For Mark Roberts’ Use: Have you ever considered what might happen if you were no longer able to work due to a sudden disability, such as an extended illness or serious injury? If your retirement planning revolves around the assumption that you’ll be able to work until a certain age, you should probably create a backup plan just in case things don’t go as planned. Without a backup plan, you could end up having to dip into retirement savings in order to pay monthly bills, or you could even wind up unable to pay for medical expenses.
This might not seem like a great possibility, but statistics say a 50 year old person has a 36 percent chance of experiencing at least one long-term disability before age 65*. A long-term disability is defined as a condition which lasts 90 days or more, and 9 out of 10 such disabilities are caused by illness and health conditions rather than injuries.**
How then, would you go about replacing your income in the event of such a disability? Counting on Social Security Disability is not wise for many reasons. It can take months or even years of appeals in order to qualify for payments, and in the meantime you would receive no income. There are also strict rules and guidelines regarding assets which prevent many people from ever qualifying.
A better plan would be to purchase an individual disability income insurance policy. In many cases, if you paid the premiums with after-tax dollars the benefits will be free of income tax. There are a variety of policies available, with benefits replacing a certain percentage of your income in the even you’re unable to work. You will, of course, need to decide when purchasing the policy how much coverage you really need and can afford.
Also, be advised that some policies only pay out if you become unable to work in your current occupation, while others will pay only if you can no longer work any type of job at all. Speak to your financial advisor about the many options available in order to find the plan that is right for you.
*2012 Field Guide, National Underwriter
** CNNMoney, June 26, 2012