Income Protection: Protecting your most Valuable Asset (Your Paycheck) WHEN EXAMINING OUR FINANCIAL PLAN OR CURRENT FINANCIAL SITUATION WE MUST ASK OURSELVES, WHAT IS MY MOST VALUABLE ASSET? Is it your home? Your car? Your health? For most of us it is our income. Income gives us the ability to pay for the big things in life, home, car, etc. It also gives us the ability to pay for the little things, vacations, activities, and cell phones. We buy insurance to protect our home, health, car, and other items but we often ignore the most important asset which needs to be protected—our ability to earn an income. Let us examine some facts about day-to-day costs of items and services we use to set the stage for the need to protect your income. Most of us have two categories when it comes to breaking down how we spend our income: One: Assets and Two: Annual costs of other products and services. Let us review each: ɨ One: Assets ɦ Car – Average price of a car: $38,9481 ɦ Average Price of a House: $349,0002 ɦ Income – $50k of salary of a 35-yr-old retiring at 65: $1,500,0003 ɨ Two: Annual costs of other products and services ɦ Large Coffee: $7634 ɦ Satellite TV: $8395 ɦ Smartphone Services: $1,0206 ɦ Individual Disability Income Protection: $8677 If you were to become sick or hurt and unable to work, how would you pay for all the items listed above? Disability insurance can protect your mortgage and car payments. Even if you do not own a home, it will provide income to cover most of your daily living expenses. Americans perceive disability insurance as expensive. Most of us spend $250 or more per month on the latest technology and dining out. The average cost of an individual disability policy is 1.5% to 3% of your income to protect 55% to 65% of your income on a Tax-Free Basis. Disability plans come in two forms, group coverage and individual coverage. You may have a group LTD (Long Term Disability) or STD (Short Term Disability) coverage at work paid for in whole or in part by your employer. Most employees are not aware of the limitations a group policy may have. Group coverage is not portable and if any portion of the premium is paid by your employer the portion paid for by your employer is taxable. For Example: An employee that makes $100,000 annually and their employer offers an LTD plan that covers 60% of their monthly income to a maximum of $5,000 per month and the employer pays 100% of the premium for the plan, the benefit will become 100% taxable. In this situation the actual LTD benefit will be $3,500 to $4,000 per month after taxes (depending on your tax rate). The ultimate question becomes: does 35% to 40% of your paycheck help you cover your monthly costs? What most employees and some employers do to help close the gap left by employer paid/ taxable disability plans is purchase or offer individual disability plans to fill the gap left by the employer paid plan. An individual disability plan will pay in addition to a group plan on a tax-free basis if premium is paid with post tax dollars. The group plan will not offset for the individual plan. As stated above for 1.5% to 3% of your income you can make sure your living expenses can be covered by replacing 55% to 60% of your income. Paying for the plan on a post-tax basis will bring your coverage closer or in line with the income replacement ratio described above. Bankers Cooperative Group has put together a review process to help our members analyze their current disability plans and help supplement their group plans in effort to educate employees on how much of their income is being protected and needs to be protected. In closing, we must understand that our ability to earn an income is our most important asset. We should take the time to review how we are protecting and how we can protect our income. Reviewing your current disability coverage is the first step. RESOURCES 1. Kelly Blue Book, December 2019 2. Realtor.com July 2020 3. Integrated Benefits Institute, Health and Productivity Benchmarking, 2017 Long Term Disability, September 11, 2018 4. Fastfoodmenuprices.com 10/2020 Daily Large Coffee at Dunkin’ Donuts- $2.09 per day 5. DirectTV.com 10/2020 XTra Package with DirectTV- $69.99 per month 6. Sprint 10/2020 Magenta Plus Plan- $85 per month 7. Male Age 30, Radius Choice 4A Occ class, 90 day waiting period, benefit period to age 65, $5,000 monthly total disability benefit. Annual premium for female client with same assumptions: $1,363 WE MUST UNDERSTAND THAT OUR ABILITY TO EARN AN INCOME IS OUR MOST IMPORTANT ASSET. WE SHOULD TAKE THE TIME TO REVIEW HOW WE ARE PROTECTING AND HOW WE CAN PROTECT OUR INCOME. REVIEWING YOUR CURRENT DISABILITY COVERAGE IS THE FIRST STEP. 30
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