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Focus on finance: Insurance against disability

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By Steve Wright

Question: What is the biggest setback people encounter when getting close to retirement?

Answer: While millions of Americans are doing everything they can to save for retirement, one critical risk often is overlooked: The chance of disability lasting for at least three months is a greater possibility than death for those aged 40 to 65, according to the Insurance Information Institute. But while most people are willing to contemplate the possibility of premature death, the idea of simply being incapacitated by accident or illness for any extended length of time is a foreign concept. In fact, the normal recovery period for the average disability is a whopping two-and-a-half to three years. Obviously, an absence of this length from work has the potential to be financially devastating for the vast majority of victims.

When totaling your retirement assets, you must realize that your greatest asset always is your ability to earn an income. That is why disability is such an important risk to insure against, because disability usually is much more financially damaging than death. If you die, you incur no further expenses of any kind, and your heirs will receive the death benefit proceeds of your life insurance. But if you were to become disabled, even for a short time, you not only would have no income, you most likely will have substantial medical or other care-related expenses that you may not be insured for.

This double-whammy can easily set your retirement plans back by several years if you have no disability protection.
Therefore, having proper disability coverage is an indispensable part of any retirement plan. While worker’s compensation may cover you if you become disabled on the job it offers no protection if you become disabled under any other circumstances.

There are several different types of disability insurance, such as long and short-term, residual and professional. Some types of coverage only pay the difference between your current earnings and what the carrier considers you to be capable of earning in a lower-level job if you become partially disabled; while others reimburse you for the full amount. A key factor to remember is that employer-paid disability coverage will be counted as taxable income to you; but if you pay for the premiums yourself, any benefits received are tax-free.

Steve Wright is managing member of The Wright Legacy Group LLC.