“Protecting Your Wealth. Planning Your Future.” – This is what we strive to do for our clients at Rodgers & Associates. A comprehensive retirement financial plan should consist of two parts: Offense (Investments) and Defense (Insurance). It’s been my experience that most people who work with an adviser tend to think of planning only from an offensive standpoint. It’s exciting to discuss the growth aspect of investments and being able to utilize those dollars to experience all the fun things you’ve dreamed of doing for years during retirement. But are clients missing a key part of their plan by overlooking the defensive part of the plan? Specifically, we will focus on two critical components of a solid defensive plan: Life insurance and Disability insurance. It’s essential to include this as part of your financial plan while you are still working, as your savings will not be able to support your family now and in retirement.
The Role of Life Insurance in a Comprehensive Financial Plan
Life insurance provides a tax-free death benefit to your loved ones if you pass away. This is key to the financial planning process if your family is relying on your current ability to earn and save for retirement. In other words, it’s a good idea to have adequate life insurance until you are confident that the financial plan, which includes providing for your spouse and children, will succeed even if you were to pass away unexpectedly. The death benefit gives immediate liquidity to your family, which can be reinvested in your investment portfolio, allowing it to continue growing and replace what you would have otherwise saved. Adequate is the key word. It’s important to remember that your employer is likely to provide you with a basic benefit, usually equal to 1–2 times your base compensation, if you work full-time. This coverage usually does not apply to any bonus compensation you earn. This is typically not sufficient to replace the income and investment growth that your retirement financial plan requires.
Term vs. Permanent Life Insurance: What’s the Difference?
The two main types of life insurance are term insurance and permanent insurance. Term insurance coverage lasts for a specified period. For example, you could purchase a policy that lasts for 10, 20, or 30 years. If you pass away after that time, there will be no death benefit for your beneficiaries.
Permanent insurance will provide a death benefit regardless of how old you are when you pass away. There are pros and cons to both types, and your adviser will be able to help you decide which is best for you. In either case, working with a licensed insurance agent is beneficial to compare the best rates and policy features that suit your needs. Remember the adage: It’s best to have the parachute on before you jump out of the plane. There are no re-dos on this, so plan accordingly to protect your loved ones.
How to Protect Your Retirement Plan with Disability Insurance
But what about the (statistically) more likely event that you experience a sickness or injury that takes away your ability to go to work1? This could last for a few weeks or months, but a physical or mental disability could also endure for your lifetime. Interestingly, according to one insurer, workers are more likely to have a disability caused by sickness or mental impairment versus physical injuries2. Unfortunately, the “I’ll always be able to work” sentiment is more wishful thinking than reality for many people. This is where disability insurance comes in.
There are two flavors of disability insurance: Short-Term and Long-Term. Most of the time your employer will provide a basic employee benefit, typically around 60% of your pre-disability earnings. The Short-Term policy will pay out first and usually lasts around three months. After this initial period, your Long-Term policy kicks in. Depending on the policy, you may continue to be paid until age 65 or 67. Here’s the problem: If your company offers you this benefit and they pay for it, then the benefit you receive (once you go on claim) is taxable even though you aren’t physically working. So instead of taking a pay cut of “only” 40%, you are likely to receive even less since a portion of your disability income will be used for taxes. This is why we often recommend that clients speak with a licensed insurance agent and purchase supplemental Long-Term disability insurance, especially during your peak earning years, which can provide more coverage above and beyond your employer-provided benefit. One potential workaround for part of this issue is to inquire if your company offers an after-tax payment option for your disability coverage. If so, your monthly income while on claim would not be taxed. While helpful, this may still leave a sizable gap between your pre-disability and post-disability income that would need to be replaced.
What to Consider Before Purchasing Insurance Coverage
Another key point in this discussion is your current health. Suppose you recognize the need for increased life or disability insurance. In that case, your monthly premiums will be based on factors such as your height, weight, smoking status, blood pressure, medical history, and the type of job you have. However, if your health prevents you from obtaining new insurance with a third-party provider, all hope is not lost. Your employer may provide supplemental add-on policies with no medical underwriting up to certain coverage limits. Also, check with your Union or professional Association to see if your industry has any additional options for you outside of your employer.
Organizing Your Insurance Policies for Peace of Mind
As with all financial matters, it’s important to stay organized. Be sure to keep accurate and accessible records of all the insurance policies that you and your family own. Regarding life insurance, you’ll want your family or executor to know which insurance companies to contact to process your claim. For disability insurance, your Health Care Agent/proxy should know what policies you own and how to apply for benefits on your behalf.
Balancing Growth and Protection in Your Financial Plan
Financial planning involves two stages: Growing your wealth and protecting your wealth over time. The first is accomplished with a strongly implemented investment and tax strategy. The second can be achieved with appropriate insurance planning. Whether you are still working in your career or if you’ve been retired for several years, it’s a good time to review your policies with your adviser. You may be surprised at the significant impact that paying attention to details can have on you, your family, and your legacy.
At Rodgers & Associates, we don’t sell insurance and, more importantly, we don’t earn commissions. That puts us in a great position to help our clients evaluate their insurance needs.
