As a child do you recall the fable of Jack and the Beanstalk? In that tale Jack buys magic beans instead of milk which his mother sent him to the market to get. Thinking him a fool for buying beans, she contemptuously throws them out the window. But overnight a huge beanstalk grows that Jack climbs and eventually steals something of great value from the giant. Think now, did Jack take the golden eggs or the goose that laid them? Turns out, Jack was not the fool his mother thought and to best provide for his family he took the goose! Now think about how this applies to us. Have we insured for full value our car and house but neglected to fully insure our income? For most of us our ability to earn a living is the most valuable asset we have but frequently goes un/under insured. Most of us tend to avoid thinking about the possibility of a disabling disease or accident happening to them. However, experience shows that the chances of being disabled for longer than three months are much greater than the chances of dying prematurely.
Disability Insurance provides protection for you and your family for your income if you were to become disabled due to disease or an accident. Most disability policies pay a benefit that replaces a percentage of your income.
Most employers have short term and/or long term group disability insurance policy that covers employees. However, the benefits are often limited when they are offered. So it is important to know exactly how much coverage you are actually getting from your employer – is it enough for you and your family to live on if you were to become disabled? As an example, if your group coverage would replace 60% of income to $5,000 per month and you earn $150,000 per year would you get 60% replaced? If you work the math you will see its only 40% and taxable income at that.
Does Social Security Offer Disability Benefits?
The Social Security Disability Insurance (SSDI) program pays benefits to qualified individuals who are under age 65, regardless of their income. However, Social Security only pays benefits under strict definitions of disability, making it very difficult to qualify. To receive benefits as an adult, you must have a physical or mental impairment that has lasted or is expected to last for at least 12 months or is expected to result in your death. Your impairment must also be severe enough to prevent you from performing any “substantial gainful activity” or, in other words, the work that you were doing when you became disabled or any other work. The SSA has a list of impairments that are considered so severe that they automatically define you as disabled. If your condition is not on the list, the SSA must decide if it’s severe enough. In most cases SSDI is not enough to live on. However as a general rule, group coverage will offset against Social Security disability income so you will still only get the $5,000 per month in our example above.
Get the Level of Additional Protection that is Right for you:
You can receive additional protection with supplemental disability insurance which can be purchased to cover up to 50-70% of your income. You should aim to cover a significant portion of the income that you will lose if you become disabled. The amount of individual disability insurance depends on:
- How much income you need if you become disabled;
- How much you can afford to spend on premiums; and
- How much insurance you’ll be able to purchase under the insurance company’s guidelines (usually insurance that replaces 50-70% of your monthly pretax earnings).
If you own a business, key person disability insurance, overhead expense and disability buy out coverage can protect your own income, protect you from the impact of losing an important employee, keep the doors open or enable you to purchase a partner’s business interest in the event he or she becomes disabled.
As planners we work with each client to review current coverage and determine whether they have adequate insurance coverage including disability insurance.
|Personal Profile: An Accident Can Happen to Anybody
Bill Reid was 32 when a horrific car accident nearly claimed his life. He had to relearn how to walk and talk, and short-term memory loss has made it impossible for him to return to work. Fortunately, Bill had purchased individual disability insurance and had additional coverage through work, which has enabled him to maintain the same lifestyle he had before the accident.
|Don Goldberg, JD, CLU, ChFC||Chris Schiffer, CPA||AEPG® Wealth Strategies|