By FPA member A. Christopher Engle, LUTCF, CFP®, ChFC®
Last Updated: June 21, 2010
You’ve heard over and over that about half of all family bankruptcies are due to medical expenses. It must be true. A Harvard study said so. It was repeated by politicians on what seems like every TV station and every newspaper. Now that the Health Care Reform has passed and will become law, medical bankruptcies should be wiped out like polio, right? Well, not quite.
While the Health Care Reform may help you with your medical bills, it does nothing to help you replace your lost income when you are sick or recovering from an accident. In the same Harvard study, it was determined that loss of income was the primary cause in 21 percent of the bankruptcy cases.
How long would your savings last if you could not go to work? What would happen to your retirement plans and college savings? What if you had to live on your credit cards? What would be the impact on your financial plan? How many weeks of lost income are you from personal bankruptcy?
According to the National Association of Insurance Commissioners Individual Disability Table, your chances of becoming disabled for at least 90 days are greater than one in three. Health insurance will pay the doctors and hospitals, but who will pay the mortgage, car payment and put food on the table.
So how do you protect your financial future from disability?
The first step is to review your situation with a qualified financial planning professional — one who will help you evaluate this risk as it fits in with your overall plan. Here are some important considerations:
- Does your employer provide disability benefits?
- Are the after-tax benefits adequate to cover your expenses and other needs?
- How long do you have to wait for benefits after you become sick or hurt?
- Do you have enough emergency savings to cover the waiting period?
- Once you are sick or hurt, how long do the benefits last?
- Does the policy cover both accident and illness?
- Does the policy pay benefits in addition to Social Security or Worker’s Compensation?
- Does your benefit go up with inflation over time?
Once you answer these questions, you may determine that you need to purchase additional individual disability income insurance. You should look for policies that best fit your needs from quality insurance companies. Policies that are guaranteed to be renewable and non-cancellable have the benefit of a level premium that cannot be increased. Also, you can only be cancelled if you fail to pay the premium.
Look at the definition of disability. Does it cover you in your specific occupation or do you have to be unable to do any occupation for the benefits to be payable? What happens if you are able to work part-time? Partial or residual provisions in policies would provide a partial benefit if you could work part-time while your recover.
Make sure you know how long your benefits last. In general, consider a policy that pays benefits for 65 days or longer. If you have good savings, you can choose a longer waiting period such as 90 or 180 days. This is a great way to protect you from a long-term financial disaster while saving money on the premiums. You are going to want to get back to work, so a policy with a rehabilitation clause will provide coverage for services that get you back on the job.
It sounds overwhelming. This is why your first step should be to discuss it with your financial planner. They will help you evaluate insurance provisions and fit them into your overall plan. In addition, they will compare the insurance companies for your needs and cost.
Remember, your most valuable asset is your ability to work and earn a living. Your families’ financial future depends on it. Planning for disability may be the most important part of your financial plan. Make sure you review this with your financial professional.
FPA member A. Christopher Engle, LUTCF, CFP®, ChFC®, is a partner with Argus Financial Consultants in Grand Rapids, Mich.
Securities offered through LPL Financial, Member FINRA/SIPC.
