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Disability
For those of us still working (and particularly if you are your family's primary income source) our biggest risk is loss of income. Loss of income comes from three possible sources: accident, illness or death. Statistically, an accident or illness leading to disability is more common than pre-mature death. In fact, at age 45 the chances of disability are twice as high as that of death. Thus, long-term disability (LTD) insurance is very important.
Let's start with group policies offered through an employer. While these policies are a great benefit, they may not fully cover an individual's risk. First, does your policy cover what is known as your "own" occupation, or will it expect you can take a lower skilled position to generate income. This is of particular concern to specialized occupations such as doctors or accountants. Next, consider how much of your salary will be replaced in the event of disability. Many group policies cover only 60% of salary, with no coverage of bonuses. Can your family live on 60% of your salary? A further constraint is that many group policies have income caps that limit annual payout regardless of salary. In addition to annual payout limits, some group policies may limit the number of years payout is available based on the severity of the disability. Always remember that employers who provide group policies must consider cost and compromising on own occupation protection or salary coverage is not uncommon.
An individual LTD policy can be purchased separately as a stand-alone, or to augment existing group policy coverage. An individual policy will provide added flexibility to specify your own occupation and salary coverage of up 80%. Annual payout caps and payout time limits can also be avoided. For self-employed individuals, an individual LTD policy is almost a necessity.
Premature Death
Although pre-mature death is less common than disability, that doesn't mean it should be ignored. Continuing with the concept of income protection, it is easy to see that premature death can remove a significant portion of expected earnings. Let's consider an example: imagine a 40-year old male, with a stay-at-home wife, two children, mortgage payment and a consistent $75,000 annual income. If he expects to work to his full retirement age of 67, he can expect to earn more than $2 million over the next 27 years (not considering raises or inflation affects). If he dies prematurely without insurance, depending on timing, his wife could face some financial challenges. The house and future college expenses come quickly to mind. Granted, he may not need, or be able to afford a full $2 million in life insurance coverage, but it is important that he and his wife consider their risks, needs and what they can afford. Perhaps they would only want enough coverage to pay-off the mortgage. Or maybe the mortgage and a college fund. Whatever they choose, it all starts by sitting down and having a serious conversation about how to manage the risk. If our imaginary friend has group life insurance through his employer, it may only provide two times his annual salary, or $150,000 in death benefit. Is that enough to provide financial stability for his family?
Life insurance policies come in many flavors and have many options. To generalize, there is pure life insurance, a.k.a. term insurance, which only offers a benefit in the event of death. Life insurance can also include a savings component via policies known as whole or universal life. Variable life policies go further by adding an investment feature. Again, the key is to understand the risks and protect your income within reasonable means. |
