You’re in a unique space in that you actually have employees, and we’ve never talked about this, but are you the type of employer who provides your employees with benefits or do you encourage them to go out on their own to do this?
Jennifer Fitzgerald: [00:04:26] It’s a great question, Carol. Given the mission of our company, we believe in providing benefits to our employees, but that might not be the case for other entrepreneurs, particularly small business owners when you have a smaller workforce. My advice to other small business owners and entrepreneurs is to consider a couple of things:
- One is your budget and what you can sustainably afford. The last thing you want to do is offer, or entice employees with the rich benefit offering that you have to pull back later. It’s better to start modestly and then build up over time as your budget can afford it.
- The second thing is consider the needs of your employees. If you have younger, single, healthy employees, their needs are going to be different than employees who have families, mortgages, things like that.
So, consider your employee mix, and consider your budget. Consider that employees do look to their employer to provide these types of benefits, and manage those expectations accordingly.
Carol Harnett: [00:05:25] Thank you. You know I am going to actually go off the cuff for a minute because you both inspired me a little bit.
Now, all three of us have made decisions to be in our own businesses. And I know for myself– and I think part of it is frankly my background; although originally a physiologist, I have worked in and around insurance and consulting for a good number of years– so when I went into my own business, I actually was really conscious about making sure that I had some particular types of coverage. I absolutely wanted to have health insurance. Obviously, I worked in healthcare so I know that’s important, and obviously,s now it’s the law because I started five years ago.
But then I did– in my case, frankly – I spent a lot of time in the disability insurance industry– I wanted to make sure I continued to protect my income. As you both went out on your own, are there some conscious decisions you made to make sure that you had some really basic benefits that were important to you?
Why don’t we have Mary Beth start because Jennifer just spoke?
Mary Beth Storjohann: [00:06:30] As an entrepreneur and a financial planner, I think I’m the most risk averse person. So I always err on the side of conservatism, and therefore I was very conservative myself. When I made the transition from employee to founding Workable Wealth, I had already thought out some private forms of disability insurance and some life insurance for myself as well.
When I made that transition, what I thought about was my husband and what my income will look like going forward, and then again ensure that we are protected in all of those areas in terms of healthcare disability and life insurance because we’re a unique situation. We don’t have kids yet. But those are things that might be on the horizon. So making sure that we’re planning for today and also for the future because that’s kind of what you do. I work with Gen Y Millennials and in this age group you have to kind of balance. So those were definitely boxes I checked off.
Carol Harnett: [00:07:21] Interesting. How about you, Jennifer?
Jennifer Fitzgerald: [00:07:23] Like Mary Beth, I was also conscious of that when I was starting out as an entrepreneur particularly because I was leaving a corporate job at an employer that provided a very generous benefits package; great health insurance, disability, and life insurance.
I wanted to make sure I could afford to be on my own and what the options were to continue those benefits. It so happens that it was easy to convert disability and life insurance to an individual policy that I could afford for myself. The health insurance, comparing what I would be paying with COBRA versus getting my own plan on the marketplace, I decided to get my own plan because that was a more cost-effective option for me, but it’s definitely something that I considered.
And it’s advice for several other friends. The startup scene is hot. A lot of people want to be entrepreneurs and start their own company. The biggest piece of advice I give them is, make sure that, if there are any benefits that you have at work and that you want, to continue to do that because it can be difficult to get disability insurance in particular if you’re a brand new entrepreneur or a freelancer. The options are more limited, so consider those carefully before you leave a job where you have benefits coverage.
Carol Harnett: [00:08:41] Yeah, that’s actually a really good point. I already had two disability policies in addition to the one. I also was in a very rich corporate benefits package before I left and struck out on my own. But I had two policies: an individual policy that was an association policy, it’s a group technically, and then I also had a voluntary policy. And to your point when you want to supplement that with an individual policy, you have to show proof of income for a period of time so it can become difficult to do that. It’s very important to think through that.
Mary Beth Storjohann: [00:09:20] I was just going to say the same thing. My policy’s actually an association policy as well, so it is a group policy. I was able to get that through one of the organizations I participate in as an independent financial planner.
For freelancers and entrepreneurs out there, I would encourage you to look at that route too. If an individual policy is not an option, look to the group policies for any organizations you’re a part of because that can be a more affordable option.
