Protecting Your Income
The leading cause of bankruptcy will shock most people. It is not poor money management, bad business deals, or taking on too much debt. The leading cause of bankruptcy is unpaid medical bills and bills related to a disability preventing an individual from earning income to pay their bills. The possibility of sustaining a long-term disability from an accident or illness is something most of us would rather not contemplate. However, there is a way to help protect yourself and your family should you lose your ability to earn an income. PERMANENT (to supplement your employer sponsored) long-term disability income insurance can play a key role in your overall financial plan, and provide a benefit to help replace a portion of your income in the event of a total disability. Think of yourself as an ATM. You're filling up your reserves everytime you go to work. We go to school, take professional development classes, and work for promotions to increase the ability to have larger reserves. Shouldn't we make sure the ATM has a backup ATM in case it ever breaks down?
Evaluating Your Needs While most people understand the necessity and value of life insurance, many may overlook the valuable role disability income insurance plays in your financial strategy. How will you support yourself and your family if you cannot work as a result of an accident or illness? For most, Social Security cannot be solely relied on to replace lost wages. THIS IS ESPECIALLY TRUE FOR SKILLED PROFESSIONALS. One must meet very specific criteria to qualify for disability benefits, and it is often necessary to wait several months for payments to begin.
You may be able to “get by” for a few months on your savings, but if the disability is prolonged, you may exhaust most—or all—of your savings. Further financial hardships may then follow. You may miss mortgage, car, and other credit payments, causing damage to your credit rating. Utility bills, tuition, grocery bills, and business/professional expenses will also continue despite disability and loss of income.
The bottom line is that losing your ability to earn an income may make it difficult to make ends meet. Disability income insurance can be a practical solution to help protect your financial security in the event you become disabled. Disabilities or illinesses that can keep you from working for a long period of time include, but are not limited to: Hypertension, Heart Disease, Cancer, Diabetes, complications from pregnancy, and the list goes on. These types of events can happen to anyone and you should be particularly aware if you have them in your family history. You are uninsurable once you develop any of these and will regret not taking the proper defensive measures.
Types of Coverage Available Depending on your income, the maximum coverage will typically replace 45% to 75% of your pre-disability earnings. The cost of the coverage will depend on such factors as the risk level of your occupation, your age, your health history, and the scope of coverage. Professionally employed individuals are typically in a lower risk category than those engaged in more physically demanding work. Individual disability income insurance is by application and is subject to underwriting approval. Employer disability is generally group coverage that can be canceled by either your employer or the insurer. Group coverage will NOT follow you to a new employer. Thus, you are exposed and at risk if your health should ever change. Individual coverage that you control fills that void.
It should also be noted that when you pay the premiums (vs. an employer-provided policy), the benefits from individual disability income policies is tax free. If your employer has a salary continuance plan, you should know the dollar amounts of coverage, the waiting period, and the length of payments, so you can coordinate your individual coverage with your employer-provided benefits.
When examining the contract provisions outlined in a potential disability income insurance policy, consider the following:
- Definition of total disability: Does the policy provide coverage in the event that you cannot perform the duties of your own occupation or the duties of any occupation? The former offers better protection, PARTICULARLY if you are a highly skilled professional.
- Length of benefits payable: Depending on your choice of coverage, the policy may pay benefits until you reach age 65, the age at which many individuals choose to enter retirement.
- A reasonable waiting period: Waiting periods (prior to receiving benefits) are typically between 90 and 180 days, depending on your policy. To determine the length of waiting period you can reasonably manage, consider your liquidity, sick pay, and any money owed to you.
- Is the policy non-cancelable?: As long as your premiums are paid on time, most carriers cannot cancel or change your policy, or increase premiums before you reach age 65.
- Does the policy offer any type of residual disability benefits?: Some policies will provide a benefit if, while still disabled, you return to work but suffer a loss of income as a result of the disability.
- Future insurability: If available, this rider allows for the purchase of future coverage without regard to medical insurability.
It is important to note that the cost of your disability income insurance policy will vary according to the scope of coverage you choose, and there may be an additional premium charged for adding any riders.
Disability income insurance can help protect your most important asset—you and your ability to earn an income. Reviewing your disability coverage may help you determine what type of policy would best help protect you and your family.
Disability income insurance policies have exclusions and limitations.
Feel free to contact me if you have questions and want more information.
K. Orian Williams, J.D.
Financial Services Professional
Fleur de Lis Financial an agency of Mass Mutual Financial Group
One Galleria Boulevard
Metairie, LA 70001
The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.