Examine and Improve Your Income Protection
Let’s review your Disability, Health, and Long-Term Care Insurance
Income Protection 101: Disability, Health, and Long-Term Care Insurance
Protecting Your Greatest Asset
What is your greatest asset?
Many people respond to this question with the following answers:
- My home
- My automobile
- My business
And the list goes on…
While all of things listed above are important, the truth is, your greatest asset is your ability to earn income.
Think about it for a minute. Let’s say that you are 35 years old and you currently earn $50,000 per year. If you are like most people, you are hoping to retire around age 65. Therefore, over the next 30 years, your earning potential is at least $1,500,000.00. (30 working years X $50,000 per year)
Take a minute and do this exercise on your own.
How Much Is My Ability to Earn Income Worth?
# of years to retirement: ______________ x Your Annual Income: $_______________
= Your Income Producing Potential $_____________
Now, compare that number to value of your home or your automobile.
(Obviously, the closer you get to retirement, the lower your total earned income potential becomes. However, your income-earning ability is usually your greatest asset for the majority of your working life.)
For most people, the difference will be astounding.
Yet, most Americans spend more money insuring their automobile, or their home, than they do their ability to earn income.
As we discussed in our last issue, proper auto and home insurance covers you, and your assets, in the event of a minor accident, or even a worst case scenario.
If your home and automobile are worth protecting at their current values, how much more so is your income earning potential worth protecting!
The most obvious way that your income earning potential could be disrupted is through a short-term or long-term disability.
Before we continue, consider these cold hard facts about the chances of becoming disabled in the United States.
Just The Facts
- Three in 10 workers entering the work force today will become disabled before retiring.
Social Security Administration, Fact Sheet January 31, 2007
- Over 51 million Americans are classified as disabled, representing 18 percent of the population.
U.S. Census Bureau, Public Information Office, November 2008
- In the last 10 minutes, 498 Americans became disabled.
National Safety Council, Injury Facts 2008 Ed
- 70% of the private sector workforce has no long-term disability insurance.
Social Security Administration, Fact Sheet January 31, 2007
- Disability causes nearly 50% of all mortgage foreclosures, 2% are caused by death.
Health Affairs, the Policy Journal of the Health Sphere, 2 February 2005
It may seem that the worst thing that could happen to your financial plan is for the primary breadwinner in the family to die prematurely. But, in reality, a permanent disability of an income earner will actually put more pressure on your family’s financial plan. This is because when someone dies, the family’s income and expenses will typically decrease. However, disability can actually cause household expenses to increase despite a loss of income. In short, a disabling injury could be devastating to your financial plan.
According to the U.S. Census Bureau, nearly one in five Americans will become disabled for a year or more before the age of 65. When so many families are living from one paycheck to another, even a short time out of work could be devastating.
Could you, or your family, afford to live without your income?
When you consider that 1 in 3 people between the ages of 35-65 will face a disability and be unable to work for 90 days or longer, and that the average length of a disability is 4 years, it is no wonder that dealing with this topic is vital to your financial future.
Therefore, the first income protection strategy to consider for you and your family is disability income insurance.
Income Protection 101 – Disability Insurance
There are at least three primary insurance-related income streams that can be generated by your family when a disability occurs. These three include: Social insurance, Employer-provided benefits, and your own individual disability insurance plan.
Social Insurance: Social Security Disability Income (SSDI) pays benefits to you and certain members of your family if you are “insured,” meaning that you worked long enough and paid Social Security taxes. Many people mistakenly believe that they don’t need any disability income insurance because the Social Security system will take care of everything if they become disabled. This mistaken belief can cost you big. According to the Social Security Administration, only 39% of the 2.1 million workers who applied for SSDI benefits in 2005 were approved. That number is even lower today. Why? Because, the definition of disability under Social Security is different than that of other programs. Social Security pays only for total disability. No benefits are payable for partial disability or for short-term disability. In essence, to qualify for Social Security disability payments, you must prove that you cannot perform any job.
Employer-provided Benefits: Many corporations today offer short-term disability insurance as a group benefit. In the event of disability, short-term plans are typically designed to pay a portion of your salary for 13 to 26 weeks after a brief 7 day waiting period.
Some corporations also offer long-term disability insurance as a group benefit. In the event of a major disability, these long-term plans cover a portion of your salary for anywhere from 2 years to life. Typically, these plans are subject to a 3 to 6 month waiting period. And most group long-term disability (LTD) plans cover 60% of one’s salary to a maximum of say, $10,000 a month.
When I offer financial coaching to clients, I almost always recommend that they take advantage of their short-term and long-term group disability plans through their workplace. These plans are usually very reasonably priced and of you ever need it, you will be glad that you paid the small price for it.
However, there are a couple of caveats to keep in mind.
- As with most group benefits, the disability policies that you can purchase through your workplace are not portable. That means that if you lose your job, get laid off, or decide to move on, you will lose your group benefits.
- Because group benefit costs are taken out of your paycheck on a “pre-tax” basis, this means that your group disability benefits would be taxed. So, not only would you only receive only 60% of your previous salary if you became disabled, but it would also be taxed.
For these reasons, many people purchase their own individual disability insurance policy that is both portable, and which pays out its benefits “tax-free.”
Individual Disability Income Policy: The final layer of protection that you can place over your income is through the purchase of an individual disability insurance policy. Small business owners and employees of companies that do offer any type of disability income protection are the first ideal candidates that come to my mind for this type of coverage. According to the Council For Disability Awareness, more than 100 million workers in the United States are without private disability insurance and 70 percent of workers in the private sector have no long-term disability insurance through their jobs that would keep providing a regular paycheck if they became either permanently or temporarily unable to work.
