Protecting Your Family in the Case of Disability

I was playing tennis last week with a buddy of mine. I texted this week to see if he was up for playing again. His response, “Can’t, I’m in the hospital. Played yesterday. Had a heart attack.” I couldn’t believe it! This is a younger, former college athlete. Talk about a wakeup call. A fall, sickness (think of how many individuals contracted an illness in the last few years) or cardiovascular issue can leave you without income temporarily or permanently. You are your greatest financial asset. Your ability to earn a living – to earn a paycheck – should be protected.

According to the Social Security Administration, one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach their normal retirement age. Each year around 5% of working Americans will experience a short-term disability (lasting six months or less) due to injury, illness, or pregnancy. The consequences can be catastrophic. Disability causes nearly 50% of all mortgage foreclosures, compared to just 2% caused by the death of the primary breadwinner, according to Health Affairs.

You could be thinking, can’t I rely on Social Security Disability Insurance? After all I’ve been paying into it with my FICA taxes. There are a couple big issues with this thought process. First, SSDI has a very strict requirement. The legal definition of “disability” states that a person can be considered disabled if they are unable to perform any substantial gainful activity due to a medical or physical impairment or impairments which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. Second, for the those who do qualify, the average SSDI benefit for a disabled worker as of February 2021 was $1,279 a month. This amount is below the poverty level for a two-person household.

So, what can you do? Having an emergency fund should be a priority. Most financial advisors would recommend you keep approximately six months of expenses in cash reserves to pay for unplanned expenses. Congratulations if you are one of the 28% of Americans who have set this amount aside; you should be covered for a short-term disability. The size of your emergency fund may vary based on individual circumstances, such as a two-income household or the industry in which you work. Keep in mind that some employer-sponsored retirement plans allow systematic emergency savings that may offer distinct advantages.

Once you have your emergency savings in place, you can start to focus on a plan for a potential long-term disability. Perhaps the most effective plan is to eat well and exercise, but for most, insurance is still a vital part in protecting your financial plan. Some employers may offer a long-term disability policy, usually 50% to 60% of income, but these benefits are likely taxable to you and insufficient, especially if you are now incurring additional medical expenses. We tend to prefer an “own occupation” policy that covers up to 70-80% of your income. Parsec can assist you with an insurance needs analysis. Often folks have too much insurance in one area and are vulnerable in another. Parsec does not sell insurance or receive referral fees.

We should not live in fear, but we need to be prepared. Insurance is something you buy but hope you never need. The value is not just in the potential financial benefit but in the peace of mind it provides. As Benjamin Franklin once said, “If you fail to plan, you are planning to fail.”

Doug Bazley, CFP®, CRPC®
Financial Advisor

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