Personal Finance Flowchart by Frum Finance

[ExGingi]

Overall observation I just had.

If the only feedback we have after almost 800 people viewed this thread is a guy who sells insurance trying to convince me to push an additional insurance product, I'd say the chart must be holding in really good place! Thank you all.

That is a disingenuous portrayal of what I was saying!

What I was saying is that putting the purchase of LTD in step 25 rather than step 0 is incongruent with YOUR explanation of step 0! Notice I am not saying to purchase anything that you did already say one should purchase. I am just questioning the priority.

And as to what @David61 wrote, there are several notable quotes (though if I were him I'd be very careful in bringing ChatGPT as a source)

The term disability can include many different things.

It's not clear if your statistic above, refers to a permanent disability that is as financially catastrophic to the insured's family as death i.e. that prevents the person from earning any income through retirement OR includes shorter term disability too, that is less catastrophic?

Here is an informative article that challenges the statistics on disability claims: https://www.nytimes.com/2010/02/06/your-money/life-and-disability-insurance/06money.html
And an associated graphic: https://archive.nytimes.com/www.nytimes.com/imagepages/2010/02/06/business/06money_g.html?action=click&module=RelatedCoverage&pgtype=Article&region=Footer

On a practical level, premiums of all insurance products are designed to be in the favor of the insurer. In addition most people can't afford to insure against everything (dollars available for spending on insurance is limited), and you can't insure against every possible loss, (such an extended loss of income from being laid off), so it makes sense to prioritize insuring against financially catastrophic events using life insurance ahead of what is usually a less catastrophic loss (albeit it still a potentially significant loss) like a limited-period of disability.

P.s. If you have credibly sourced data on the odds of a disability that leads to loss of income for more than 1 year, 2 years, 5 years, 10 years, that would be appreciated.

I fully agree (and I believe that is what I wrote earlier) that one should prioritize financially catastrophic events, which is why LTD takes priority over STD IMHO.

How many can afford to go 2-13 weeks without income, vs how many could go 13-110 weeks without income? What is more financially catastrophic?

For well-sourced statistics, I refer you to: https://disabilitycanhappen.org/disability-statistic/ and https://www.limra.com/siteassets/newsroom/fact-tank/fact-sheets/2023-Fast-Facts-about-Disability-Insurance.pdf

I can tell you from personal experience (with 4 friends who suffered from a long-term disability, 3 of whom eventually passed away from the disability, while one is BH alive. In addition, I recall that my father A"H suffered from a disability for an extended period when I was young. I was too young to know the details, but later on in life I heard in detail the financial effects it had) that long-term disability (defined as more than 90 days on most individual policies, or 180 days on most group policies) is financially devastating!

On the other hand, I think most would agree that a short-term disability is something that a person with adequate savings (emergency fund) won't find financially catastrophic.

[niebloomj]

That is a disingenuous portrayal of what I was saying!

I am not C"V saying that your feedback is not correct or that you are not giving what you believe is actually of the best interest to clients. I apologize if that was the way it came off. I was intending to be playful.

Let's try to get all the opinions and data on the table. I think we can all agree life insurance is a must. Should either short term or long term disability insurance be a requirement before going through the roadmap, or should it be a later step? If you say short term disability shouldn't be a requirement, in between which two steps would you add it? If you say long term disability shouldn't be a requirement, in between which two steps would you add it?

What data do we have to support recommending disability insurance where that same money could have gone into someone's 401k?

Maybe if we get all the data and ideas flowing we can come to an improved flowchart that can help more people.

[Yehuda57]

I can tell you from personal experience (with 4 friends who suffered from a long-term disability, 3 of whom eventually passed away from the disability, while one is BH alive. In addition, I recall that my father A"H suffered from a disability for an extended period when I was young. I was too young to know the details, but later on in life I heard in detail the financial effects it had) that long-term disability (defined as more than 90 days on most individual policies, or 180 days on most group policies) is financially devastating!

This anecdotal evidence is essentially worthless without knowing how many people you know of, among other things. For instance, if we're going by your experience, how many families do you know of that have had their breadwinner die pre-retirement, and how does that number compare to the 5 that you mentioned re: diability?

