Disability insurance can be the key to protecting your assets if you have a car accident or a serious illness. If you have people who depend on your salary – it’s a must.
Working Men: Believe it or not a male age 35 has a 32% chance of disability.
Women: The statistics show that a female age 35 has an over 52% chance of becoming disabled for at least 90 days prior to age 65. That’s over half of all females. So that’s why Disability Insurance is so important for both men AND women.
Head of Households: if you are the major breadwinner in your family, you need Disability Insurance. For example, a 35 year old making $150,000 today will earn over $7.1 million dollars during their working career up to age 65. Should an injury or illness occur, where will money come from to help pay for ongoing mortgage, car, and ongoing expenses?
Employees with a Group Long Term Disability Plan: Most employers will offer or provide a Group Long Term Disability plan (GROUP LTD). The typical structure is designed to pay 60% of your pre-disability income to a maximum of $5,000 or $10,000/month. If we look at the $5,000 monthly cap, that means that anyone who is earning more than roughly $8,000/month in gross earnings will be limited to $5,000 of income. If you are one who is limited by this type of monthly cap, you could be well underinsured…suppose you are earning $12,000/month and are capped at $5,000? With 60% of your $12,000 equal to $7200/month but capped at $5,000, you are in the hole $2,200 per month. That might be the difference in car or equity line payments or other ongoing obligations.
Here’s what’s worse…since most employers pay for the Group LTD plan and deduct the premiums as a business expense, any benefit received will be taxable as ordinary income to the recipient. So, if we use the example of the above individual earning $12,000/month gross, not only do they lose the difference between the $5,000 monthly cap and their 60% replacement of $7,200, the $5,000 will be taxed leaving the disabled employee with somewhere close to $3000/month net…this is hardly reflective of the pre-disability $12,000 monthly income.
The real key in this planning area is to ask questions…ask if your company provides a Group LTD plan; ask what the monthly cap is; ask what percentage of lost income it replaces, i.e. 60% or 66/23%. Then, we need to look at your income and see how much of a taxable loss there might be and also how much additional protection you can obtain from an individual supplemental plan so that your full working income is protected.