Financial security now and later
Are your bases
covered?
by Sherman On
Disability income coverage ensures earnings today while retirement
solutions achieve financial goals tomorrow.
When you think about achieving a secure financial future, retirement
savings and investments most likely come to mind. But while retirement
savings protect our daily necessities and desired lifestyle tomorrow, what will
protect your necessities and lifestyle today?
Disability income insurance protects a person's ability to earn an income --
his or her most important financial asset -- by guaranteeing monthly pay if
his/her ability to work is impaired by sickness or injury. Unfortunately, for
many, insuring one's current income and lifestyle is never addressed -- an
oversight that can lead to eroded retirement savings, should work disability
unexpectedly strike.
Ironically, even though they see the value in having insurance coverage, a
number of Americans do not have protection should they become disabled.
According to an ongoing Money Maladies survey by Northwestern Mutual
conducted 2000-2003, while three-fourths (or 75 percent) of Americans think
it's important to have financial coverage in case one becomes disabled, 30
percent of Americans reported not having enough disability income coverage
(1).
Work disability can lead to income disability
If you suddenly became disabled, how would you adjust financially? Many
people mistakenly think they can simply scale back regular expenses to
offset lost income during a period of disability. Surely, a disability may limit
one's ability to leave their home and, as a result, transportation, recreation
and entertainment costs will likely be curtailed. However, it's important to
realize that most people's monthly living expenses remain constant during a
period of disability -- and perhaps even increase with the addition of medical
bills and other related costs.
The fact remains that having to deal with lost income during a short- or long-
term disability is a distinct possibility for Americans. Consider the following
statistics:
* There's at least a 60-percent chance at ages 30, 40 and 50 that one in a
group of five people will suffer a long-term disability before age 65(2).
Between the ages of 25 and 55, for both males and females, the probability
of becoming disabled is greater than the probability of dying(3).
* By the age of 35, people have a one in three chance of being disabled for
more than 90 days during the rest of their working life(4).
While the prospect of disability is real -- 18.1 million Americans reported a
work disability in 2002(5) -- people should be more concerned with the
consequences of disability rather than the probability.
The link between disability and retirement
In many ways, considering disability income options and retirement
solutions work interdependently to secure one's financial future. Each
process helps replace a portion of lost earned income, meet daily living
expenses and achieve a certain lifestyle.
The daily living expenses during disability and retirement are very similar; in
most cases, each life phase requires payments for rent, mortgage, property
taxes, housing maintenance, utilities, food, clothing, car maintenance,
insurance, healthcare and installment loans. By planning ahead to cover
these costs during disability and retirement, one's standard of living can be
maintained.
Unfortunately, for some without disability insurance, the onset of disability
will cause them to dip into their hard-earned savings earmarked for their
retirement years and run the risk of jeopardizing their financial future.
Consider how long your retirement assets would last during a disability:
First, calculate your monthly household expenses during disability. Now total
your savings and retirement account balances and divide that number by
your monthly household expenses. Based on national averages for annual
expenditures and account balances, the average savings account and 401(k)
balance would be depleted within 24 months. One year of total disability can
devastate 10 years of retirement (or education) funding if you've been saving
10 percent of your annual income each year(6).
In the overall scheme of preparing for the future, the interdependent and
complementary relationship between disability and retirement is key to
building a secure future. Those who plan early to protect their income during
disability and retirement will remain in better control if and when those times
arise with minimal impact on their family's finances today and tomorrow.
___________
(1) Money Maladies Survey, 2000-2003, Northwestern Mutual
(2) 1985 CommissionerÂ’s Disability Table (a) Disability lasting at least 90 days. Best
occupation classes. Sex-neutral statistics.
(3) 1975-1980 Basic Table; 1985 Commissioner's Individual Disability Table (a) for all
occupation classes.
(4) National Association of Insurance Commissioners, Commissioner's Individual Disability
(5) U.S. Census Bureau, 2002, unpublished data
(6) Based on average annual expenditures for 2001 as reported by the U.S. Dept. of
Labor/Bureau of Labor Statistics; average 401 (k) balance as of 2001 as reported by the
investment Company Institute; and average savings account balance as of year-end
2000 as reported by the American Bankers' Association.
About the author:
Sherman On, CLTC, is a Financial Representative with the Northwestern
Mutual Financial Network based in Brookfield, Wisconsin for The
Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin. To
contact Sherman On, please call (262) 787-7053 or e-mail him at sherman.
on@nmfn.com.