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Jim Lentini: Disability and your retirement

Business commentary

Posted: June 1, 2010 2:05 a.m.
Updated: June 1, 2010 4:55 a.m.

You probably don’t think twice about insuring your home, car and other personal assets. But what about the income that allows you to purchase those assets?

Many individuals who don’t have any or enough individual disability income (DI) insurance can find little solace in having only SDI (State Disability Insurance). A statistic some years ago stated that the odds of becoming disabled before age 65 over dying is four times greater. Some fortunate people have group coverage through work. But that often only covers part of needed income replacement, especially for higher income earners.

Some of the myths or reasons people don’t have personal disability insurance are:

* “I can rely on my savings.” Fact: Even if you save 10 percent of your salary, one year of a disability could easily wipe out many years of savings.

* “Social Security benefits will take care of me.” Fact: Just 35 percent of the 2.8 million workers who applied for Social Security Disability Insurance benefits in 2009 were approved.

* “A disability won’t happen to me.” I expect to stay healthy. Fact: every 10 minutes, 490 Americans become disabled. (National Safety Council).

* “I can rely on disability coverage through my employer.” Fact: Group long-term disability insurance typically covers 60 percent of gross income, and benefits are usually taxable. Can you afford more than a 40 percent pay cut? Especially when you have additional medical costs, as well as loss of medical coverage if out of work past the time of continued coverage when disabled? (Check the extended coverage when disabled of your employer’s plan).

* “Individual DI insurance costs too much.” Fact: The average annual cost is typically only 1-3 percent of what you earn.

Another major factor when you are disabled for an extended period of time is you stop contributing to your retirement plan, and more often than not will have to draw on your retirement plan.

This creates additional problems other than the obvious, as you will incur tax penalties for early withdrawals prior to age 59½. Also, if you are in an employer pension plan that has matching contributions, you also lose those contributions by your employer.

Don’t let the consequences of a disability derail your lifestyle and future retirement plans. Be sure to discuss your options and different plans available with your advisor who is familiar with disability coverage. Be careful in your research of qualified coverage. As it may be hard to believe, there are still companies out there whose definition of disability is just short of “being hit by a pink Cadillac between midnight and 4 a.m.” to qualify for benefits.

And be sure if possible to get a plan that pays for “partial disability.” Many disabilities are not total, and after experiencing a total disability and returning to work, partial DI will provide continued benefits.

After a total disability and returning to work, while rehabilitating, you will be able to still collect partial benefits until you can return to full time.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investments Inc. His column reflects his own views and not necessarily those of The Signal.


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