Monday, June 4, 2012
Savvy Money: Ability to earn money is most important asset – take steps to protect it
In March we talked about life’s bracket busters: disability, illness, and death. We want to explore disability a little more this week because our ability to earn an income is our most valuable asset. While we want to plan for the future, those plans are pretty much tied to our ability to earn money now.
Since most of people think becoming disabled won’t happen to them, let’s start with a few facts: Three in 10 workers will become disabled for at least three or more months during their working career. Seventy percent of working Americans would face financial difficulty within a month of becoming disabled; more than 25 percent would face difficulty within a week of becoming disabled. Pretty sobering, right? There are calculators available on the Internet that will help you determine your personal risk of disability.
So, what would happen if you weren’t able to work? Do you have any other sources of income?
The Social Security system does provide some disability benefits, but it takes a long time to qualify – and 65 percent of claim applications are denied. If you do receive benefits, the benefit is relatively low. The average monthly benefit is just a little over $1,000, so it will cover some of your basic living expenses. I don’t know about you, but our monthly expenses are well over $1,000!
If you are injured at work, Workers’ Compensation might be available to replace some of your earnings. Employers in all 50 states are required to provide Workers’ Compensation coverage. However, Workers’ Comp pays only when the disability is work related. And work-related disability is only about 10 percent of total disability claims.
Employers often offer short-term and long-term disability plans. The short-term disability should replace a large percentage of your income for three to six months. After that period, long-term disability kicks in and usually pays about 60 percent of your base salary. If this is an employer-provided benefit, the disability benefit itself is taxable. Even though many employers offer disability plans, few than one-third of American workers have coverge. Check with your human resources department to see what your current coverage is and if there is any additional coverage available.
You can purchase a private disability income policy. These policies typically will provide 45 to 60 percent of what your pre-tax salary was before your disability. There are two major advantages to these policies: 1) You don’t lose them if you change jobs, and 2) Benefits are tax-free if you pay for them yourself (after-tax dollars).
So, how does any of this apply to you? First, accept the fact that disability CAN happen to you. Secondly, look at what happens if you become disabled. If you become disabled tomorrow, how would you pay your bills? How does disability affect your total plan, including college savings and retirement savings? Would your spouse be forced to take a second job? Again, there are calculators online that can help you identify any gaps in coverage.
If you do not have access to an employer-sponsored plan and you need coverage, contact your insurance agent to discuss purchasing individual disability coverage. If you are a member of a professional organization (attorneys, etc.), check its website to see if the organization sponsors any plans. There are a few drawbacks with an association-sponsored plans – what happens if you change occupations or the association decides not to offer them anymore? The association plan usually offers very competitive rates, though.
One of the important things to remember when looking at benefits and premiums is that if your budget is tight, you don’t have to purchase a Cadillac plan. If you can only afford a plan that pays the mortgage and basic expenses, that is so much better than nothing. A two-year disability might mean that your retirement plans and college savings plans look very different, but a base policy could mean the difference between filing bankruptcy or not filing bankruptcy.
Know that your most important asset is not your home or your investments but your ability to make a living. Take steps to be sure you can take care of your obligations even if disability occurs.
Christina Harrison and Judy Howell, H2 Investments, are affiliated with First Kentucky Securities Corporation (member FINRA, SIPC). They have over 25 years of experience assisting individuals in meeting their investment and retirement goals.