Making Sure Money is Still There When You Can’t Work
Statistics from the Social Security Administration show that three out of 10 workers entering the workforce today will become disabled at some point. According to a study by the Health Insurance Association of America, one in seven workers can expect a disability to last for at least five years prior to retirement.
This is a risk that many overlook. If you haven’t already, you should consider a disability income protection policy to help you replace wages (and other forms of income) that could be lost in the event of an illness, or injury that takes you away from the job for an extended period of time.
When it comes to disability coverage, there are three types of situations for people:
• Those who have sufficient coverage in place.
• Those who have coverage, but probably not enough to replace all of their income needs in the event of a disability.
• Those who have not taken steps to protect their income and cash flow needs if a disability should occur.
Too Much Risk—Too Little Coverage
Unfortunately, too many people fall into the second and third categories, and are either under-insured or uninsured. It is important to assess the situation in a realistic fashion to make sure you are adequately protected from unforeseen events.
You may have some disability coverage through your workplace. If premiums for the policy are paid by your employer or taken out of your paycheck before taxes, this means any disability benefits received will be considered taxable income. Typically, workplace benefits provide enough coverage to replace 60 percent of their regular income. If the benefits you receive are subject to taxation, the net amount you keep after tax could, in effect, represent half or less of your current income. It is important for you to determine whether such a policy provides enough protection for you in the event of a disabling injury or illness.
If you purchased a policy on your own, paid for with after-tax dollars, the benefits would be tax-free if you receive them. But even in that situation, you need to determine if the level of coverage is adequate for your needs. Consider the impact on your expenses if you are unable to work for an extended period of time.
Along with expected expenses that need to be paid each month, such as a mortgage, food or household utilities, you may incur other unexpected costs associated with your condition, such as increased medical expenses or the cost of modifications to your home, depending on the type of disability you face. In addition, you may need to hire people to perform tasks you would normally do yourself.
Most people who buy coverage will use their base salary as a guideline to determine replacement income. However, if a large portion of your annual income is derived from bonuses, commissions, overtime pay or employer contributions to your retirement plan, you may find your current policy comes up short. Consider whether, in reality, your lifestyle would require a higher benefit payout should you become disabled.
Protection You Should Not Live Without
The Social Security Administration estimates that 70 percent of individuals in the private workforce have no long-term disability insurance. If you are in this group, it puts you in a precarious situation. While many perceive that the greatest risk of disability can come from an accident on the job, in reality, the causes are far more widespread. Among the most prominent reasons that people miss work for an extended period are back injuries, car accidents or serious, unexpected illnesses. If you ever are confronted with a health concern (such as cancer or other diseases or ailments) it is very likely you will be forced to miss work for a few months, if not longer.
If you do have coverage, take a close look at how much it would truly provide for you and your family if you were forced to rely on it. Planning ahead while you are healthy is the best strategy to prevent a serious financial setback if you should become disabled.
Please visit your financial advisor to discuss your insurance plan. Protection is a critical element of a comprehensive financial planning approach.
This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.
Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
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