Protect your most valuable assetPublished 10:24pm Friday, December 7, 2012
By Mark U. McGahee
Quick, name your most valuable asset. Did you say it’s your house? Your boat? Your 401k plan account? Your priceless Mr. Peanut collection?
All of these may be valuable, but how did you acquire them? Most likely, it was by your hard work. So, in fact, your most valuable asset is your ability to get out of bed each day and go to work to earn the money it takes to buy and maintain these and other items.
What would happen if you lost your ability to get up and go to work because of an illness or accident? Think it won’t happen to you? According to the Council for Disability Awareness, citing the US Census Bureau, more than 36 million Americans are classified as disabled. More than half of them are in their working years. The chances are nearly one in four for a healthy 35-year-old female to be disabled three months or longer during her working years. They are greater than one in five for a healthy 35-year-old male.
Suppose you were given credible information that if you were to drive your regular route to work on a given day, your chances are one in five you would be in a serious accident that would either kill you or disable you for life. Would you take a different route to work?
Doesn’t it then make sense to protect yourself from an illness or an accident that could prevent you from earning a living?
Many employers include group short-term and long-term disability Insurance plans in benefit programs offered to their employees. If the employer pays for the benefit, the benefit is subject to federal and Virginia income taxes when the employee becomes disabled. If the employee pays for the benefit, the benefit is not subject to income taxes.
Most group plans will pay benefits up to 50 percent of the employee’s base salary, capped by a monthly maximum amount.
Generally, group benefits are not portable — the long-term disability plan gets left behind when an employee changes jobs. The remedy? An individual disability insurance policy. A policy issued to an individual will remain with the individual no matter how many times a person changes jobs. Also, because the individual bears the cost of the policy, when benefits are paid, they are not subject to income taxes.
Individual policies can usually include options such as a cost-of-living-adjustment benefit. This is crucial for individuals who have many years to work before retirement. If disability strikes, each year the benefit will increase by a pre-determined factor to help keep pace with inflation.
Another important option pays a benefit when the individual can still work, but only at a reduced capacity. Usually if the disability causes a minimum of a 20-percent reduction in income, the insurance company will pay a proportional amount of the benefit.
Finally, make certain you understand how “total disability” is defined in the insurance contract. The definition varies across the spectrum of insurance companies and contracts. Look for something like this: “You are not able to perform the material and substantial duties of your occupation, even if you are gainfully employed in another occupation.”
Mark U. McGahee is a financial planner specializing in investment and protection planning. Email him at email@example.com.