A close friend of mine, ‘Jim’, was recently diagnosed with Corticobasal Syndrome – a type of Frontotemporal Degeneration (FTD). Jim is 53 years old and had been a successful engineer before he began showing symptoms ranging from burnout and fatigue to the inability to complete tasks. It had been the subtle signs of dementia that forced him to stop working.
If FTD sounds familiar to you, it may be because it is the same condition that Bruce Willis was recently diagnosed with. With FTD, Jim will be facing a decline in motor functions and potentially the inability to walk, trouble with his speech and language, and difficulty thinking.
It is life events like this that make it important to prepare for the unexpected. Fortunately, Jim’s company had employer-sponsored long-term disability insurance. It took 6 months for the policy to kick in, but Jim will now receive 60% of his previous income until age 67. This will cover his basic living expenses, easing his financial worries and preserving his nest egg for bucket list trips and legacy for his children.
While disability insurance is a critical component of any financial planning strategy, it remains an underutilized and misunderstood product. Disability insurance replaces your income if you are medically certified as being unable to work or can’t perform your job duties with a corresponding income reduction. This could happen as a result of cognitive degeneration or other extreme illness or accident.
What is disability insurance?
Disability insurance protects against loss of income due to disability. It provides a portion of your income, usually up to 50 or 66 percent, if you become sick or injured and are unable to work. Disability payments are usually tax free as long as the premiums were paid with after tax dollars.
This type of insurance may have significant benefits since a disability can be a two-fold financial problem. Those who become disabled often find they are unable to work and are also saddled with unexpected medical expenses such as high deductible payments.
What qualifies as a disability?
A disability is commonly defined as an inability to perform the duties of one’s job coupled with a loss of income of at least 20% compared to pre-disability earnings. And while insurance policies and the Social Security Act may define disability in different ways, many companies require that these criteria be met in order for an individual to qualify for benefits.
How long should disability insurance last?
The length of time disability insurance benefits are paid will be based on the type of policy you purchase. For example, a short-term disability policy will pay benefits for 1 year while a long-term disability policy may pay for a set number of years or to a certain age. Many individuals opt for coverage of wages until retirement age 65 or 70.
How does disability insurance work?
Even if your work has coverage, it's likely only for half your income. By protecting yourself with personal disability insurance, you can create the right protection for your lifestyle. Some personal disability policies can increase coverage to 66% of wages.
Long-term disability insurance reduces the risk of financial ruin if you become disabled. Without a policy in place, that period without income could make it hard to afford everyday necessities, support your family, or keep up with retirement goals. Long-term disability policies may have a waiting period before benefits are paid.
The ideal situation is to have a short-term disability insurance plan with a benefit period that matches the waiting period of your long-term insurance plan. That way, there’s no lapse in income – when your short-term benefits run out, the long-term benefits kick in.
If you become disabled, personal disability insurance can be structured to pay a benefit weekly or monthly. And benefits may not be taxable if you have paid the premiums with after-tax dollars.
When you purchase a policy, you may be able to tailor coverage to suit your needs. For example, you might be able to adjust benefits or elimination periods. You might opt for comprehensive protection or decide to define coverage more specifically. Some policies also offer partial disability coverage, cost-of-living adjustments, residual benefits, survivor benefits, and pension supplements. Since coverage is designed to replace income, many people choose to purchase protection only during their working years.
What about Social Security disability insurance?
Social Security disability insurance (SSDI) is a federal program that provides payouts to qualifying disabled U.S. workers and families. This is a benefit that comes with paying Social Security taxes. Unfortunately, SSDI typically provides only a modest supplemental income, and qualifying can be difficult. If you don't want to rely solely on Uncle Sam in the event of an unforeseen accident or illness, disability insurance may be a sound way to protect your income and savings.
Think disability won’t happen to you? Think again. The Social Security Administration (SSA) reports that one in four of today’s 20-year-olds will become disabled for 90 days or more before they turn 67 years old—and that a massive 65% of non-government workers have no disability insurance.
What About Workers Compensation?
Many people think of workers compensation as a disability safety net. But workers compensation pays benefits only to individuals who become disabled while at work. If your disability is the result of a car accident or other off-the-job activity, you may not qualify for workers compensation.
Even with workers compensation, each state makes its own rules about payment and benefits, so coverage may vary considerably. You might consider finding out what your state offers and plan to supplement coverage on your own, if necessary, especially if you have a high-risk profession. Likewise, if you have an active lifestyle that puts you at a higher risk of disability, considering an extra layer of protection may be a sound financial decision.
What questions should you discuss with your trusted financial professional about disability insurance?
When you discuss disability plans with your financial professional, be prepared to share as much as you can about your financial situation and goals, so your disability policy may be tailored to your needs.
Ask a lot of questions – and make sure you get clear answers:
How much coverage can I qualify for?
How does the definition of disability work? Is it for my current-occupation or any-occupation? What conditions are covered?
How long will benefits be payable, and when do they begin?
Could my policy be changed or canceled — or could my premium increase?
How do I make a claim if and when needed?
You’ll probably want to look at the cost for a few different plans before choosing one that provides the best combination of benefits and value for your needs. After you’ve made a decision, there will be a medical exam and some paperwork to do – and you’ll have income protection that can last for years.
Consider how you would pay your bills if you were no longer receiving a paycheck. Think about what would happen if your adult children lost their job, would they turn to you for financial assistance? Can you afford that help? If you don’t have a good answer, have a conversation with your financial advisor about disability insurance options.
Do you need help identifying risks that might impact your family? Have you evaluated and quantified the risks to your financial well being? Are you certain your risks have been adequately transferred with insurance? If you have more than $2 million saved and need help from a wealth manager, the Peak Wealth Planning team can assist.
Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.