Disability and Income Protection

Protecting Your Income:

  • How will you pay the bills if you become ill or are injured?
  • How will your savings and investment programs be impacted if you no longer have a steady paycheck?
  • Is a one in four chance of becoming severely ill or disabled worth insuring?
  • Which would have more of an economic impact on your family, death or disability?
  • What's your definition of disability? Is it the same as your insurance carrier's definition?

Disability and income protection planning is one of the most important topics in the context of comprehensive personal financial planning. Without careful consideration of disability risks, even the soundest of financial plans can be derailed. This section will focus on the two major areas of disability planning: Pre-retirement disability planning and post-retirement long-term care planning.

As clients approach their retirement dates, disability risks shift from being sick or hurt (and not being able to earn a living) to the risk of having to dramatically spend down their retirement nest egg to pay for the costs of an extended stay in a nursing home, assisted living facility or to fund home health care costs.

Pre-Retirement Disability Planning

It is critical that clients own the proper amount of disability insurance to protect them and their families in the event of an extended disability. To put this risk into proper perspective, it is helpful to quantify the client's remaining earned income to retirement age as an asset. For example, assuming a 20% effective total tax rate, a 35-year-old client, earning $100,000 per year, has an asset of $2,400,000 (30 years x $100,000 per year x .80 tax effect) that needs protecting (assuming an age 65-retirement and ignoring time value of money considerations). This asset is at risk if a client becomes sick or hurt and cannot work anymore. The client will typically understand that they should insure the value of their home and car; however, some clients have not considered their future income as an asset.

Many clients can see themselves "sick or hurt" but not disabled. As the above example illustrates, the further a client is from retirement age and the higher the client's annual income, the greater is their risk of a long-term disability. As the client approaches retirement age, the risk of not being able to work shifts to the risk that they will need to pay for custodial care.

  • Disability insurance policies replace the income of an insured person who is unable to work because of injury or illness.
  • Disability insurance policies replace the income of an insured person who is unable to work because of injury or illness.

Post-Retirement Long-Term Care Planning

According to recent studies based on nursing home admissions indicate that 40% of all persons age 65 and over will enter a nursing home in the future. It is critical that clients understand the risks to their retirement nest egg if they (or their spouse or both client and spouse) need to spend an extended time in a nursing home, assisted living facility or fund home health care costs. This is another key area where a Financial Advisor can add value to client's financial plan. A good long-term care policy (from a top financially rated insurance carrier) on each spouse is a simple way to transfer this risk to an insurance company.