Carol Harnett: [00:09:44] That’s a great point. And I will want to get back to you at some point Mary Beth because I remember when I went out on my own, I was maxing out my 401k. And that is the one thing I will admit I did let go. I knew I was doing better when I got back on track with the future, but I wasn’t thinking about retirement at the time I was starting a business.
So I’m going to ask Jennifer a question specific to the most important employee benefit — whether we’re working for somebody or working for ourselves– I think we’d all agree is health insurance. In some ways we can also argue it it does protect your income because we do know the connection with medical bankruptcy.
What option should entrepreneurs and freelancers consider, Jennifer, starting with health insurance, but then looking at the broader pieces around benefits?
Jennifer Fitzgerald: [00:10:36] Sure, for health insurance, there are a few options now, thankfully more than there were a few years ago.
The first is if you’re leaving a job with coverage, you know COBRA’s there, so talk to your HR person about what it would cost to extend your health insurance coverage with your group on COBRA. That’s particularly important if you have a doctor that accepts your current plan that you’d like to keep seeing.
The second place to go are the Affordable Care Act exchanges or your state health insurance marketplace. Loss of a job or or leaving your job is an event that allows you to enroll in health insurance outside of open enrollment. And particularly for freelancers or entrepreneurs starting out, your income most likely is going to decline from your full-time job, meaning you might be eligible for a subsidy to help you pay for the monthly premium. And if that’s the case definitely go to the state marketplace, which is where you have to shop to get that subsidy.
A separate option for entrepreneurs is the all-in-one options services that provide HR, payroll, benefits. They often will have access to to health insurance plans that aren’t available on the exchange to small businesses. Definitely worth a look there, too, if you have employees that you’re needing to cover.
Carol Harnett: [00:11:55] You know, that’s a really good point, and it’s one I often forget to tell people, that there are those services out there and they seem to be picking up steam given the number of small businesses that are being started. So a lot of us would argue it’s important at some point to have some HR assistance and I think that’s good for people to consider.
Another question for both of you, but we’ll start with Mary Beth this time: how should people think about protecting their income through insurance?
One of the places we default is disability insurance. But when we think about it, particularly when you’re new in your own business, it can become an expensive insurance sometimes, particularly on the individual side, depending on your age and the provisions that you want.
So we’re trying to expand some of the conversations to things like critical illness and accident insurance as a cheaper alternative to disability insurance and as a way to maybe make up the deductible for a high deductible health plan.
So how should people think about protecting their income Mary Beth?
Mary Beth Storjohann: [00:12:56] First, I think they actually have to start thinking about it. A lot of the clients I work with in terms of education perspective think “it won’t happen to me,” but in reality it could and it might. According to the Social Security Administration– this is a stat that I quote to a lot of my clients– is that 1 in 4 of today’s 20 year olds will end up disabled before retirement age, experiencing some sort of a disability.
The average disability actually lasts up to like almost three years, and that’s definitely long enough to do some serious damage to your finances and also long enough to fully wipe out your emergency fund because in my personal finance realm we recommend typically a 3 to 6 month cushion for your lifestyle expenses in your emergency funds. If you’re disabled for three years and have no income that’s going to definitely do some damage.
I bring it back there right away to kind of make that relationship stickier and then the thing you have to think about is first, what will happen if you’re out of work for an extended period of time, where will your income come from? You know, what if you can’t go to work and how will you pay your bills? Do you have credit cards and student loans and mortgages that still need to be paid.
You have to really step back and a lot of people just don’t even consider those questions. They think they have the emergency fund in place, and they don’t consider the longevity of what a disability will look like.
And then, understanding, what disability insurance does. So it’s when it will kick in, how much of your income will it replace, and then obviously, I think, disability insurance will cover up to 66 and 2/3 [percent] of your income, so understanding that’s definitely a better replacement ratio than zero.
And so the thing you have to consider is for example, their short-term versus long-term disability and there’s elimination periods there, so when it comes to cost effectiveness, as I mentioned before, are there any trade association policies that you can take a part in. Is it perhaps the way that you can self-insure against the short-term disability, you know for that maybe 90 day period and then purchase a long-term disability policy and save yourself some money there.
So I think there’s ways to get creative with it, but it’s understanding, It’s really going back to understanding your personal financial situation and what it what it looks like now, what it could look like if you didn’t have your income any longer, and being able to fill in those gaps.
