Are You Prepared For A Disability?

My knee hurts. It's been bothering me for over a year. Physical therapy has helped a little. Seeing a chiropractor has helped a little. Even with daily stretching and strength training I still experience an annoying level of chronic pain.

The good news is a recent MRI showed my problems can be remedied with arthroscopic surgery. Hopefully I'll be back to full function soon. I miss my bike.

I've been thinking about my knee as it relates to my job. What if I wasn't a financial planner that sits around all day? What if I worked as a field engineer or in any other career that requires being on your feet. Would the movement required in another field impair or eliminate the ability to perform my duties? If it did and I couldn't work, how would I be able to support my family?

Most of us work for employers offering disability insurance. Typically, an employee is automatically enrolled in a disability program covering 100% of compensation over a short period of time (30 to 180 days) as well as long term disability covering 50% - 60% of income. Don't just assume you have coverage. Ask your HR department if you need to sign up during an open enrollment period.

I always recommend to clients they investigate if they pay for their disability with pre-tax or post-tax dollars. The way the coverage is paid for matters because the method of payment determines if a disability payout will be taxable or not.

Let's assume you make $100,000 and your spouse doesn't work. You carry workplace disability insurance covering 50% of your income, and you suffer a malady preventing you from working for 35 months (that's the national average*). A few things happen; after your first few months of full income replacement, you're now making half of what you grew dependent on. In addition, your disability insurance is paid for with pre-tax dollars from your paycheck. This means your after tax income is reduced by 15%, your new marginal tax bracket. Congrats, you now take home $42,500/year.

And you now have medical bills, which everyone loves dealing with. Don't laugh. I just received a bill for $445 for a basic nasal swab lab test during a recent sick visit to the doctor. And I only had a little cold. Imagine if you were battling cancer on a high deductible plan with a 5-figure out of pocket maximum!

Here's some more scary...

• Just over 1 in 4 of today’s 20 year olds will become disabled before they retire (U.S. Social Security Administration, Fact Sheet February 7, 2013).

• 56.7 million Americans have some level of disability. They represent 19% of the population. More than half have a severe disability (U.S. Census Bureau, July, 2012).

• The actual odds for a worker entering the workforce today of becoming disabled for 3 months or more during their working careers is about 25% (U.S. Social Security Administration, Fact Sheet February 7, 2013).

• While many people think that disabilities are typically caused by freak accidents, the majority of long-term absences are actually due to illnesses, such as cancer and heart disease (Life and Health Insurance Foundation for Education November, 2005).

• The average group long-term disability claim lasts 34.6 months (Gen Re, U.S. Group Disability Rate & risk Management Survey 2012, based on claims closed in 2011).

• Just 10% of disability cases account for more than half the total medical and disability costs (Integrated Benefits Institute, IBI News September 8th, 2008).

Despite these statistics, we continue to associate prior good health with future good health. It's the superman effect; I'm invincible, and nothing can touch me. Folks are actually correct that the likelihood they'll get hurt on the job is quite low. But they're right for the wrong reason. It's not that they won't get hurt. It's that their chances of getting sick or hurt outside of work is much higher than they realize**.

A good Financial Plan will help identify a disability insurance weakness. If your retirement plan blows up when a disability event is modeled, you should consider the following four strategies very seriously.

Ensure Retirement Savings Is More Than Adequate

If your retirement goal is barely on track, what do you think will happen if you can't continue your contribution schedule? Throw in weaker than expected market returns prior to your retirement date and your golden years suddenly aren't so golden.

Build A Healthy Emergency Fund

The CFP Board recommends 3 to 6 months of living expenses. Many times I recommend a bit more; enough to cover living expenses if you find yourself out of work plus some cash to cover insurance deductibles and out of pocket medical expenses.

Carry More Disability Coverage

The first place to start is your employer. Most benefits programs allow an employee to bump their coverage up by 10% for a nominal cost. This is a no brainer, however it's typically not enough. Obtaining supplemental disability insurance to bring total coverage to ~ 80% of compensation is usually a smart move. An even smarter move is to work with an insurance broker who can shop the marketplace and help navigate policy mechanics like own occupation protection. I strongly recommend avoiding agents representing only one company or "fee-based" financial advisors that sell products on the side (this is most financial advisors by the way).

Talk With Your Spouse About Their Return To The Workforce

If the breadwinner goes down, can the spouse rejoin the workforce and pick up the slack? Can they earn enough to keep the financial plan afloat? If the disabled person is now at home, are they able to perform all the household / kid duties? These are important questions to address before one has to.

Disability insurance protects our ability to earn an income. For investors more than a decade away from retirement, future income is usually the greatest asset. Even if you're closer to retirement like many of my clients, you probably still need to take the proactive steps above. Doing so will mitigate the common weak link in most of our financial armor.

If you want a little assistance deciphering your workplace benefits plan, use the Shoot Us An Email section below to reach out. Explain your situation, and we'll be in touch to help guide your disability insurance decision making process.

* Gen Re, U.S. Group Disability Rate & risk Management Survey 2012, based on claims closed in 2011.

** Counsel for Disability Awareness, Long-Term Disability Claims Review, 2013.

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