Imagine for a minute that you had this marvelous machine in the basement of your house. All this machine does is make hundred dollar bills, day in and day out. You simply go downstairs, turn the machine on, pull the lever and just crank out cold hard cash, every single day. Sounds wonderful, right? You would probably spend a great deal of time, energy and money to make sure that this machine is well maintained, functioning properly and insured against damages and breakdowns, wouldn’t you? You could probably do nothing but work that machine when needed and then kick back and enjoy the fruits of the machine’s labor. Seems like a dream world, I know. But, in reality, you are that machine. The greatest machine that exists that will produce the most money over the course of your life, is you. So, why is that many of us fail to maintain and insure ourselves against breakdown the same way we would if we were dealing with some mechanical gadget in our basement? Sure, we may go to the gym sometimes, try and eat healthier, and even quit smoking, but what about situations where the machine breaks and stops working for a year or two, or more? Many people are fully aware of the need for permanent income replacement in the event of death. That’s what life insurance is for, but what about protecting ourselves against the loss of income due to disability? The truth is, a healthy 30 year old is FOUR TIMES more likely to become disabled before the age of 65 than they are to die. Yet, many people that I talk to have or want Life Insurance, but dismiss the idea of Disability Insurance as unnecessary. I recently had a client who was purchasing a fairly large life insurance policy who said, “I just want to make sure that if I am driving down the road and get hit by a mack truck and die, that my family will be taken care of.” Fair point. However, as I pointed out to the client, what happens if that mack truck hits you, and you survive? The greater risk for most of us right now is becoming disabled and not able to work or produce income for our family for years. It is sobering that 60% of all personal bankruptcies are due to medical issues and disability. Fortunately, there is something that you can do to prevent the financial ruin. Let’s take a look at a few key points about Disability Insurance and what type of person is the right fit for it.
- Disability insurance, in most cases, is cheaper than life insurance and in some instances can be considerably less expensive. This makes it an affordable and crucial piece of long term financial planning.
- There is a maximum benefit that you are allowed to receive from disability insurance. This number varies based on state and other factors, but usually falls somewhere between 60-66% of your pre-disability income.
- The benefit can usually last all the way up until ages 65-67 if needed. This is all worked out before you purchase your policy. Obviously, the shorter the maximum age you choose, the cheaper your policy becomes. This applies to other facets of the policy as well, such as elimination period, cost of living adjustments for inflation, benefit amount etc. You are in control. The higher the benefit, longer the term and more adds on you want for your policy, the greater the cost.
- The monthly benefit received from a private/individual disability insurance policy is not taxed. The premiums you pay for your policy, like life insurance, is paid with post-tax dollars and therefore not eligible to be taxed. This is different from a group disability policy offered through work, which will be discussed later in this article.
- Most private/individual disability insurance policies cover the all forms income including commissions. A group policy from your employer usually only covers a base salary.
People Who Need An Individual Disability Policy the Most:
If your income represents the sole or majority share of the household earnings – This is probably the single greatest group at risk for having a disability destroy their family’s financial well-being. In this situation, the husband or wife will have a job that brings in enough money to support the entire family, while the other usually stays at home with the children or has a smaller income job to just help supplement the family finances. If one member of the household is the primary earner, an individual disability policy is an absolute must.
If you have a group policy through work that will get taxed – This is the majority of disability plans found in the workplace. Most employers offer short and long term disability free of charge as a benefit to their employees. There are two big problems with this. First, since you did not contribute any money to the group plan, the benefit you receive is going to be taxed. Remember earlier I mentioned the maximum benefit being up to 66% of your income. Well, if you are only receiving 66% of your normal income, and then that benefit gets taxed, you may only be receiving around 40-45% of your regular income. Can you and your family survive on only 40% of what you make right now? A private, individual policy purchased outside of work will help you bridge that gap and get you the income you need, should you become disabled. Secondly, you are no longer covered once you are not employed there. The new job you choose may not have any coverage or in a similar manner, leaving you at risk. An individual policy purchased privately is portable. You can take it with you, wherever you go.
If you are self-employed or work for a smaller company that offers no coverage – Small business owners are usually very hands on, and are a major driver in their company’s profitability. If they become disabled and unable to work, their business will surely suffer. Most have no protection against this risk and therefore need disability insurance. The same is true for employees of companies that do not offer ANY kind of disability coverage at all. This is usually found with smaller companies or young, upstart operations that do not have the budget or scope to be able to offer such benefits to employees.
If a portion of your compensation comes from commissions and other forms of income – This generally refers to people working in sales jobs and other commission/bonus heavy positions. Yes, you may receive a base salary, but a decent portion of your earnings for the year are derived from commissions and bonuses. The good news is you are in control of your earnings. The bad part comes if you become disabled and are expected to live off of your employer’s group disability coverage. These plans are very basic, and only cover a percentage of your base salary. They do not account for commissions or bonuses. If you make a $30,000 per year base salary but earn another $70,000 in commissions, can you really afford to make ends meet off of the $18,000-20,000 that you would receive from your employer’s plan? Private/individual policies purchased outside of work can account for the difference and are a perfect supplement.
If you are a high income earner in a white collar field such as physician or lawyer – For many reasons already described above, a high income earner who supports his/her family should definitely be looking to mitigate the risk of a crippling disability by purchasing insurance. However, there is an added benefit to people in white collar occupations such as physicians, dentists, lawyers and college professors. They are in the lowest risk class for disability in terms of occupation, and therefore their policies will be considerably cheaper than someone in a much riskier field. The difference in price can be significant when dealing with very high income policies.
Disability insurance is a lot like life insurance, in that when you lay your head down at night, you have the peace of mind knowing that you and your family are covered if something happens. If your roof caves in and falls on you in the middle of the night and you can’t go back to work for a while, you will be taken care of. Your main concern should be getting healthy and back on your feet. The financial stress and worry is natural during a disability, but it can be alleviated by taking steps before hand to help protect against those potential pitfalls. That’s why an individual disability insurance policy is a critical and valuable piece of any person or family’s financial plan. Once again, your local trusted financial advisor or agent should be consulted to see which options are right for you and how you should proceed. Protection first! It can save your family from financial disaster.
Peace and Wealth 