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| Bar Bulletin |
December,
2003 |
| MSBA News |
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"If It
Weren't for the Disability Insurance..."
By David M. Morris
“If it weren’t for the disability [income] insurance, I’d be dead now. I
simply wouldn’t have had the energy to fight the disease and the financial
pressure I would have been under without the insurance money.”
So went the account of a friend and client in my office several years ago.
It is very sobering to talk to someone who is with great certainty
convinced that the only reason he is still alive is an insurance contract.
That gentleman and many others have had a different quality of life – and
perhaps a different life expectancy – simply by having the foresight to
buy appropriate amounts of disability income insurance.
I
am often asked, “Do I need all that coverage?” When clients are
considering updating their disability income insurance, my answer is, “I
have never seen a situation in which a disabled person on disability claim
couldn’t use every dollar being received from the insurance companies.” I
have had clients with significant wealth in addition to their current
earnings become disabled and still use every claim dollar available to
them. I also have several clients, like the one quoted above, for whom the
stream of disability income payments meant the difference between dignity
and depression, between having the energy to live and hopelessness, and
perhaps even death.
In assessing your need for disability income insurance coverage, consider
these factors:
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Once the ability to
generate income is interrupted by accident or injury, the earnings
spigot is turned off – sometimes for good – and the energy previously
used to produce that income now has to be allocated to treatment and
recovery. Rarely can a disabled person be the one controlling the flow
from that spigot.
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When there is an
interrupted income flow, either temporary or permanent, long-term
savings and accumulation for tuitions, retirement and general financial
security are also interrupted or halted altogether. Even a temporary
interruption can have a dramatic impact on savings and investment goals.
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Expenses don’t
necessarily go down during a disability. Sometimes the niceties of life
stop – that extra trip to Bermuda might not be taken, but the series of
trips to Sloan-Kettering or Hopkins or the Mayo Clinic might come up,
with attendant expenses for family to stay for days or longer at
out-of-town treatment facilities. Family backup support systems need to
be in place to help the family of the disabled person, and those often
cost money not otherwise being spent prior to a disability.
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Employee benefits
previously available can stop. New cash flow commitments may occur for
health and life insurance that was formerly paid for partly or in full
by an employer.
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Non-employed spouses
may have to go to work, triggering support expenses including child
care, housekeeping and home repair and maintenance. A working spouse may
have to - or want to - stop working to care for the disabled spouse,
further reducing income sources.
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The level of benefit
available is usually less than the full amount of income prior to
disability. Often, a percentage of income is replaced, but a cap is also
applicable. For instance, it is common to replace two-thirds of income
up to a cap amount such as $100,000. For those with incomes over the cap
amount, the percentage of income protected is actually much less than
two-thirds. Disability income insurance benefits may also be subject to
income tax – usually when the premiums are paid by the employer.
“Implement, then review” and “monitor, then update” are both hallmarks of
good financial planning and are also crucial to disability income
insurance planning. As part of your overall financial planning, implement
a disability income insurance plan by purchasing an appropriate amount of
coverage. Review this policy and the amount of coverage regularly. Then
monitor your personal and financial goals and progress and update your
disability income coverage to match your goals. How important is this? For
some, it has proven to be, literally, the difference between life and
death; at the very least, it is the basis for peace of mind for many of my
clients and their families.
Disability Statistics
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Surprisingly,
disability is a bigger hardship because so few people plan for it.
Three- quarters of all U. S. households owned life insurance policies in
1999, but only 40 percent carried disability coverage.
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Nearly half of the
one million Americans who filed for bankruptcy protection last year did
so after being sidelined with an unexpected illness or injury – and the
vast majority of those people had medical insurance.
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On average, it takes
years to recover from a disability once it has lasted over 90 days. At
age 25, 2.1 years; at age 30, 2.5 years; at age 35, 2.8 years; at age
40, 3.1 years; at age 45, 3.2 years; at age 50, 3.1 years; at age 55,
2.6 years.
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During the course of
your career, you are three-and-a-half times more likely to be injured
and need disability coverage than you are to die and need life
insurance.
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At age 35, you have
a 50/50 chance of being unable to work for more than three months before
you turn 65, according to data from the Society of Actuaries.
David M. Morris, JD,
CLU, is President of FranklinMorris, exclusive coordinating broker for the
Bar Associations Insurance Agency, Inc.
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