Are You Protecting Your Most Valuable Asset?

We are all leading busy lives, and it’s all to easy to “miss the woods for the trees”. What if we prioritized by taking a step back and simply asked ourselves – what is our most important asset? Are we adequately protecting that asset?

Yourself

Unless you’ve got a trust fund or are close to retirement, you’re likely going to have to rely on yourself to work for a while. What if you couldn’t? You need disability insurance.

The first place a lot of people go for disability insurance is work. There is either short-term and long-term insurance, and it’s important to know both what triggers a insurance payout and how much money you’ll get. Sometimes, as long as you can sit and do some form of work, you’re not considered disabled. If you want to get a form of disability insurance that kicks when you can’t do your specific job anymore, then I usually see a recommendation to see an independent insurance broker that works with several different insurers. Social Security will kick in as a last resort, but it’s also hard to qualify and definitely won’t replace all your income.

Your Spouse

If you’ve got children or are already disabled yourself, you might depend most on your spouse for income. If that person is your most important asset, then you need both disability and life insurance. Term life insurance is cheaper because it is straight insurance without any investment component to muddle things up. Start with Term4Sale for some quotes and leads to local agents. Don’t forget about life insurance for yourself, as you might be the most important asset to your spouse as well.

Your Home Equity

Even after the credit crisis, a lot of people have a great chunk of their net worth tied up in their house. Do you have adequate homeowner’s insurance? It’s important to check on how much coverage you have, and what it covers. Do you have actual replacement cost coverage, or just an estimate? Are you covered in case of hurricane, flood, or earthquake?

Your Pension / Investments

Perhaps you are nearly or already living off your accumulated assets. Good job! If you have a pension, be aware of the financial stability of your former employer. Understand what the Pension Benefit Guaranty Corporation will pay out in the worst case. Some people decide to take a lump sum in case of future bankruptcy. In general, make sure your investment mix is aligned with your need and tolerance for risk. Consider this rough rule of thumb.

Avoid a Madoff situation. Is someone else in charge of your investments? Do a basic check at FINRA. Whoever manages your portfolio should use an independent financial institution, known as a custodian, to hold your assets. They should also be audited by a licensed, independent, and preferably well-known firm.

As for me, I’ll be looking at some individual disability plans in the near future.

Comments

  1. Looking forward to a future post on disability shopping. I’ve thought about it but not done much research, will be curious to see what you find.

  2. These types of transactions are always “grudge” purchases. People often put them off, thinking they may be a waste of money. People often think “that will never happen to me” when it comes to disability or other unfortunate incident or accident. My advice – don’t delay. You never know what’s around the corner.

  3. Roberto says:

    Disability insurance is a great thing to buy when you’re young and (hopefully) healthy.

    Another thing to consider with disability policies is “group” (employer/trade org/etc.) vs. “individual”. For a variety of reasons that involve ERISA, group policies are more likely to deny your disability claim.

    Not that group policies are bad (I have a group policy). Just something to be aware of.

  4. Great post! I’d add that it’s often worthwhile to get more life insurance than you think you need. I got life insurance when my first child was born. Even though I only had one child, I paid for an amount appropriate for having two children and expecting a reasonable rate of inflation in the future. It was a good move, as I now have a chronic illness, and can’t increase my coverage.

  5. Heather says:

    If you are going to be writing a disability post, I’d really like to know what you suggest doing if you are dq’ed for disability insurance due to a preexisting condition. Larger emergency fund? How much??

  6. I did a huge amount of research on disability insurance a while back. The only way to go is to go with a VERY reputable firm. The big fear is that you pay in for 10 or 20 years and then when you need it, they deny your claim. The other issue is that if you make your money off of anything sedentary – like if you are a computer worker – then it is next to impossible to prove that your disability makes it so that you can’t do that anymore.

  7. Marissa says:

    This is a great post about disability insurance. The sad thing is that most people do not realize how important it is to have until they actually need to use it. The same thing goes with homeowner’s insurance. A lot of people are not fully aware what their plans cover. You have made some very important points here. People should really be knowledgeable exactly what is included in their plans.

  8. Hello all,

    This subject caught my eye as it is rarely discussed on PF websites. I thought I would share my experience and get opinions of others, esp regarding price and tax treatment. I am with one of the UNIFI companies for long-term personal disability insurance. Unifi has an A rating from I forgot which company. Concerned a bit about ratings looking at the problems with bond ratings lately (e.g. S&P vs. Moody’s) the bond issuers are ‘shopping’ for the best ratings. Not sure relevance of this for disability insurance.

    My job has no benefits. I pay for everything myself.