Carol Harnett: [00:15:09] Great, and I’m sure Jennifer you have some places to fill in the gaps because for people who haven’t had a chance to look at policies {audio garbled}. I think your algorithms are really interesting. So I’ll let you explain them, but, you know, how does somebody who’s trying to sort through this idea of protecting their income, how do they start to make some choices? Is there an income threshold they should be thinking about, and what are their alternatives if they don’t have a lot of excess cash?
Jennifer Fitzgerald: [00:15:37] Sure, that’s it’s a great question and one that we see a lot, particularly for people who are self-employed. I completely agree with Mary Beth’s analysis in terms of you know, trying to self-insure for the short-term and looking at the cost-effective options for long term disability insurance beyond that. Association policies are a great place to start.
I’d add on two other pieces of advice. One is if you don’t belong to an association and you can get long term disability insurance, work with a broker who can help you tweak and design a policy that’ll get it, will likely get it down to a monthly cost that you can afford, particularly if you’re younger, you can typically get a policy that you can’t afford it might require some belt-tightening in some other instances, but I think all of us would agree that it’s really really important in terms of protecting yourself, not just your income but your savings, your assets, and what you put away from retirement.
If you live in a state where these policies are available, critical illness insurance and accident Insurance can be cost-effective alternatives if you can’t find disability insurance. And what those policies do is they pay a cash benefit if you suffer an accidental injury, or if you get diagnosed with a critical illness. That cash you can use either to meet a deductible on your health plan or to cover living expenses because if you get diagnosed with cancer or you suffer a heart attack, odds are you’re going to be out of work for some time.
So those policies can help cover the “beyond the health” cost of those conditions. So if you live in a state where those policies are available, we highly recommend them as a short-term and often cost effective alternative to disability insurance if you can’t get it.
Carol Harnett: [00:17:29] Yeah, I don’t…. I had the great privilege of meeting. Dr. Marius Barnard who is Christiaan Barnard’s brother. And he, the two of them, were actually involved in the surgery that did the first human heart transplant in South Africa many years ago.
And most people don’t know that Dr. Marius Barnard actually created the concept of critical illness insurance. Because he used to have patients that always died. And once they developed heart transplants, he had patients who survived but were wiped out financially and so that was his reason for creating critical Illness, but I think it’s interesting at the end of his own life– and he passed away last week– he developed a very unique cancer. And he used– he had critical illness insurance– he used the lump sum payment to pay for the experimental treatment that his carrier wouldn’t. So it was an interesting application of critical illness insurance. So sometimes we don’t always realize there’s a way you can unanticipatedly benefit from having that kind of insurance.
So Jennifer I’m going to actually take a question back to you again and say are there are other products beyond health insurance and. disability insurance and even the cheaper alternatives of critical illness and accident when available. Are there other products that entrepreneurs and freelancers should consider, could consider perhaps maybe as their income flow gets a little bit better?
Jennifer Fitzgerald: [00:18:59] Definitely. So, you know the first thing that we look at beyond those needs that you mentioned is do you have a need for life insurance. And not everybody does, but if you have a dependent spouse or children or even if you have a business partner that you are part of so a lot of a lot of entrepreneurs would get life and disability insurance not only to protect themselves, but to protect the business and their business partner is going concerns.
And beyond that, you know, it’s often overlooked, but protecting yourself against business risks. So, your laptop that you use as a freelancer, you know, sometimes there’s liability that you could be on the hook for, as an entrepreneur, as a freelancer, but we always advise folks don’t overlook the business risks involved in your day-to-day as an entrepreneur or a freelancer. So, you know, there are some very affordable policies out there for property protection, liability protection, and to definitely not forget about that as as part of your overall risk management tool box.
Carol Harnett: [00:20:00] You know, I think you bring up an interesting point. My sister is also an entrepreneur and she didn’t go the VC route, but she did have private individual investors and their requirement was for her to have key man insurance, which she was able to address via a disability policy that protected the company.
So I think sometimes entrepreneurs don’t forget, you know, they don’t, they just are looking at their immediate situation and sometimes they aren’t looking at growth and what you might need to attract additional money or in cash sometimes when you want to advance the business. So that’s a really good point.
