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Do you need it? Insure it

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By Linda Norman

“If you need it, insure it.” This was the recurring theme during a continuing education class that I recently attended. The laundry list of risks that we all face would include market risk, inflation risk, longevity risk, being held liable, dying too soon, and one that often gets overlooked; becoming disabled during your working years.

Most people have no trouble understanding their need for homeowners insurance, car insurance or life insurance. Yet when it comes to insuring one of the greatest exposures to possible loss – loss of earning capacity due to long-term disability – many people just take a pass.

Price, of course, is one reason. Disability policies are often expensive but that is because there is a high probability of actually using the benefits during your working years. Cost can often be mitigated by choosing longer waiting periods, shortened benefit periods, by coordinating benefits with Social Security payments, or insuring a lesser amount.

If you are someone who wouldn’t dream of not insuring your car, and you don’t presently carry disability insurance and you need your income to live, consider this: in any single year your chance of being disabled before age 65 is about 1 in 8 (according to the National Safety Council). If those statistics don’t make you feel warm and fuzzy then you should know that as we age the chance of being disabled for 5 years or more increases significantly.

Ask yourself what the effect of 5 years or more without a paycheck would do to your family’s finances? Even the Aflac duck wouldn’t be able to help you – his specialty is short-term disability not long-term.

Depending on Social Security is not a good plan either when you consider that less than one third of the claims are ever actually approved. According to the Social Security Administration, to be eligible for benefits a person must not be able to do any substantial gainful work because of physical or mental impairment that is expected to last 12 months or more or result in death.

The term any is relevant here because if you are able to work in any job you are not considered disabled. That is a mighty wide moat. Thus, the surgeon who loses the use of her hands but is able to teach is not considered disabled, even if the loss of income is substantial.

Four key definitions of disability are: “any occupation, own occupation, reduction in income, and residual.” The most restrictive definition is “any.” If you can still bring home a paycheck from anywhere you are not disabled.

Under “own occupation” you are disabled if your condition prevents you from performing the major duties of your occupation. Policies will vary as to the precise definition of “own occupation” so it pays to read the fine print.

“Income reduction” covers you when you are disabled as long as your condition forces you to earn less than you were earning before you were sick or injured. Again, definitions vary from policy to policy so be sure to read it to find out how much less you would have to earn before benefits are triggered.

“Residual disability” is designed to help those who may be able to return to work but are not quite up to speed and thus their earnings are not up to the former level. “Residual disability” is an enhancement to the “own occupation” type of policy.

Be sure to consult an insurance agent or financial planner who is well versed in the nuances of disability policy language if you are considering adding this protection to your financial plan.

Linda Norman is a Certified Financial Planner affiliated with Raymond James Financial Services Inc, member FINRA/SIPC. Formerly located on the 200 Corridor, her office has moved to Deerwood II office complex in Ocala. She can be reached at 629-9138, e-mail Linda.Norman@raymondjames.com or www.raymondjames.com/practicalplanner.