[niebloomj]

For anyone interested, here was one of the times this was discussed previously. I definitely think we should dive deeper into this topic to get the right recommendation. https://frumfinance.slack.com/archives/C04E9F1HAJK/p1671806293026499

[ExGingi]

Here is an informative article that challenges the statistics on disability claims: https://www.nytimes.com/2010/02/06/your-money/life-and-disability-insurance/06money.html
And an associated graphic: https://archive.nytimes.com/www.nytimes.com/imagepages/2010/02/06/business/06money_g.html?action=click&module=RelatedCoverage&pgtype=Article&region=Footer

Let's examine this informative article and the associated graphic.
First, a non-paywalled link: https://archive.ph/mYP0k

And the graphic embedded here:

The first thing that struck me was the graphic, which seems to fully support my assertions. Around 5% of men by age 47 (approximating based on graphic) requiring a 90-day or longer leave due to disability is quite compelling, and definitely higher than odds of dying, or else 20 year term insurance for 27 year olds would be a lot higher!

And from the article (with some emphasis added):

Think your odds are in the single digits? You may be happy with the disability coverage that your employer provides. About one-third of workers have at least some coverage, according to the Bureau of Labor Statistics. Keep in mind, however, that it may not replace all of your income, it may not last forever and it’s likely to be taxable income if your employer is paying the premium.

Don’t count on Social Security, either, because it may take more than a year for your claim to be processed and longer if you appeal a rejection. Also, it doesn’t pay out more than a few thousand dollars a month, and the eligibility rules are very strict. Worker’s compensation, meanwhile, covers you only if you were hurt on the job. Most disability insurance claims don’t result from on-the-job injuries.

So 2/3 don't have any employer coverage! I would guess the percentage is higher in the frum communities, due to the profile of employment.

Employer coverage is limited (sometimes ridiculously so, where one cannot qualify for LTD if they didn't claim STD which one might often not claim since it isn't catastrophic as well as other reasons). There's a huge detail missing which is "partial disability" that is often missing from employer-sponsored LTD, and is very real, especially for self-employed people and business owners.

[ExGingi]

For anyone interested, here was one of the times this was discussed previously. I definitely think we should dive deeper into this topic to get the right recommendation. https://frumfinance.slack.com/archives/C04E9F1HAJK/p1671806293026499

Any way for someone without a slack account to view this?

[ExGingi]

For anyone interested, here was one of the times this was discussed previously. I definitely think we should dive deeper into this topic to get the right recommendation. https://frumfinance.slack.com/archives/C04E9F1HAJK/p1671806293026499

I really don't want to seem like I'm trying to sell anything here (I am not, I am advocating for my deeply held beliefs), but one of the most powerful presentations IMHO on this topic involve asking a simple question:

If you were offered a choice of compensation on a hypothetical new job when freshly on the job market.

Choice A: Get paid $100,000/yr as long as you are actively at work, and $0 if you need to take a leave due to sickness or injury.
Choice B: Get paid $96,000/yr as long as you are actively at work, and $60,000 tax-free if you need to take a leave due to sickness or injury until you recover or reach retirement age.

Which one would YOU pick?

[Bored Bachur]

I recall once hearing that some chasidishe kehillos are against/don't encourage life insurance, any accuracy to this?

[MiInvstr]

I really don't want to seem like I'm trying to sell anything here (I am not, I am advocating for my deeply held beliefs), but one of the most powerful presentations IMHO on this topic involve asking a simple question:

If you were offered a choice of compensation on a hypothetical new job when freshly on the job market.

Choice A: Get paid $100,000/yr as long as you are actively at work, and $0 if you need to take a leave due to sickness or injury.
Choice B: Get paid $96,000/yr as long as you are actively at work, and $60,000 tax-free if you need to take a leave due to sickness or injury until you recover or reach retirement age.

Which one would YOU pick?

That’s honestly a tough question imo. When you’re at a 100k salary usually every penny makes a difference. And to just drop $4k on insurance is a big deal.

ETA: There is also a built-in insurance that everyone has from government programs if need be. So the salary wouldn’t be zero.

[JMHO]

That’s honestly a tough question imo. When you’re at a 100k salary usually every penny makes a difference. And to just drop $4k on insurance is a big deal.

That's why its hypothetical

[MiInvstr]

That's why its hypothetical

True but it’s not simple imho!

[ExGingi]

That’s honestly a tough question imo. When you’re at a 100k salary usually every penny makes a difference. And to just drop $4k on insurance is a big deal.

ETA: There is also a built-in insurance that everyone has from government programs if need be. So the salary wouldn’t be zero.

The best questions are tough questions.

You can easily multiply the numbers by 2 if you feel it's more of a fair question.

The point is that there is no right or wrong answer, it's all about what YOU feel. I educate people and help them crystallize their own objectives and feelings. They then make their own decisions.

