My good buddy Teddy and I go way back. We have been friends since high school. He is a self- employed attorney in the metro Detroit area and has a specific specialty within the space. He has struggled with weight and health his entire life. Heart disease runs in the family.
Teddy knew he had trouble, so he went to get checked out. Along with cardiovascular disease the doctor told him he had diabetes, high blood pressure, and high cholesterol. The doctor came up with a 3 - step plan: Exercise, a plant-based diet, and medical leave from his practice. He did the plant-based diet, became a vegan and dropped 33 pounds. The other 2 points needed to wait because COVID hit. Fast forward 10 months and the stress from everything brought the symptoms he was experiencing to another level. This time Teddy went back to the doctor who issued a very ominous warning, “Start following the plan soon or your odds of seeing grandchildren are going down to zero very fast.”
As part of our planning process years ago, Teddy bought two different disability insurance (DI) policies that would subsidize around 60 percent of his earnings. One was short term, defined as keeping a person from working for a short period of time due to sickness or injury not related to the job. The other policy is long term which usually starts after the short-term policy ends, typically 10-53 days post the disabling event.
His disability insurance policy is profession specific so it clearly states he cannot work as an attorney in order to receive payments. He can work in any other capacity to generate income and will likely consider this option once his health improves. Some of the issues we considered when researching the policies were affordability, how soon he can start collecting, can the insurer make coverage changes and what are the renewal provisions. It’s so important to work with a financial professional to help assist in the planning for this to work through the myriad issues involved in making this part of the financial plan. Teddy can see now how beneficial it was to plan for this disabling event and have the income replacement the policy provides. This will require changes in lifestyle to make ends meet but he is glad he has the policies to keep a roof over his head and avoid a bankruptcy.
Other steps we’ve discussed to help live within his new financial means include having one car for a short period to avoid the payment and refinance his house to take the equity out, pay for his child’s college, and utilize the tax deductibility of the mortgage income. To reduce expenses the family will prepare more meals at home, forgo a vacation over the next year or two, and use streaming services instead of cable. He will continue to work with his personal trainer but will need to negotiate a better package while not working, or use free workout videos or online apps. They will most likely sell their boat.
At the time he bought the DI policies he also purchased term insurance. He bought about 10x his income at the time so if something were to happen to him his wife would have the bills covered for an extended period. He debated buying some permanent insurance, but it is very costly given his underlying health issues. He regrets this now. Like most people, he never thought he would need the coverage.
Teddy always tried to be aggressive and consistent with his savings. He maxed out his SEP IRA for many years – and he can benefit from that now: In the event of a disability the tax code allows for early withdrawals that are not subject to the 10 percent penalty but are taxable as regular income. This is a very viable option for him as he prepares to map out where and how he will utilize his buckets for income. We have had several conversations discussing the different buckets and what makes the most sense from a tax perspective. He has utilized a health savings account (HAS) as a tax-deferred savings vehicle to help with the medical expenses over the years.
He is researching applying for Social Security disability. For this, he must provide the Social Security Administration with proof the disability would be long term, meaning 12 months or longer. Typically, 60 to 70 percent of applicants are initially denied. If he cannot meet the criteria, he still might be eligible for worker’s compensation benefits or other short term government relief. He is considering retaining an attorney who specializes in Social Security disability claims to assist in the process.
As far as the medical leave relating to his practice, he is working with an attorney to try and figure out the best, most practical way to handle the situation. Unfortunately, the Family Medical Leave Act, which is a federal law that guarantees 12 weeks of unpaid, job protected time off, does not address business owners.
His office lease is month to month so he can cancel with notice of 30 days. There is a significant balance of receivables which will subsidize the leave for some time. He is also working with his associate on how to handle future business while on leave.
It will take Teddy 5 – 6 months to get healthy and control his underlying health issues. Prior to this recent health decline, we spent a lot of time planning for “what ifs” to develop a plan. With the recent events, we’ve been working through his financial scenarios, weighing his options, and implementing a strategy to help him and his family to successfully navigate this short-term hurdle financial hurdle.
Mark Bordelove became a licensed financial advisor in 2000 and co-founded Bordelove Foster Wealth Management in 2009. A devoted husband and father, Mark has also completed two Ironman competitions
Mark Bordelove is a Financial Advisor with, and securities and advisory services offered through LPL Financial, a registered investment adviser, member FINRA/SIPC. This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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