What
would your family do if you had a temporary or permanent loss of
income? While most could handle a short-term loss of income such as
a job loss or temporary illness, few families can financially endure
a more sustained loss of income.
Consider
the following statistics from the Journal of the American Society of
Chartered Life Underwriters:
-
People
age 35 or younger have a 50% chance of becoming disabled for at
least 90 days prior to reaching age 65
-
People
between the ages of 40 to 50 have a 40% chance of being disabled
prior to turning 65
-
60%
of those who become disabled between the ages of 35 to 55 remained
disabled after 5 years
-
70%
of all disability applicants are rejected for Social Security
disability benefits (Source: Social Security Handbook)
We
generally recommend clients take a two-tiered approach to protecting
against an unexpected loss of income.
-
Establish
an emergency fund that is adequate to cover approximately 6 months
of your household expenses in the event of a temporary loss of your
income (through a job loss or short-term disability).
-
Obtain
a disability income insurance policy to cover a sustained loss of
income exceeding 6 months.
Disability
Income Insurance
As
with most insurance products, there are many types of disability
insurance policies. However, from the most basic standpoint,
disability insurance can best be categorized into two types of
policies based on their definition of disability.
Own
Occupation policies
will generally cover a disability if you cannot perform the job
duties of your specific occupation. "Own Occ” policies, as they
are commonly referred, are the most comprehensive and expensive form
disability income insurance. If an insured cannot perform the exact
job held before becoming disabled, they would receive a benefit under
the terms of an own occupation policy.
Any
Occupation policies
will only pay a benefit if your disability prevents you from
performing any job. This type of disability policy is so limiting in
its definition of disability that benefits are rarely paid (the
Social Security Administration uses this definition of disability
when granting disability benefits).
Selecting
a Disability Income Policy
Check
with your employer or professional organization that you are a member
to see if you are eligible for group disability coverage. Group
policies are usually cheaper than individual policies.
Unfortunately, with most group policies your coverage may cease if
you change jobs or drop out of the professional organization offering
the coverage.
It
may be most appropriate to seek coverage through a highly rated
insurance company. Since disability income insurance can be somewhat
costly, here are a few of the key features of disability insurance
that can be adjusted to meet your specific needs:
Benefit
Amount
– this is the monthly benefit your policy would pay if you were to
become disabled. Most policies will replace no more than 70% of your
earned income prior to the disability.
Benefit
Period
– this is the amount of time your policy would pay a benefit in the
event of a disability. Common benefit periods are 2 years, 5 years
or to age 65.
Elimination
Period –
this is the amount of time that you would need to be disabled prior
to receiving any benefit from your policy. Longer elimination
periods result in less expensive policies. We generally recommend an
elimination period of at least 90 days.
Cost
of Living Adjustment
(COLA) – this is a rider that allows your benefit amount to be
adjusted periodically for inflation.
If
you have any questions, or would like to discuss disability income
planning in the context of your specific financial plan, please
contact Chip Hymiller, CFP® or Erin Campbell, CFP,
CPA/PFS with Beacon Financial Strategies at (919) 321-8625.
Beacon
Financial Strategies is an independent financial planning, tax and
investment advisory firm. Beacon works with clients on a consultative
and objective basis to help them achieve their personal financial
goals. Beacon professionals specialize in the following areas of
financial planning: retirement feasibility planning, estate planning
and coordination, tax minimization strategies, and wealth management
services. For more information, visit Beacon's Web site at
www.BeaconFinancialStrategies.com.