Preparing for the Unexpected Part Two: Failing to Plan is Planning to Fail
It is easy to make plans – for the weekend, vacation, your future – filled with hope, achievement, and success. It is not as fun to plan for catastrophe, but this planning is perhaps even more important than planning for the good stuff in life. What planning subjects begin with the letter “D” and are an immediate turn off? Disability and death; no one ever wants to deal with them. Avoidance is understandable, but unwise. Our previous blog focused on the three documents you should have in place to deal with the unexpected: a Will, a Durable Power of Attorney, and Advanced Directives. Insurance planning is another facet to planning for the unexpected calamities of life. The next step is to provide financial security for yourself and your dependents though a sensible insurance plan. Consider the following as you think about insurance planning:
Your Disability and Recovery Plan.
Get long-term Disability insurance, and, if you can arrange it, pay for it with after tax dollars. Why? Because if you pay for disability insurance with after-tax dollars the benefits you collect will be income tax free. We understand what it means to be insurance poor, but at least plan to cover some of your income if you can’t work, especially for an extended period of time. If you receive disability insurance as part of a benefit package, inquire whether you can receive the benefit on an after tax basis. Yes, you will have to pay a little more income tax come April 15, but the small amount of tax due is worth it. Even small companies typically offer disability insurance as part of their package, often up to 60% of your salary. Think about the difference between 60% of your salary income tax free versus taxable. It could be the difference between dignity and discomfort as you heal. If you are not covered on a group plan, consider getting coverage individually. We asked Scott Boucher of Barresi Financial to weigh in on this subject. He says disability is not as unusual a situation as we might think. “I have seen statistics showing that a 20-year-old has more than a 1 in 4 chance of becoming disabled before reaching retirement age. For so many young individuals, they are living pay check to pay check with no additional savings being set aside. The days of having three to six months of your income set aside in an emergency savings account just isn’t happening. Disability insurance plays such an important role allowing for people to meet their basic financial obligations during a time of rehab or recuperation. I have personally seen individuals rush back to work way before the doctor recommended as a result of not being able to fulfill their necessary financial commitments.”
The old saying “a stitch in time saves nine” applies here. Taking the step to obtain disability insurance will provide peace of mind as well as financial benefits in the instance where you are likely to direly need both. Make sure you have disability insurance to protect your lifestyle. Disability insurance should not replace an emergency fund, however. Most companies do not offer short-term disability coverage, and long-term disability coverage generally does not kick in until 90 days following the incident. This is one of the reasons why we advise clients to have three to six months of basic spending set aside in short term, liquid investments. Note that your spending is not the same measurement as your income. Presumably, during a period of disability, your expenses are reduced without contributions to a qualified plan or normal vacations and typical spending. Taking the time to reflect on what you would really need during a period of disability or even a period in between jobs is time well spent. Remember, with luck, you will not need to rely on the fund, but it good to have it there.
Your Graceful, Permanent Exit Plan.
We discussed the need for an estate plan in our last post, but if you are one of the unlucky few who exit early, you may not have accumulated enough to cover your debts and support your dependents. If you are employed with benefits, you may receive term insurance possibly one or two times your salary, but is that amount enough? Again, we asked Scott Boucher for input on how to determine how much is enough for life insurance coverage. “We treat each client independently. We look at their specific situations and scenarios before making a specific recommendation on the level of coverage a person should have. We take into consideration their current age, income level, family situation (multiple household incomes, number of children), total debt, etc. One quick calculation that is sometimes used is 5x Annual Income + Total Debt + Future College Expenses. However, this is mainly a starting point.” Susan McKay of Allen Freeman McDonnell Agency concurs that individual needs take precedent. “I meet with the person to gain an understanding of their plans, passions and personality. Two people can look identical on paper, but require very different solutions. It is also vital to remember that any plan is a snapshot in time and must be reviewed periodically.”
I then asked our experienced insurance professionals about the advisability of adding more insurance at work versus purchasing it individually. Susan McKay warns “It isn’t that simple. Group insurance can be more expensive at any age depending on one’s health and the amount needed. One can customize their insurance solutions with a variety of plan designs and amounts not connected through their employer. Most importantly, if you actually own your life insurance plan(s) you can better depend on your financial planning process being more on target because the coverage won’t be dropped when/if you change employers, or work past age 65 when many group insurance reduce the coverage levels.” Scott Boucher adds, “Purchasing additional life insurance through a payroll deduction is convenient but does have some downfalls. Traditionally the price increases every five years and does not stay at a set level. The coverage may not be portable and could possibly end once employment is terminated with that employer. However, there may be advantages for persons with chronic illnesses increasing coverage through an employer plan such as obtaining specific levels of coverage that would be on a guaranteed issue basis with no medical questions being asked. Payroll deducted premiums can also be easier to budget in some households. This approach to life insurance is part of the discussion, but not a total solution. Life insurance in general is a challenging topic to discuss because it involves one’s own mortality. You are essentially purchasing this benefit for the ones you love, and not yourself. Once a person finds a spouse/partner to share their lives with, outlooks take a completely different perspective. This perspective changes yet again once a person becomes responsible for a child. If you love your family and wish them financial security, you need life insurance.”
Susan McKay advises, “A long term disability can drain a family’s coffers quickly. Disability coverage, if thought of as an income protection plan, can help keep a person financially sound. Suffering a long term disability without an income stream takes a sound financial plan and lights it on fire! The premiums in comparison to the potential benefits received are very low.”
For life insurance, buy it while you are young and insurable. When deciding how much to purchase, don’t be conservative if you can afford to be generous. You can usually reduce the amount of coverage down the road, but if your health changes even a little, additional coverage may become more expensive or even unavailable in the future. Thinking about wanting to cover a mortgage and that you might not need much after that? Think again! Home equity loans over time may become larger obligations than your mortgage was. Hey, you might even want to buy another property someday. If you are financially joined with someone and one of you dies, the expenses don’t just cut in half even if the income does.
We concur with this good advice. If you have any questions on how and where to take the first step to tackle these difficult topics, please give us a call. We are happy to help you make disability and death planning a little more palatable. We have your back!