Part of being financially secure is protecting yourself and your family from the unexpected. Besides possible risks to your life and property, it is important to have a plan to deal with threats to your long-term income and savings. Think about it: what would happen if you became sick or injured and unable to work?
For most people, the ability to earn an income is their most important asset, the means for achieving personal and financial goals. Many protect their property and life with insurance, but their odds are greater for suffering a long-term disability than for dying prematurely. An unexpected injury or illness can have physical, emotional and financial impact – for the short-term and possibly for a lifetime. Be aware of the following to understand how to protect yourself and your family.
A disabling injury or health problem that affects your ability to work can occur at any time – whether due to a serious illness, a disabling mental or physical condition, or a lengthy recovery. A 42-year-old is 3.5 times more likely to have a long-term disability (lasting at least 90 days) than to die before reaching age 65. When this happens, earned income stops but you still have monthly costs for housing, food, clothing, loans, insurance and maintenance. There may be more expenses for necessary physical care, medical equipment, and help with activities of daily living. In addition, you may have education, retirement savings or other financial security goals.
To protect against the impact of a disability, you need to plan how your family might handle such a situation before it happens. Who could help manage the house, provide transportation to medical appointments or handle family needs while your energy and attention are focused on physical care? Whom do you trust to handle your finances? You may not want to share details now, but do create a summary of your income sources and financial obligations, medical information and providers, and other essential information, just in case. Be prepared with a legal power of attorney, health care power of attorney and advance health care directives. Discuss with your family how you would like things to be managed if something happens to you. It is a difficult, but important, conversation.
Disability can have a dramatic impact on income unless you are protected through an employer group or individual disability insurance policy, or both. Be sure you know what short-term and long-term disability coverage is available to you and the benefit amount and benefit period it covers.
Employer/group disability insurance programs provide helpful coverage, but may still not meet your needs. Short-term illnesses or injuries often are covered by sick leave, and some employers offer additional short-term disability insurance. Long-term group disability insurance (conditions lasting more than 90 days) is designed to replace part of your income (50 to 60 percent) when a qualifying condition is ongoing or permanent. Compensation such as commissions or bonuses often is not included in the calculations and benefits may be capped for higher-paid employees. A typical group disability insurance benefit would pay $36,000 a year to someone who was earning a salary of $60,000, and the payment could be taxed.
Individual disability insurance may offer more comprehensive coverage and flexibility to meet individual needs. Pensions, commissions and bonuses may be considered insurable income for these policies, and benefits may be payable for total and partial disabilities without tax. Your financial representative can help you find the right protection for your particular needs.
Other disability coverage may be available on a limited basis, depending on your condition, but is likely to be limited. Worker’s compensation provides benefits for illness or injuries that occur on the job, but only about 4 percent of disabilities are work-related. Some people receive Social Security Disability Insurance benefits, but to do so a person must be so severely impaired that they cannot perform any substantial, gainful work. Only 35 percent of the 2.8 million claim applications for Social Security Disability Insurance benefits were approved in 2009.1
Your earning power is your most important asset and the surest path to a secure future. Protect it by taking care of your health, avoiding risk and planning ahead to handle possible issues. Understand the disability insurance benefits you currently have and where they could fall short of meeting your needs. Do not expect to rely on Social Security, worker’s compensation or even a company disability policy to protect you, but fill the gaps with individual disability insurance. Your financial representative can help you find the best disability coverage and take advantage of other protections available in the event of disability.
12010 CDA Long-term Disability Claims Review, Council for Disability Awareness