Do You Hold an Adequate Disability Plan?

Physician's Money Digest, September30 2003, Volume 10, Issue 18

Few doctors think about becoming disabled.Why should they when they're healthy andproductive? According to data from the Societyof Actuaries, a 35-year-old has a 50/50 chanceof being unable to work for more than 3 months beforeage 65. Although an individual may think they're coveredbecause they have disability insurance through anemployer, what they don't realize is that this may notprovide their family with all the protection needed.

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A disability can have a devastating impact on a family'sfinances. Expenses for mortgage, rent, groceries, andother necessities continue even while a wage earner cannotwork. According to an article in , just 1year of total disability could consume the entire savingsof a person who has been conscientious enough to save10% of their salary for 10 years.

Expenses Not Covered

Often disability income insurance providedthrough an employer only pays a percentage ofincome, covers salary but does not cover commissionsand bonuses, has a maximum cap, often offsets bene-fits by any Social Security payments received, andresults in benefits that are taxable. While the odds ofbecoming disabled are greater than many people realize,the risks of suffering a major decline in income asa result of inadequate disability income insurance arefar more certain. Most income earners, regardless ofincome level, have spending commitments that consume65% to 75% of normal cash flow.

Group disability income insurance generally coversabout 60% of base salary. Its benefits are usuallytaxable, and it does not cover incentive compensationsuch as profit sharing contributions, deferred compensation,commission income, or regular incentivebonuses. Usually group disability income coveragecaps at $5000, $10,000, or $15,000 a month, and thebenefits scale runs to a top base salary of $100,000(ie, anyone making more than $100,000 in base salarywho becomes disabled receives a reduced benefit).And this type of coverage generally offsets benefits byany Social Security payments received.

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Some people mistakenly believe that the governmentwill fill in the gaps left by a company plan. Yet, accordingto the , only 43% of those who apply for Social Securitybenefits ultimately qualify for them.

Calculate Your Income

Clearly, everyone who relies on a paycheck needsto assess how well they would do if they were unableto work. As a first step, it's important to consider consultingwith an experienced financial representativewho can help evaluate your needs. Look for someonewho is both knowledgeable and trustworthy. Makesure the insurance company that person represents isreputable, based on the company's market share,financial strength and stability, financial ratings, andcommitment for the future.

Once selected, the representative can help determinehow much income would be available throughemployer-provided disability income, as well asthrough investments and other sources. The representativealso can help assess what type of taxes thisincome might be subjected to, to help determine theactual amount of money available.

As the next step, the representative can also determinewhat expenses might exist in the event of a disability.Key considerations include your mortgage,groceries, and other basic living needs.

Because most physicians, regardless of theirincome level, have spending commitments that consume65% to 70% of normal cash flow, it's wise tosecure disability income insurance for 65% to 75% ofnormal earned income, if possible.

If that additional disability income coverage isneeded, a financial representative can advise whattypes of supplemental plans would be appropriate.Underwriting rules by insurance companies often dictatehow much coverage is available to an individual,but the wide variety of plans on the market today cansuit many different income levels and needs.

The process need not be a grueling one, and itshould not require undue amounts of time. But it isimportant to ensure that a solid income protectionplan is in place. This is probably 1 of the most importantfinancial needs that an individual has. Life cantake an abrupt curve, sometimes, it seems, in seconds.In expecting the unexpected, it's crucial to be prepared,no matter what path life takes.

James Douglas Mattern is a financial representativewith the Northwestern Mutual FinancialNetwork based in Philadelphia, Pa, for theNorthwestern Mutual Life Insurance Company,Milwaukee, Wis. He welcomes questions orcomments at 215-569-1222 ext 2778 or atjames.mattern@nmfn.com.