Mary Beth, is there other things that that you find either for yourself or people you counsel who are freelancer entrepreneurs that they should consider?
Mary Beth Storjohann: [00:20:44] You know, I think Jennifer checked all the boxes there. Errors and Omissions insurance, liability insurance and life insurance if you need it.
I think for me – working with a lot of entrepreneurs and freelancers, life insurance is a big one. I work with a lot of younger couples and people who are starting their own businesses. And so it’s more than just telling them hey, you need to get life insurance, and understanding the questions to ask themselves around that. It’s important to understand what the values and goals are for your family.
One of the big things people will get is a couple hundred thousand dollar policy and they think they’re good to go. Ultimately, what it comes down to is whether your family is fully dependent on your income or another person’s income. Having that conversation and if you have small children at home, what happens if something happens to one of the spouses and you pass away and there’s one of you left? Would your significant other want to go back to work full time, or is there going to be a reduction in income there as well? It goes back to if you have a mortgage and if you want that debt wiped out so there’s no stress and you know your partner has the home fully paid off and can stay there without concern.
There’s a lot of questions you have to ask in terms of understanding how much coverage you actually need. That’s the one I really focus on with clients is disability and life insurance. There’s a lot of questions there because if something did happen, it will obviously come to a lot of changes in your life, and understanding what you would want to happen if unfortunately something did happen to you.
Carol Harnett: [00:22:15] Thank you. You both inspired a thought I actually didn’t consider asking you until now, which is that a lot of us, when we think about entrepreneurs and freelancing, we think about people early in their careers or maybe people who’ve worked for, you know, about 10 years or so and we’re seeing them make a break.
But in 2008, we saw a different trend with entrepreneurs, and that was — in some industries, massive– layoffs that we saw people in their late forties, fifties, and even early sixties becoming entrepreneurs and freelancers. Would you give different advice to someone who– let’s pick an age– let’s say is 52 years old? Would you give them different advice that you would give to somebody who’s earlier in their career? Let’s say late twenties or early thirties.
And it can be either one of you by the way.
Mary Beth Storjohann: [00:23:10] I’ll go first on that one. I know for me my financial planner answer is: It really depends on their situation. So if they’re in their fifties and they’re still going to be working for the next twenty years because they’re playing catch-up with retirement, that’s a different look than if they’re in their fifties and they have a short timeframe and they have the retirement cushion and their self insured by then.
As you get older it definitely gets into more of a detailed specific answer. You know, a twenty- and thirty-year-old, you can typically throw out a general number that can give a bigger protection for the long term, but as you get older, I think we need more details, more specifics.
So I was going to give you the generic “it depends,” but I truly believe it. You know, I think as you get older too and your net worth grows, you get more into the types of policies that might make more sense in terms of, life insurance, term versus whole life. It really depends on your net worth and where you’re at in terms of retirement.
Carol Harnett: [00:24:05] Great.
Jennifer Fitzgerald: [00:24:06] I would agree with Mary Beth that it does get more complicated if you were in your fifties and you’re either working to catch up with retirement assets or you’re stringing together some freelance or part-time jobs because of a layoff. The complexity is that insurance is definitely more expensive whether it’s health insurance or disability insurance– and you might have other needs such as long-term care start to surface.
So it’s definitely a more complicated situation and the advice is going to be different. In some cases, disability insurance might not be available if there’s been some adverse health conditions in which case self-insurance is going to be possibly your only option. The landscape definitely changes and it’s one of the reasons why for young people in their twenties and thirties, that we we encourage them to get the policies that you need early, lock them in with a non-cancelable policy if you can, because you never know, what’s going to happen twenty or thirty years down the road.
Mary Beth Storjohann: [00:25:07] Exactly. That’s exactly what I tell my clients.
Carol Harnett: [00:25:10] You know and it makes me want to close with a question, that I tipped my hand at earlier in the show, and that is when I was going in my own business, I had Mac. I was one of those people when I first entered my career my Dad’s and Mom’s counsel to me was, “You know, we don’t care, how much money you’re making, we don’t need to know, but even if you’re not making a lot at least put something in savings for retirement – even though you’re 24 years old, 25 years old.” Often when people start their own businesses, retirement isn’t something people think about. I knew I was finally doing better in my business when I was confident to start developing vehicles to enhance my retirement future.