What built-in insurance does everyone have from government programs? (do you mean welfare and medicaid?)

[MiInvstr]

The best questions are tough questions.

You can easily multiply the numbers by 2 if you feel it's more of a fair question.

The point is that there is no right or wrong answer, it's all about what YOU feel. I educate people and help them crystallize their own objectives and feelings. They then make their own decisions.

What built-in insurance does everyone have from government programs? (do you mean welfare and medicaid?)

Liked.
Yes I mean those programs.

[niebloomj]

Any way for someone without a slack account to view this?

No, but I'd love for you to join in <3 https://frum.finance/slack/join

[David61]

I really don't want to seem like I'm trying to sell anything here (I am not, I am advocating for my deeply held beliefs), but one of the most powerful presentations IMHO on this topic involve asking a simple question:

If you were offered a choice of compensation on a hypothetical new job when freshly on the job market.

Choice A: Get paid $100,000/yr as long as you are actively at work, and $0 if you need to take a leave due to sickness or injury.
Choice B: Get paid $96,000/yr as long as you are actively at work, and $60,000 tax-free if you need to take a leave due to sickness or injury until you recover or reach retirement age.

Which one would YOU pick?

If instead you take that $4000/year over 40 years of employment, invest it at 8% growth rate, you would have about $1.1 million.   

So how about
choice A 96K a year, plus $1.1 million package upon retirement.
choice B 96K a year, plus LTD benefits.

If insurers are charging 4% of your income, (and assuming the actuaries are pricing that accurately), to be profitable for the insurer:
--the odds must be less than 4% of that resulting in a claim (in any given year) of over 100K.
--the odds of that a claim of over $1 million arising in any given year, must be below 0.4% (in any given year).

P.s. I'm not against LTD insurance. But it's more expensive, a more complicated decision, and generally covers losses less financially catastrophic than life insurance. 

[ExGingi]

If instead you take that $4000/year over 40 years of employment, invest it at 8% growth rate, you would have about $1.1 million.   

So how about
choice A 96K a year, plus $1.1 million package upon retirement.
choice B 96K a year, plus LTD benefits.

If insurers are charging 4% of your income, (and assuming the actuaries are pricing that accurately), to be profitable for the insurer:
--the odds must be less than 4% of that resulting in a claim (in any given year) of over 100K.
--the odds of that a claim of over $1 million arising in any given year, must be below 0.4% (in any given year).

P.s. I'm not against LTD insurance. But it's more expensive, a more complicated decision, and generally covers losses less financially catastrophic than life insurance.

Here is what you're missing (and I'm actually surprised @niebloomj gave you a like after missing it) resulting in your choice/comparison being an apples to oranges one:

If instead you take that $4000/year over 40 years of employment, invest it at 8% growth rate (how safe is it to assume that rate of return? what about taxes), you would have about $1.1 million. (IF you were actually able to put that $4,000/yr for over 40 years and average 8% over that timeframe).

So how about
choice A 96K a year, plus $1.1 million package upon retirement, and $0 if you are too sick or injured to work, and retirement and other savings goals are out the window.
choice B 96K a year, plus LTD benefits that will give you $60,000 tax-free if you are too sick or injured to work and for as long as that continues up to age 67.

Remember, insurance is about guarantees. If the definition of disability is met, the benefits are guaranteed (and I didn't even mention additional benefits such as COLA, Catastrophic disability and more). Or to put it slightly differently: insurance is about the transfer of risk. Assuming an 8% rate of return over 40 years isn't achieved risk-free! And you've kept the risk of income loss due to sickness or injury.

Keep in mind, that when I use the 4% figure for the premium, I am being extra cautious. If talking about someone under 30 at a favorable occupation (for example teacher) the premiums could be in the 2% range.

[niebloomj]

Here is what you're missing (and I'm actually surprised @niebloomj gave you a like after missing it) resulting in your choice/comparison being an apples to oranges one:

I don't think he was missing any of that, which is why I liked it. He was painting the other side of the picture since you already painted the positives. That was my understanding.

[ExGingi]

I don't think he was missing any of that, which is why I liked it. He was painting the other side of the picture since you already painted the positives. That was my understanding.

Well, he omitted the parts of the equation that I added in bold.

[niebloomj]

Well, he omitted the parts of the equation that I added in bold.

Yes, my point is that it seemed omitted because in your message you already painted the picture of that other side (where you omitted the other counterpart)

[Euclid]

yay another insurance thread