A quick test to determine if you should consider this type of coverage is to ask yourself this question:
How would you pay your monthly bills if you were unable to work for extended period of time.
Is your current financial plan able to withstand the loss of your income for six months? Two years? Five years?
If your plan would be able to withstand such financial pressure then congratulations! You are part of a select few. However, if you are like 71% of the population who live paycheck to paycheck, then you should immediately consider investigating the benefits of an individual disability policy. Why? Because if you even might remotely want a stream of income pouring into your life in the event of a unforeseen disability, you will only be able to qualify for it before you need it. That’s the important thing to remember about insurance protection. You cannot buy when you need it. When you need it, it’s too late. Remember, there are no do-overs. That is why Level Two in our Five Levels of Financial Freedom is all about protecting you, your family, and your assets from unforeseen events.
A new survey by the Life Foundation shows 84 percent of Americans strongly agree they should insure their cars, and 80 percent feel it’s critical to have homeowner’s insurance. Yet only 48 percent believe that it’s imperative to have disability insurance if they have a job.
Perhaps this explains why one recent study demonstrated that unexpected illnesses and injuries cause 350,000 personal bankruptcies each year. Don’t allow you plan to fail because of an oversight or wrong thinking. Don’t become a statistic.
So, how much disability insurance coverage should you buy? Only you can ultimately determine the answer to that question by examining your personal financial situation. However, allow me to stir your thinking on this matter for a moment.
To illustrate, let’s imagine that tomorrow you were to become disabled after a bad auto accident. (I know it’s morbid, but just go with me.) The injuries will force you to be bed-ridden with little chance of returning to work for at least three years. You have no disability insurance and now desperately wish that you did. Now, if you could somehow turn back time and purchase a disability insurance policy before the accident, how much would you buy? Just enough to get you by, or the maximum?
In my experience, the answer to that question is the amount that you should buy. If you would want maximum benefits in the above scenario, why should you buy less? If it is a matter of cost, speak with a trusted insurance agent or financial advisor in your area. The good ones can show you how to maximize your benefits while minimizing your costs.
A rule of thumb is to have approximately 60% of your income covered by disability insurance. You will rarely be able to buy more. The cost of a disability insurance policy will vary based on your income, age and occupation.
The most comprehensive disability insurance is known as “own occupation coverage.” This type of policy entitles the owner to benefits if the illness or injury prevents the person from continuing his or her current occupation.
For example, if a surgeon lost an arm in an accident, he or she could not perform surgery, but could still teach at a medical school. Own occupation disability coverage would pay in this case.
The other two main types of disability insurance are “any occupation” and “modified any occupation” coverage. Policies that use an “any occupation” definition do not provide benefits unless the insured is “unable to perform the duties pertaining to any gainful occupation.” Under this definition, a former tennis instructor confined to a wheelchair would get no benefits because he or she could work as a telemarketer.
Modified occupation plans are a bit more generous. These plans consider a person to be disabled if he or she cannot work in any capacity for which he or she is reasonably suited on the basis of education, training, experience and, sometimes, prior economic status.
“Own Occupation” means you will receive benefits if you are unable to work at your specific occupation, even if you are able to work in another. “Your Occupation” or “Modified Own-Occupation” means you will receive benefits if you can’t work at your specific job and are not working at all. “Any Occupation” means you will receive benefits only if you are unable to work at any job.
Income Protection 101 – Health Insurance
Today, one out of every three Americans has either no health insurance or is woefully underinsured. It doesn’t help that health care costs are high, and getting higher.
Many Americans today are hoping to get ahead financially through starting their own business or working hard at climbing the corporate ladder. And yet, without health insurance, they are literally just one bad health diagnosis or accident away from massive medical bills… and potentially financial disaster.
Unpaid medical bills are the leading cause of bankruptcy in the United States. To make matters worse, every 30 seconds in the United States, someone files for bankruptcy in the aftermath of a serious health problem.
Because medical and disability issues are so common in America today, they must be confronted “head on.” Any financial plan that attempts to ignore these potential wealth-destroyers is playing with fire.
Usually, the best way to get health insurance is through your workplace if they offer group coverage. And thanks to the Consolidated Omnibus Budget Reconciliation Act (COBRA), your group health insurance is portable in the event that you lose your job.
There are two major types of health insurance today: Health Maintenance Organizations (HMO’s) and Preferred Provider Organizations (PPO’s).
The trade-off between these types of coverage involve costs.
HMO’s offer low cost health coverage but with a limited choice of medical providers. If you want to use a health provider outside the “network” of providers within the HMO, you will usually not be reimbursed.
PPO’s were created as a solution to the limitations inherent within HMO’s. Therefore the PPO offers more flexibility in choosing a provider. However, the trade-off is that PPO’s typically cost more.
Income Protection 101 – Long Term Care Insurance
Our final topic for this article is Long Term Care insurance. Many Americans work a full lifetime accumulating retirement funds, buying appreciating assets, and creating income streams only to have their financial plan decimated by a illness during retirement. Some of the saddest financial planning stories that I know, and that I have seen first hand, involve the financial destruction of an elderly couple’s finances after a life changing medical diagnosis required one of them to move into a nursing home. Today, the average nursing home stay costs on average $75,000 per year. And if you want a private room, it will cost even more.
I am a strong advocate of using long term care insurance to strategically safeguard an individual’s estate.
Before proceeding, be sure that you:
|– Examine your disability, health, and long-term care insurance (if you have them).||– If your employer offers disability coverage at a reasonable cost, run (don’t walk) to the HR department and request this coverage.||– Review your premiums and deductibles and make sure you are getting the best deal.||– Make sure each of these areas in your plan looks the way you want.|
When you have completed this step, you are now ready to proceed to step three, which is to examine your Life Protection!