09/01/2023

How much have you set aside for a catastrophe?

Most insurance conversations focus on  life insurance. Unfortunately, disability insurance is too often met with the opinion that, “it can’t happen to me!”

If this resonates, it may be an ideal time to consider the protection of your income in the event of disability. Often, the response we get to the question about income protection usually comes in the form of, “I have it at work.” However, group disability protection usually comes in the form of insuring approximately 2/3 of your income, which is taxable and is offset by other income sources such as social security, disability, and worker’s compensation payments. It is important to understand whether that amount of income will be sufficient to maintain the same standard of living prior to the disability. For those who rely on social security disability payments as an income stream, be careful as the definition of disability under social security is so strict that most individuals do not qualify for payments.

For business owners, the absence of any disability coverage can result in decreases in productivity and potentially higher healthcare costs if employees try to work through a disabling illness or injury.

I once insured a client, “Dr. Smith,” a sole medical practitioner. Because of the underwriting for their disability insurance, medical tests revealed that they were a smoker, which contradicted the response on the initial application. Not wanting to pay the higher smoker premium, Dr. Smith finally acquiesced and bound the coverage. The difference between the smoker and non-smoker premiums ultimately proved to be inconsequential. Policy benefits were $5,000 per month payable until age 65 and included a cost of living rider (COLA) benefit that was designed to keep pace with inflation. Dr. Smith also had business overhead expense coverage for a 24-month period which was designed to pay the bills so that they could keep their medical office operating until a replacement could be found.

Several years after the policy was placed in force, Dr. Smith was diagnosed with Parkinson’s disease and filed for disability payments under the policy. The decision to purchase disability insurance saved them from financial ruin. Further, the business overhead expense coverage helped provide a smooth transformation to another physician who retained the majority of Dr. Smith’s patients and continued the practice uninterrupted. Dr. Smith was still receiving disability income checks, some 24 years later.

For every policy written for those like Dr. Smith, there are a number of policies written where no claims were ever paid. Each of those insured, however, was secure in the fact that they had a plan in place for that catastrophe. Make sure you are aware of what your plan is and what will happen for you and your family in the event of a sudden accident or sickness.

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  • John Dugan headshot
    Contact John John+Dugan+Jr john.dugan@CohnReznick.com
    John Dugan Jr.

    Director of Financial Planning

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