Securing Your Lifestyle With Disability Insurance

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By Neil Boone, CFP® and Ryan Quigley, CFP®

What’s your most valuable asset? Like most people contemplating that question, you might think of your home, retirement or brokerage accounts, rental properties, business, or personal property. While those are all assets of value, you may overlook the asset that made it possible to accumulate those things.

Imagine you have a machine in your garage that prints $175,000 every year. You rely on the money generated by the machine to pay your mortgage, student loans, car payment, dinners, entertainment, and travel—the entirety of your current lifestyle. As each year passes, the machine prints an extra 3 percent to keep up with inflation. You calculate the machine’s printing potential for the next 30 years to be just over $8.3 million. Not bad, right? That is, as long the machine continues to work flawlessly.

You may have guessed it by now, but that money machine is your ability to earn an income, and that may be your most valuable asset. Of course, the machine may not work flawlessly over the next three decades. If you experience an illness or injury and can only work part-time, let alone not work at all, how will you continue paying for your current lifestyle and support your loved ones? How will you save for the goals that lead to your happiness? What back-up plan do you have in place to make up for lost income?

Securing your lifestyle in the event of a temporary or permanent disability requires a thorough planning process. Let’s look at how disability insurance can help you protect your future and what you need to consider during the planning process.

The Planning Process

According to the Social Security Administration (SSA), more than one in four of today’s 20-year-olds will experience a disability lasting at least 90 days before they reach the age of 67. Most people only consider worst-case scenarios like spinal cord injuries or amputation. But things like cancer, back injuries, and heart attacks make up the bulk of disability claims. It’s important to understand these risks affect a broad group, and it’s vital to start planning now before hindsight tells you otherwise.

Cash Flow and Other Sources of Income

If the income you generate is reduced partially or completely due to a disability, first determine your other income sources (rental or spousal income, etc.). Next, if you have retirement and investment accounts, you will need to determine the income that those assets can generate over a given period.

Once you have calculated your income from other sources, take the difference between your main income and other sources to determine if there is a need for additional planning. Do the lifestyle expenses exceed and outlast the other sources of income? If so, what can you do to address the need?

Understand Your Options

Below is a list of sources that may provide supplemental income to your household:

  • Friends and family financial support
  • Supplemental Security Income (SSI)
  • Social Security Disability Insurance (SSDI)
  • Pension disability benefits
  • Disability Insurance (employer and Individual)

There are significant differences between these various sources. In many cases, the process of obtaining supplemental coverage or qualify for benefits can be time-consuming and challenging—which makes life even harder if you are dealing with the loss of income and disability.

The Social Security and Supplemental Security Income disability programs are the largest of several federal programs that aid people with disabilities. While these two programs are different in many ways, both are administered by the SSA. Only individuals who have a disability and meet medical criteria may qualify for benefits under either program.

Private and government pensions generally provide disability benefits to eligible employees.

If you are an employee of a company that offers disability insurance, your company’s benefits handbook is a good place to start. What benefits are offered under short- and long-term disability insurance? Typically, group disability insurance is available to all employees, meaning you will not be subject to medical underwriting.

You can also obtain disability insurance individually. For example, a 35-year-old self-employed individual with a need for additional coverage may have to obtain individual disability insurance directly from an insurer. The process is usually subject to medical and financial underwriting.

Overall, some general considerations for obtaining individual coverage include:

  • Financial position
  • Benefit eligibility requirement(s)
  • Medical history and current health
  • Amount of benefit, benefit period, and waiting period
  • Definition of disability
  • Type of occupation
  • Cost of insurance
  • Cost of living adjustments to ensure adequate coverage in the future

The Importance of Objectivity

You can see that the planning in this area requires a lot of time and expertise, including the need to work with a professional—but not just any professional.

At Brighton Jones, we believe that the cornerstone of any financial plan is objectivity. In the world of financial services, objectivity can be achieved by working with a fee-only fiduciary advisor who acts in your best interest. Brokers and insurance agents are compensated by commissions and fees, which inherently come with conflicts of interest.

Your ability to earn an income may be your most valuable asset. If your resources are limited, and there is a need for additional disability planning, you have options. Work with a fee-only advisor to help you navigate the complexities of disability insurance.

Neil Boone, CFP® and Ryan Quigley, CFP® serve as advisors in Brighton Jones’ Scottsdale office.

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