Even in good time, bad things can still happen
In the course of a financial planning engagement, most people want to talk about their financial future, dreams and visions. During a year like 2013, the discussions get slanted to bragging about investment returns and what is working well in your plan. A qualified planner, however, is trained to go beyond your overconfidence as an investor and ask “what can go wrong with this picture”?
Of course, what goes up can also come down. To that end you must recognize that your investment performance may not always be so stellar or enough to meet your needs. But beyond the performance of your portfolio are a host of other possibilities that can go wrong and derail your plan to a point of no return.
Your inability to work, for example, may be more devastating than your pre-mature death. This sounds brutal, but having you in a permanently disabled state, with no income and a significantly higher cost of living because of the illness or injury could be more financially devastating than losing you immediately.
Many who work ignore this peril for two main reasons. First is that few want to realistically address their own mortality or disability. The second reason is a false sense of security that they may gain from their benefits package at work.
Many companies offer short term and long term disability insurance for their employees. Whether it is standard fare offered with employment or a policy that you must pay for, understand what you are buying.
First ascertain exactly what health conditions must exist to qualify for coverage. Some will pay if you are unable to perform your specific duties and others will only pay if you can’t do anything for which you may be reasonably suited. If your plan is the later definition of disability, and you can flip burgers after your disability instead of being a cost accountant, the policy will not pay a dime.
Look into the waiting period. A waiting period is the amount of time you must wait after being disabled to actually collect benefits. This can be as long as 3 to 6 months in some policies. Even social security disability income has a 5 month waiting period. That may not sound like a long time until the mortgage company or auto loan companies come knocking on your door. This is also why most competent planners will recommend that you have savings to cover that possible gap.
Also look at offsets within the policy. Many policies will offset amounts of benefits paid to you by money that you collect from other sources. These other sources could be social security disability, income from other businesses you own or jobs that you may be able to perform.
If this situation has already become a reality for you, look at any life insurance policies that you have. Some life policies contain an accelerated death benefit rider that will pay an advance on the death benefit for terminal illness.
For those healthy, make sure that you have adequate savings and a disability insurance policy that meet your needs.
This article was written by John P. Napolitano