feedback on emergency fund plan vs. short term disability

[MichelleD1977]

Hello everyone,
I just started my own business working as a physical therapist and am once again looking at both short and long term disability options. I looked into short term disability about 10 years ago, and ended up deciding against it due to the cost. However, with having my own business and therefore added financial burden if I do end up becoming temporarily unable to work, I am looking at this again. I'm sure I will end up with some kind of long term disability (although I can see firsthand that those policies don't always deliver as my old employer was just diagnosed with a brain tumor and I think her company gave her a hard time and I'm not sure they paid in the end.) If anybody has thoughts about long term disability I'm curious to hear them. However, I'm really asking about short term disability. I've noticed there are few plans out there, and I'm ending up talking to Northwestern Mutual again, which is who I was talking with 10 years ago. I haven't gotten a quote from them yet, but 10 years ago it was $350/month.  I want to run an alternative emergency plan by you all:

Our current expenses are $4500/month. My husband brings home $2000/month, so I will need to make up the difference of $1500/month. In addition, my business expenses are $1000/month= $2500/month. I will assume I'll have medical expenses due to being injured, so bump this up to $3500/month (assuming some expenses like surgery or hospital stay can be put on a payment plan and paid long term at no interest.)
Assuming 6 months of self funded disability (either before a long term plan kicks in, or until I'm better and can return to work)=$21,000

I currently have (and will continue to have) $10,000 in emergency fund. I also have an inherited IRA annuity that I can take out at any time. I'll have to pay taxes on it, but I won't be making money so it would be OK to pay those taxes. Total emergency fund is therefore $17,000-ish.

I also will at any time have $7000 in my business bank account. My business expenses are $1000/month. There is also, at any given time, about $5,000-$10,000 that will be coming into my business from medical insurance company payments that can support the business until I start working again for the past few weeks of work. Of course that means when I start working again I also have time before I get paid again, but even with copays only it doesn't take long to meet my monthly expenses. yay for frugality!

Right now for retirement savings my husband contributes about $12000/year to his 401 K and I'm going to start a simple IRA and contribute $14,000 through my business. Over the past 10 years, anything extra we've been putting into traditional IRA with Vanguard.  My emergency fund idea is to instead of dumping money into the insurance plan, and instead of the traditional IRA, open up a roth IRA and put at least $600/month into it, beginning with one for my husband (who 52), and then me (age 44) so that we could withdraw on the contributions as an additional savings if we needed it, but it would also be working for us. And any earnings would be more accessible than in a T-IRA or 401K, although there could be some penalties. From what I am reading, if you are disabled or have medical expenses you might not need to pay those penalties. At $600/month it would take us 3 years to save up the $21,000 that I would in theory receive from a 6 month short term disability plan that costs $350/month.

I know it's not the most secure plan to have your emergency funds in the stock market, but I know all of the risk assessment stuff is about threading the needle, and I think this plan does that well. Because I'm planning for injury or illness (not loss of job due to a recession for example) it is unlikely that loss of work would come at a time of economic downturn (although certainly possible.)

I'm curious what you think!

[terran]

I tend to think short term disability isn't the kind of insurance most mustachians need: it's kind of expensive and has a pretty limited payout which can be somewhat easily paid for with a modest emergency fund. At least for people with some savings, the insurance you really need that which covers losses that would be difficult or impossible to recover from (health, liability, long term disability, homeowners, auto, personal property roughly in that order).

[Dicey]

I know it's not the most secure plan to have your emergency funds in the stock market

I'm curious what you think!

It's awesome that you're thinking this through and making plans, but the bit in bold is an oxymoron.

Also, just because one can cash out a Roth, it doesn't mean one should. Think of those annual Roth contributions as golden nest eggs. Their tax status makes them worth more than their face value. Once redeemed, they can never be recaptured.

[MichelleD1977]

I'm thinking a Roth that I might cash out has more value than money I spend on a short term disability insurance plan that I don't ever cash out. Of course I wouldn't PLAN to cash out the Roth.

[MichelleD1977]

I think to summarize the question, it is this: If I am going to save an extra $10-15,000 for the possibility that I might need to support both myself AND my business during a time of short term disability, is it better to just put it in a savings account, or put it in a Roth (assuming I wouldn't already be putting that money in a Roth) in the hopes that I won't actually need it and it can work for me in a few different ways?

[Dr Kidstache]

Long term disability insurance companies are, indeed, despicable at best and fraudulent at worst. But that shouldn't dissuade you from getting a policy. I became suddenly disabled and have received SSDI and private LTD and there would be no possible way for me to have income otherwise.

A few things to think about when purchasing LTD insurance:

- Brokers sell the policies but they are not in any way involved in claims so don't believe them if they try to sell you on extra riders or whatnot. Riders like residual disability sound good but actually can make it harder to get LTD benefits paid should you ever need them. The best info I know of is from Linda Nee on her blog https://lindanee.wpcomstaging.com/

- Owning your own business complicates how an LTD company will consider your loss of income. I haven't gone through that process but just expect an extra level of hassle in having to provide financial documentation. And also that the insurance company would likely have a different expectation about what your job consists of since you're a business administrator as well as a physical therapist (for example, if you have a physical limitation that prevents hands on clinical work the LTD company could decide that you could still be a practice administrator even though that's not really your job)

- Any occupation policies are worth it, but "any occupation" does not mean to you what it means to an LTD company. But any occupation is still worth paying for.

- Being disabled is super expensive. There's a crip tax on everything if you don't have the energy, mobility, cognition, or whatever to choose cheaper options. So whatever amount you think you would need to cover your typical expenses is less than you would actually need if you were to become disabled. And most (all?) LTD policies don't include cost of living adjustments so the benefits are worth less over time.

- Individual LTD policies are more likely to payout than a group LTD policy from an employer (because they are covered by different regulations) and they're also tax-free benefits. Much more valuable policies.

- If you are in the unfortunate position to ever need to file a claim, absolutely do not do it yourself. Do not communicate directly with the insurance company under any circumstances if you think you need to make a claim.

- All the LTD companies are bad, but some are less bad. I've heard Northwestern is less evil. UNUM are the devil's hellhounds.

I don't have any experience with STD but I would expect Northwestern to be better for STD than some other companies based on their LTD performance.

[shureShote]

I think to summarize the question, it is this: If I am going to save an extra $10-15,000 for the possibility that I might need to support both myself AND my business during a time of short term disability, is it better to just put it in a savings account, or put it in a Roth (assuming I wouldn't already be putting that money in a Roth) in the hopes that I won't actually need it and it can work for me in a few different ways?

It doesn't have to be 100% in one way.

I think forgetting the STD insurance and bulking up the EF, in a simple savings account (being gnawed on by inflation) while at the same time continuing to work towards maxing out tax free and tax deferred accounts would work. In the event of a truly dire situation while you work to bring the EF up, you could of course raid accounts sub-optimally (though I would be sure to try and post the whole picture here if that happens and allow some of the marvelous number crunchers help.)

[MichelleD1977]

Thank you so much for the feedback everyone! I've realized I need to do a lot of reading about long term disability before I throw down all that money on a plan. For me, because of my line of work, it will be about $300/month. That is a LOT of money over time.