Have You Protected Your Most Important Asset? 4/29/07
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
Have You Protected Your Most Important Asset?
“Have You Protected Your Most Important Asset?”
Perhaps the most often overlooked insurance coverage is disability income coverage. However, this should be a key concern since approximately one in five people will suffer a disability during their working life. Remember, your single most important asset is your ability to earn a living.
Disability Income Insurance is a contract provided by an insurance company whereby the insurer agrees to pay you a certain income for a specified period of time should you become disabled through an accident or illness and be unable to work.
Many people, including high-income earners, live virtually paycheck to paycheck. If your paycheck stops, where would the money come from to pay your bills for the next six months, one year or five years? If you don’t have an answer, most likely you need disability income insurance.
There are two possible instances when you may have little or no need for disability income insurance:
1) Your spouse has a substantial income that is enough to pay the family expenses.
2) You have accumulated enough income producing assets so that disability income insurance is not necessary.
However, you should exercise caution when making this assumption since expenses related to a disability may significantly increase your initial and ongoing expenses.
How much Disability Income Insurance should you have? The maximum coverage that most insurance companies will issue is 60% to 70% of your gross income. In most cases you will want maximum coverage.
Two types of disability coverage may be available to you:
Group Coverage. Many larger employers provide group disability income coverage. Also, many trade and professional associations offer group coverage. However, don’t assume that group coverage is always adequate as it often provides limited benefits for a very limited period of time.
Individual Coverage. If group coverage is not available to you, then you will need to buy an individual policy. While the costs will initially be significantly higher than a group policy, an individual policy has advantages. First, it is portable. If you change jobs, it goes with you. With group insurance, if you terminate or are terminated, you lose your coverage. Second, if you become disabled, the benefits you receive are tax-free. Group benefits are taxable if your employer pays the premiums, meaning you may need additional coverage to cover income taxes on the benefits. Finally, individual policies offer optional riders you’ll want to consider.
Once you have decided how much insurance you need, you should choose your policy features. Ideally your policy will insure you ‘in your own occupation’ for a minimum of two years. Disability policies often have elective options that you don’t need and should not pay for. Typically, I recommend a 90-day waiting period with benefits paid to age 65. Be sure your policy has a Partial Disability feature, meaning if your disability results in loosing, say, 50% of your income, the policy would pay you 50% of the benefits. You may also want to include a Cost of Living Adjustment Rider as well as an option that allows you to periodically increase your coverage without a medical exam.
For more information about disability income coverage, go to the