How to Insure Your Income: What You Need to Protect
In addition to factual information, your goals, objectives or special needs should be considered. Among the most common of these issues are educational objectives for dependent children, other family needs, business objectives and retirement goals.
In greater detail, these are the factors that will impact your disability needs most directly:
- Fixed obligations. Such expenses as mortgage or rent payments, car payments, utilities, food, installment purchases, insurance premiums, etc., must be itemized. The total fixed expenses must be paid from some source.
- Variable expenses. These are the unexpected, non-fixed expenses that occur from month to month, such as automobile repairs, medical expenses, prescriptions, home repairs, the ever-menacing miscellaneous expenses, etc. Some estimation of these unexpected monthly obligations must be determined -- and the source from which they will be paid.
In addition, there is the added expense due to a person's disability. Generally, income stops and there are expenses incurred relative to the disabling injury or sickness: additional medication, doctor's bills, the need for prosthetic appliances, such as braces, and possible hospital bills that are not fully covered by hospitalization insurance.
- Personal assets. The next question to be answered is: Where is the money going to come from to pay these various obligations? How liquid are your personal assets?
- The first source of liquidity will be personal savings. The questions to be raised here include:
- Do you have any savings? If so, how much and how adequate is it for purposes of paying expenses?
- Will you be willing to use personal savings to pay expenses associated with a disability?
- Work-related benefits. What type of disability benefits might you have from your employer? Is there a formal sick pay or salary continuation plan? Do you have any accumulated sick days?
- Government benefits. A few states provide statutory disability benefits. On a national scale, Social Security offers a disability income benefit if the disabled individual can qualify for it. (It may be advisable not to include Social Security disability benefits in a total plan, since so many claimants are denied benefits. In addition, even if a client qualifies for benefits, it takes nearly a year to receive the first check.)
Most insurance companies use fairly standard worksheets to determine a monthly expense estimate that relates to disability coverage needs. The worksheets usually include mortgage or rent, utilities, food, auto or tranportation expenses, tuition or education expenses, clothing, outstanding consumer loans or installment purchases, insurance premiums, medical or dental care costs, taxes and miscellaneous expenses.
Against these expenses, you'll need to weigh any non-earned income that you would expect to have during a period of disability.
This includes group disability income insurance, interest income, dividends, rental income, deferred compensation and residual commissions, royalties and other miscellaneous income.
Disability Income Needs Assessment Worksheet
Part 1
Enter your monthly expenses related to each of these items and add them for Subtotal 1. If possible, average what you spent during the last sixth months.
Mortgage or rent __________
Utilities __________
Food __________
Auto expenses/transportation __________
Tuition/education expenses __________
Clothing __________
Loans and installment purchases __________
Insurance premiums __________
Medical/dental care costs __________
Miscellaneous expenses __________
Taxes __________
Subtotal 1 __________
Part 2
Enter your monthly income provided by each of the following sources of non-earned income and add them for Subtotal 2. For the insurance items, check each policy's maximum benefit. For the other items, use a six-month historical average, if available.
Group disability coverage benefits__________
Other insurance benefits__________
Interest income __________
Dividends __________
Rental income __________
Residuals, royalties, etc. __________
Subtotal 2 __________
Part 3
Subtract Subtotal 2 from Subtotal 1. This will provide you with the monthly income figure that you need to insure against disability.
Subtotal 1 - __________
Subtotal 2 - __________
Total monthly income to be insured __________
If the final income figure is negative, check your numbers -- with an eye toward making sure your expenses are all covered and the non-earned income is absolutely reliable. If your final number is still negative, you don't need to worry about disability insurance and should be thinking about retiring.
For most people, the final income figure will be positive -- and probably disturbingly large. And remember, this is only a monthly number.
In order to estimate the likely total loss from a disability, refer back to the disability duration chart in Chapter 1.
Computing an Average Long-Term Disability Loss
Total monthly income to be insured __________
Average duration of a disability that lasts at least 90 days x__________
Average long-term disability loss __________
As you can see, a long-term disability can create a six-figure loss. The key to staying in good financial shape is covering that monthly figure. As we've noted already, group disability usually will cover just a fraction of your base salary.
The disability needs assessment worksheet gives you one of the numbers you need to tell your insurance company or agent: your monthly cost of living -- the basis of your income insurance needs. Your current monthly earned income gives you the second. The average long-term disability loss from the second chart in this section gives you the third. These numbers provide a range within which your income coverage (whether it's disability insurance, Social Security or simple cash savings) should fall.
