Create a Backup Plan

We tend to think of financial planning in regard to retirement, but what if you were suddenly unable to work due to a serious injury or long-term illness? We often plan our retirements around the assumption that we’ll be able to work until a particular age, but it’s always a good idea to come up with a backup plan. If you find yourself unable to work as long as you had intended due to a sudden disability, you might find yourself quickly depleting your retirement funds in order to cover monthly living expenses. You might even find yourself unable to pay for medical bills.

Obviously, having to retire early due to a disability isn’t included in anyone’s ideal scenario. But according to statistics, a 50-year-old has a 36 percent chance of having at least one long-term disabling condition before age 65*. In this case, long-term disability refers to a condition which lasts 90 days or more. Nine out of 10 of these disabilities are caused by illness and health conditions, rather than injuries.

If you found yourself in this situation, how would you replace your income while unable to work? It isn’t wise to count on Social Security to bail you out. Unfortunately, being approved for Social Security Disability can take months or even years of lengthy appeals processes, and in the meantime you would not be receiving payments. The program also carries strict rules regarding assets, which prevents many people from even qualifying. In many cases individuals don’t qualify for the program until their retirement funds have been completely depleted.

Rather than count on government programs, it might be better to purchase your own disability income insurance policy. Benefits will replace a certain percentage of your income if you’re ever unable to work, and if you pay the premiums with after-tax dollars the benefits will usually be free of income tax. The challenge, of course, is to plan carefully and decide how much coverage you need and can actually afford before purchasing a policy.

If you decide to purchase a disability income insurance policy, shop around and carefully compare the many plans on the market. Some policies will issue benefits if you become unable to work in your current job, while others only pay benefits if you’re unable to work any type of job at all. Since these policies can be complicated, it’s best to speak to your financial advisor about the different options available to you.

*2012 Field Guide, National Underwriter

** CNNMoney, June 26, 2012

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