Is Your Income Protected?

[Wendy B Namack, CFP®]

Given today’s economy, it’s fair to say that we are all more concerned about our financial situation than we have been in the past. Even if we are among the lucky few who have not been directly impacted by the downturn, our awareness of the need to save and plan ahead has been heightened, and everyone, it seems, is looking for ways to economize.

As someone who works in the financial services realm, few things could give me more pleasure than this collective impulse toward saving, investing, and planning for the future, even though the reason for the change is a negative one. The focus on protecting your assets ties in nicely with the idea of protecting your income. You may have considered what would happen if you were downsized, but perhaps you’ve neglected to plan for what could happen if you become disabled. Understandably, this is not a popular subject, but it is one we all must consider.

Each year, approximately one in every eight people becomes disabled. Adding to that misfortune is anxiety about the immediate consequences of income loss on hearth and home. Fortunately, disability insurance can substantially relieve that anxiety. When you can’t work because of illness or an accident, disability income insurance replaces 50 percent to 70 percent of your income.

Although the government provides base coverage to all workers, the process can involve a lot of red tape. Many people get disability insurance through their employers, too, but your employer may not provide sufficient coverage for your needs. And those who are self-employed are on their own when finding disability coverage of the type and amount they need.

Who really needs disability insurance?
Self-employed professionals and small business owners are ideal candidates. Individuals whose salary represents their family’s sole or primary source of income also risk financial difficulties if they are not covered. And, in general, people who would find it difficult to maintain their lifestyle if their occupational income were interrupted should be concerned about having coverage in place.

Admittedly, this definition includes most people, but there are also many who need not consider disability insurance, such as:

• Retirees
• Certain government workers who are explicitly covered under state or federal law
• Part-time workers who don’t rely on their income as a principal source of wealth
• Individuals whose investment income is sufficient to support their lifestyle

If you do not fall into one of these categories, keep reading!

How much disability insurance do you need?
This question is more difficult to answer because it is based on your personal financial situation. A professional can provide an analysis that includes cash flow, other income sources, and future income needs.

Once the amount you would require is determined, you must consider what type of policy makes the most sense for you. Policy selection revolves around the definition of disabled each policy employs.

In order to be considered disabled, you must be unable to work and earn an income at your occupation. Depending on the policy, however, you might also have to be unable to work in any occupation. Hence, the four distinct definitions of disability and four types of coverage:

• Own-occupation coverage means that you are unable to perform the usual and customary duties of your own occupation. This is the most liberal definition of disability because, even if you work at another occupation, you will still receive the benefits of the policy. Due to the relative ease with which you can qualify for benefits, insurance companies only issue this coverage to the best candidates with the least risk—and charge the most for it.
• Any-occupation coverage means that you are unable to perform the duties of any occupation. This is the most restrictive definition because, in order to receive benefits, you have to be unable to work at any gainful occupation, not just your own. Often, the wording is modified to take into consideration your earnings level, education, training, and experience.
• Split definition coverage combines both definitions of disability, providing pure own-occupation coverage for a limited time before converting to an any-occupation policy.
• Presumptive disability coverage protects you in the event of a catastrophic ailment that is utterly disabling. Benefits will be paid even if you are able to earn a living. Catastrophic ailments include the loss of sight in both eyes, hearing in both ears, ability to speak, use of both hands or feet, and/or use of one hand and one foot.

There are other considerations to keep in mind when purchasing disability insurance. A professional can help you explore your insurance options, and even if you cannot obtain coverage, he or she can work with you on a financial plan that allows you to feel safe no matter what tomorrow brings.

Wendy B. Namack, CFP® is a CERTIFIED FINANCIAL PLANNER™ practitioner and the managing principal of Namack Portfolio Investment Professionals, LLC located in North Port Commons, 14892 Tamiami Trail, North Port, FL 34287 and at www.Namack.com on the web. Wendy offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network®, a member firm of FINRA/SIPC and a Registered Investment Adviser. She may be reached at [phone] or at [e-mail] -- ask about our Wealth Health Assessment™.

© 2009 Commonwealth Financial Network®