Maryland Bar Bulletin
Publications : Bar Bulletin : January 2007


How a Disability Impacts Retirement

Clients of FranklinMorris have heard their respective advisors speak about the domino effect with respect to a disability. An illness or injury can place any individual in an untenable situation, and those suffering from a disability may end up juggling three fragile balls. The first ball, an injury or illness, leads to the second ball, financial pressures, and oftentimes to the third ball: depression.

It is a rare individual who can successfully juggle all three balls. This is precisely why FranklinMorris is such a strong proponent of disability income insurance and why the IRS provides favorable tax treatment for disability income insurance – making the proceeds tax-free if the premiums were paid by the individual. An appropriate amount of disability income insurance, along with liquid savings, can help make juggling the financial ball more manageable.

Between 2001 and 2005, insurance companies paid out around $80 billion a year to individuals who could not work and had a loss of earnings, according to National Association of Insurance Commissioners Annual Statement Database. Very often, disabled individuals cannot contribute to their retirement plan during the disability since they do not have earned compensation. With traditional disability income insurance payments ceasing at age 65, many individuals are faced with a difficult question: "How will I survive during retirement?"

The likelihood of long-term disability for persons between ages 35 and 65 is quite high – about 45 percent, according to ACLI, Protectors and Investors. During a disability one loses the ability to make contributions to a retirement plan and the corresponding compounding investment returns.

Consider the example of a 40-year-old contributing $12,000 per year to a retirement plan with a $250,000 balance. If he or she becomes disabled for 15 years, they lose nearly $400,000 in the form of new contributions and compounding investment returns at 8 percent. Facing retirement with a shortage of assets is a daunting proposition.

To help transition individuals into retirement, insurance companies developed a product which allows an individual to contribute funds toward their retirement while disabled. Upon a qualifying disability, a pre-determined monthly payment is paid into a trust. This trust is earmarked for retirement and benefits are received when the insured reaches age 65 or 67.

During the accumulation phase, individuals can determine how the benefits are invested by selecting from a broad range of investment options. This retirement disability coverage can sit on top of traditional disability income insurance to provide comprehensive financial protection against a disability.

Jason S. Abosch,CPA, PFS, CFP®, MBA is an associate of FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on the insurance benefits available to MSBA members, visit our website at

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Publications : Bar Bulletin: January 2007

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