What Happens if You Can’t Work?

Man with his arm in a plaster cast writing

If you read my last post about life insurance and you’ve joined me again, thank you. Really, I am very thankful for your time and I hope these posts bring you value. Now, let’s get cooking. If you didn’t read the last post here’s question I asked, “Why do you have life insurance?” There are many valid reasons why someone has life insurance, but I think it’s funny that we call it LIFE insurance. I get it, but think about it. Do you buy life insurance because someone or something is literally dependent on your life? Like your heartbeat is the determining factor of the success of something or someone else. NO, that is not it at all. Life insurance is there because someone or something is dependent on you being alive so that you can earn income or provide value to the family. Think of it this way – if your income was guaranteed to pay out until age 67 whether you were alive or not, would you still buy life insurance?

So, what happens if you’re still alive but you can no longer earn income? Why do we spend so much time and money on life insurance but give no thought to what would happen if we were to become disabled.

69% of private sector workers do not have long-term disability coverage! That is a huge percentage of people. To throw another statistic at you – 1 in 4 people in their 20s will become disabled in their working years. To clarify, disabled means you can no longer earn your income. So, let’s think about the math. You stop earning income, but you’re still alive and need more care than before. Normal life – income + increased expenses = up the proverbial creek. If you have determined you need life insurance, you probably need disability insurance as well.

There are a lot of factors that go into deciding IF and HOW MUCH coverage you need so I highly recommend you talk to a professional about your personal situation. I hope you call us, but at least call someone. Today let’s assume you don’t have coverage and need some. There are two definitions you should know.

1) Short-Term Disability: Short-term disability coverage is just like it sounds; it generally starts to pay-out 2 weeks after your loss of income, but will generally only pay-out for around 6 months, then it goes away.

2) Long-Term Disability: Again as it sounds, it generally doesn’t start to pay-out for 90-180 days after your loss of income, but can pay-out all the way till age 65.

Which do I recommend? I am not a big fan of short-term disability insurance. I want you to have an emergency fund that would cover around 6 months of expenses. Then, in the case you become disabled, you would not need insurance to replace your income for 6 months. If you are a dual income family you can stretch that emergency fund out a little further. On the contrary, having long-term disability is a no brainer. Becoming disabled is a bigger financial risk to your family than dying! Sorry to be blunt but seriously, if you are disabled, you can become a drag on your family financially. Here are some things you need to know if you are not covered.

First, just like life insurance, you need to do a needs analysis. Most long-term policies will pay-out 60% of your current income (keep in mind that if you are paying your premiums yourself, that 60% payout is tax-free). 60% is probably close to your take-home pay now. However, if you are one of those super budgeters that live on much less than 60% of your income, then you may not need to pay for coverage that high.

Second, brace yourself. Disability insurance is not as cheap as term life insurance and it can get a bit complicated. Try to work with someone that is committed to educating you on all the options before making a recommendation. Industry terms like Owner Occ., Partial Occ., and others will get thrown around in your decision-making process and you need to understand what they mean in order to make the best decision.

Ultimately, if you have a need for life insurance because someone/something is depending on your income, you probably need disability insurance too. It’s not fun to talk about  but if something happens you and your family will be grateful you took the time to discover what’s right for you. If you find you need a partner for this, we would love to help.


Why Do You Have Life Insurance?

Person Hand Holding Puzzle With Question Mark

Why do you have life insurance? Is it because you have people that depend on you? Is it because you have debt that you don’t want others to inherit? Or is it because that’s what is normal and your parents told you to get it? Any of these three answers are acceptable. The real point of the question is to see if you actually know why you have insurance at all.

Recently, my partner Jamie challenged me that we need a better system to meet the insurance needs of our clients. Historically, it has never been a big part of my practice (ask me personally if you want to know why), but Jamie has pushed me to think about our clients and what is in their best interests. I’ve come to realize that we owe it to them to have a system built on education, a system that allows them to make informed decisions instead of directing them to an industry that is built to sell them a product. Boom. Gut check. Message received. As a side note here, always surround yourself with people better and smarter than you. I promise it’s more fun that way. Let’s talk shop and I’ll give you some personal thoughts along the way.

Let’s start with some definitions so we can cover the basics. For today, I’m going to break insurance into 2 categories: term life and cash value.

Term Insurance: You pay an insurance company to provide you with a death benefit of a fixed amount for a fixed period of time, i.e., $500,000 death benefit for a 30-year term. At the end of the term, if you are still kicking, nothing happens. The insurance goes away, you are no longer covered, and you stop paying premiums.

Cash Value: You pay an insurance company to provide you with a death benefit. The term is not fixed (in theory this could be until you pass away) and there is a component that builds cash value. Essentially this is a savings account that could pay you a fixed interest rate, or it might allow you to invest the balance, or it might be attached to something else that could contribute to its growth. If and when you decide you don’t want to pay for the death benefit any more you can take your cash value out and the growth will be taxable.

Now let’s talk about my opinion on insurance. In my experience, in most cases term life insurance is the best option. However, there are 3 cases in which cash value insurance is necessary.

1) You need permanent insurance. If you have children with special needs and they are likely to outlive you, then you may need some form of permanent insurance to protect them and provide for them after you pass away.

2) For estate protection. If your family estate is at risk of exceeding the Estate Tax Exemption Limit (2017 limit is $5,450,000) permanent life insurance can be used effectively to protect the estate.

3) Accumulation of assets. If you are a high-income earner and you have exhausted all other options for saving money in a tax efficient way. For example, you have maxed out your 401(k), maxed out non-deductible IRA/Backdoor Roth options, have a fully funded emergency fund, and you still need to save more of your income to get to a 15% savings rate, then cash value insurance could be a good option.

If you do not fall into one of these three categories then most likely term insurance is your best option. Unfortunately, the industry has decided that we can make a case for almost everyone to have cash value insurance, and so that’s what they do. It is important to note that cash value premiums are much higher than term. Yes, they have a savings component built in, but the cost of insurance is still there. Jamie and I have decided that we assume the opposite – we assume that we can meet your insurance needs with term insurance unless we can prove otherwise. So, step 1: go in with the assumption that term will work. Step 2) assess the need.

If I told you EVERYONE needs $500,000 of life insurance, what would be your response? “How do you know?” would be the best in my opinion. Every family has different needs. We factor in income, debts, future expenses, and a few other things to come up with your specific amount. It is not a one size fits all hat. So step 2 would be to determine the correct amount of coverage for your family and how long will you need that coverage. For the record, I believe uncovering these 2 factors will be a vital part of your full financial plan. You may not need life insurance past retirement age, but only if you have been preparing for that fact. I would recommend you think ahead and consider life insurance a part of your bigger financial picture.

In conclusion, you most likely need life insurance, and unless you have purchased your policy in the last 5 years, you need to review the insurance you have since the general cost of insurance has decreased recently. Think term first unless you fall into one of the previously mentioned categories or have another special circumstance. If you need cash value insurance, you are the exception, not the rule. Lastly, know why you have insurance, have a well-developed financial plan, and use insurance to protect your family and your assets, and buy it from someone you trust.