    I have a policy that is specific to my job (physician who does invasive procedures .. i.e. I gotta have use of my hands), $2500 monthly, waiting period 180 days, max benefit to age 67, COLA rider up to 6% (based on CPI-U) with future increased option rider of $5000. Based on age 38.

    For this I pay $1600 a year through $133.33 monthly payments. Could be $1543 a year if I paid yearly.

    Of note, this policy did not require a medical underwriting, no exam.

    So… is this a good deal? I am fortunate to be in great health, normal weight (BMI=21.5) active with zero medical history and exercise four times a week.

    After talking with colleagues, it seems I am paying too much. As a healthy person I should seek out a policy that includes a medical exam, as I would be ‘upgraded’ based on my health status.

    Also, I chose to not expense this premium. I have thought much about this as I figure I would save a lot at my current marginal tax rate if I could take $1600 off my AGI. If I were disabled and pulling in $2500 from this policy and some more possibly from consultation / chart review whatever my tax rate would be much much lower.

    The IRS has a rule that they look back three years — you must not have expensed/deducted your premiums for the past three years if you are to receive the benefit tax free.

    So what do you all think? Good deal or not? Would you deduct on taxes or not?

    Side note: I am very frugal. I max out my tax shelters each year (PSP, 401(k), IRA, HSA). I buy nothing fancy and only spend any money on travel. Rent my place and likely will continue to rent as I live in coastal California and despite the fact I could afford to buy the numbers just do not make sense to buy (e.g. My annual rent is 2.6% of cost to buy the same house).

    Thanks to all who comment!

  9. @kern you could get it cheaper but what’s cheap insurance if they never pay you when you need it? If you have a Cadillac policy, which I would argue is the only way to go with regard to this type of insurance, then it is fine to pay this price. Incidentally, the policy I was shopping for a while back was about the same amount as yours. If I were paying very little then I would wonder if this company would be solvent many years from now. With regard to the medical test, however, I can not advise as I had not considered that route.

  10. Beth – thanks for the input. Good to hear that your price quote was similar. I was comparing to other A-rated companies with a long track record. Just like with other insurance products, as you said, the financial strength of the company is paramount. I think I am paying a bit more for the no medical underwriting clause.

    Just thought of something – I wonder if there is an agency that will pay the disability benefit if the insurance company goes under? Similar to the agencies that cover life insurance & annuities for a certain amount:

    http://www.nolhga.com/factsandfigures/main.cfm/location/stateinfo

    http://www.annuityadvantage.com/stateguarantee.htm

    So how about tax treatment? If I were disabled and collecting the $30k per year, I wouldnt be taxed on the first $9,350 anyway and only 10% federal for next $8400 or so, then 15% on the rest (about $2600 in fed tax). Of course I do not know how much I would earn doing other work. So there is a benefit to the $30k tax free as I could ‘fill up’ the lower tax brackets with any other work I would do. Also must consider social security as well as other write offs. As well as half a dozen other things most likely that I am unaware of now.

    So the question is .. considering the very unlikely chance that I will ever be totally disabled, is it worth it to deduct the $1600 each year off of my marginal federal dollar of 33% and state of 9.3% ?? The money saved could go into a low-cost ETF or bonds, munis, etc. To be used to supplement my (taxed) insurance benefit if I was ever to be disabled..

    What would you do?

  11. Posting comment to get updates.

  12. Any ideas about deducting disability insurance from income taxes.. from readers or OP?

  13. Yael Diamond says:

    This is a great post – thanks. Most people don’t think about the future and that anything bad can happen to them so a lot of policies are seen as grudge purchases. I guess if people depend on you financially then there really isn’t anything to think about. Better to plan now then be sorry later.

  14. No replies or discussion here. I wish I had not taken the time to write such a long post…

  15. @Kern – Did you get your policy from a broker? Did they mention how a physical exam would affect your premium? Physician occupation-specific insurance is something I’d ask colleagues about, hard to get good comparative info. But you can always cancel your old policy and get a new one. Find a good insurance broker that can buy from several insurers.

    I don’t know of any way to deduct such disability insurance from your taxes.

  16. @ Jonathan — be careful when your canceling out an old policy to buy a new policy. Make sure you understand exactly what you have to lose and what you could potentially be gaining. The agent trying to get you to replace may not have your best interest in heart, or could make a honest mistake. I tell my clients to trust me, but to verify. It could save a lot of headaches down the road.

    @ Kern depending on your state the guaranty association may cover the disability insurance policy if the company you chose went under. To find out your state go to the link that you posted http://www.nolhga.com/factsandfigures/main.cfm/location/stateinfo and contact them directly.

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