What is your advice as an entrepreneur for when you should start paying attention to it particularly if you start when you’re younger – because actually, it can be smaller amounts of money and a little bit easier.
Mary Beth Storjohann: [00:26:13] The earlier you start the better, and that’s always my aim with clients, starting small and putting something away. I work with twenty and thirty year-olds, you know, different, varying incomes, but most of the time especially with the variable income, I think it’s really hard.
That’s the biggest thing for an entrepreneur, the biggest thing to tackle, especially when you’re starting off, is the huge swings that you’re experiencing and actually trying to manage those. There’s lot of cash flow work that comes into helping my clients understand how to actually set up a budget and not minding setting up the emergency fund. First we need to set up your lifestyle cushion fund to pull from in those lean months, so you’re not constantly playing catch-up and feeling like you’re on that hamster wheel.
One of the first things is understanding how to manage your cash flow. Once you have that under control, you should be able to get yourself on some sort of ongoing budget, where you’re treating your retirement savings like you’re treating it as a bill. It’s something that you have to pay each month. Basically you’re making it manageable. The earlier you start the better, I always say whether it’s $25 or it’s $100 my goal is at least to be putting $100 away into an account and taking advantage of those things. Obviously, if you have a kind of debt, you want to tackle those things first. You want to make sure you’re building up the cushion, emergency cushion, and tackling the debt. And then retirement comes after those things, which is really hard as an entrepreneur.
That’s one of the big things too, I will say, is a lot of entrepreneurs who are starting their own businesses take on a ton of debt. And it’s kind of like that. There’s some sort of mindset that’s out there right now with personal development. You’re throwing money at the business; it’s okay because you might fail, but eventually it’ll catch back up and you’ll be rich or whatever that is. Breaking that debt mindset is also a big thing.
From there take advantage of the retirement plans that are out there for you. For solo entrepreneurs, there’s a solo 401K, there’s a SEP IRA, and there’s a solo IRA. Those are the ones that are going to allow you to shelter some of your income and basically save on taxes.
For younger clients who are in their twenties and thirties, one of the best things to do is still take advantage of that Roth IRA if you can. Once you get your income above above that, then you want to take advantage of the SEP IRA or solo 401K. But I say doing Roth IRA when you’re young, and again, just starting with those automatic contributions and treating it like it’s part of your bill payment, is going to be a huge thing to do.
Carol Harnett: [00:28:34] That’s great advice. Do you have anything to add to that, Jennifer?
Jennifer Fitzgerald: [00:28:38] No. Mary Beth is the expert here and she’s absolutely right that as an entrepreneur who is struggling with a variable income and doesn’t know what six months will look like, let alone what retirement thirty, forty years, down the road looks like, it’s definitely something that’s easy to put off. The way that I found that I can do it is also just treating it like a bill and then it’s something that you don’t touch or or think about.
Carol Harnett: [00:29:05] Exactly, and that’s exactly how I wound up handling it, but to both of your points, I didn’t start thinking about it until there was less variability in my income flow and kind of more money saved away.
The one thing that all of us have talked about is– but it’s because the nature of the variability of the business– that sometimes we take too much on at points because we’re afraid for the periods when we’re going to be lower than we were hoping we would be in. And that’s sometimes both the thrill and the challenge of being an entrepreneur and a freelancer.
I want to say thank you to both of you. We did this exactly in the time frame we planned. In 30 minutes, for our audience, for people who either are entrepreneurs or freelancers or considering becoming one, this is terrific advice, from people who are experts in the area and are also entrepreneurs and freelancers, to take in mind as you move forward.
Obviously health insurance is a requirement for most of us by law right now, so you want to make sure you do that. But you also do want to take a look at some other things, particularly protecting your income flow, because we are all sensitive to what a small change in your health can do to your income flow. We want people to consider that and cost compare life insurance, and as you’re doing better, to start thinking about putting away at least some money toward retirement and taking advantage of some of the vehicles that are out there.
Thank you everyone. Thank you Jennifer and Mary Beth for your participation. Please check out their companies. They’re wonderful companies, Policygenius and Workable Wealth, and until next time we’ll talk about finance and health.
Thank you everybody.
Mary Beth Storjohann: [00:31:03] Thanks.
Jennifer Fitzgerald: [00:31:04] Thank you
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