The Art of Business > edited by Josh Ripps

Disability Insurance: Are you Covered?
by Bryan Kaarlsen

Few working people think about becoming disabled, and why should they when they’re healthy, productive employees? Consider this: according to data from the Society of Actuaries, a 35-year-old has a 50-50 chance of being unable to work for more than three months before age 65. Although individuals may think they are covered because they have disability insurance through an employer, what they don’t realize is that this may not provide their families with all the protection needed. A disability can have a devastating impact on a family’s finances.

Expenses for mortgage, rent, groceries, and other necessities continue even while a wage earner cannot work. Just one year of total disability could completely consume an entire savings of a person who has been conscientious enough to save 10 percent of his or her income each year for 10 years (Agency Sales, September, 1999).

Disability income insurance provided through an employer often pays only a percentage of income, covers salary but does not cover commissions and bonuses, has a maximum cap, often offsets benefits by any Social Security payments received, and results in benefits that are taxable. Many people blindly assume that their employer-sponsored benefits package will carry them through if they are unable to work. While the odds of becoming disabled are greater than many people realize, the risks of suffering a major decline in income as a result of inadequate disability income insurance are far more certain. Most income earners, regardless of income level, have spending commitments that consume 65 percent to 75 percent of normal cash flow.

Group Disability Income Coverage (typical features):

• generally covers about 60 percent of base salary
• benefits are usually taxable
• does not cover incentive compensation such as profit sharing contributions, deferred compensation, commission income, or regular incentive bonuses
• usually caps at $5,000, $10,000, or $15,000 a month
• the benefits scale runs to a top base salary of $100,000 (This means that anyone making more than $100,000 in base salary who becomes disabled receives a reduced benefit.)
• generally offsets benefits by any Social Security payments received
Some employees mistakenly believe that the government will fill in the gaps left by a company plan. Yet, according to the Journal of the American Society of CLU & ChFC, only 43 percent of those who apply for Social Security benefits ultimately qualify for them. For those who do qualify, the program pays an average of only $722 per month (Associated Press, 6/30/99).

Calculate Your Disability Income

Clearly, everyone who relies on a paycheck needs to assess how well he or she would do if they were unable to work. As a first step, it’s important to consider consulting with an experienced financial representative who can help evaluate your needs. Look for someone who is both knowledgeable and trustworthy. Make sure the insurance company that person represents is reputable, based on the company’s market share, financial strength and stability, financial ratings, and commitment for the future. Once selected, the representative can help determine how much income would be available through employer provided disability income, as well as through investments and other sources. The representative can also help assess what type of taxes this income might be subjected to, to help decide the actual amount of money available.

As a next step, the representative can help determine a person’s expenses in the event of a disability. Key considerations include mortgage, groceries, and other basic living needs. Because most income earners, regardless of their income level, have spending commitments that consume 65 percent to 70 percent of normal cash flow, it’s wise to secure disability income insurance for 65 percent to 75 percent of normal earned income if possible (National Underwriter, April 2000). If that additional disability income coverage is needed, a financial representative can advise what types of supplemental plans would be appropriate. Underwriting rules by insurance companies often dictate how much coverage is available to an individual, but the wide variety of plans on the market today can suit many different income levels and needs. The process need not be a grueling one, and it should not require undue amounts of time. But, it is important to ensure that a solid income protection plan is in place. This is probably one of the most important financial needs that an individual has.

Life can take an abrupt curve. Sometimes, it seems, in seconds. In expecting the unexpected, it’s crucial to be prepared no matter what path life takes.

Bryan K. Kaarlsen is a Financial Representative with Northwestern Mutual Financial Network based in Newburgh for The Northwestern Mutual Life Insurance Company. Bryan lives in Newburgh with his wife Karen and three children Courtney, 9, Kayla, 6,and Bryan, 3. Kaarlsen has worked in financial services in the Hudson Valley for over 10 years.