July 2007
When Bad Things Happen to Good People: Protecting Your Income and Your Future
By Leslie A. Smith, Coronado Financial Group, LLC
How’s your day going? Is it just as you planned when you sat down at your desk? Or have there been unexpected bumps along the way?
While we hope things will proceed as planned, often the reality is much different. How do you manage the unexpected—from the important to the mundane—in your business and personal life? It may be merely inconvenient to recover from a missed appointment because your car won’t start. It may be more difficult to regain the income from a lost contract with a favored client.
As a licensed financial advisor (and small business owner) for many years, people hire me to guide them in planning for the unexpected. Planning for known risks based on the probability of their occurrence is practical. It’s also cost effective. It’s to your benefit to protect yourself against high-probability risks that could dramatically impact your financial picture.
Most everyone has been touched by a tragedy or fork in the road. Even a life of success and prosperity encounters misfortune. Bad things do happen to good people—beliefs about karma aside.
Whether we plan for the unexpected and how we plan for it can have a remarkable effect on how well we recover from it. The life of a friend of mine provides an example. Michael graduated with honors, got the job he wanted and felt as if life was falling into place. That same year he was in a terrible car accident. The car rolled several times. He survived but his hip was shattered. The good news in all of this? Upon joining his company, Michael had signed up for the company’s group disability insurance. Even though his injury was not work-related, he received rehabilitation benefits and, most significantly, he continued to receive his income. More on Michael later.
You don’t need to be an employee to manage your risk of a work-stopping disability. If you are self-employed, you can purchase income protection too. But should you?
Many individuals and small business owners have done a lot of planning for the unexpected. They insure their lives, businesses and health and start retirement and college savings plans. They have their contracts reviewed by lawyers, have living trusts or wills and buy travel insurance. Many even have long- term care insurance. However, they rarely insure their incomes. Only 30% of people have Group Long-Term disability from their employers. Of the self-employed, 80% of doctors have it and 65% of dentists have it, but less than 10% of business owners do1. Yet the following facts show that loss of income from a disability occurs with far greater frequency than the loss of life or business.
- A person suffers a disabling work injury every nine seconds.
National Safety Council, Injury Facts 2004 Ed.
- Having a “safe” occupation does not reduce the probability of a disability. Over 90% of disabling accidents and illnesses are not work-related.
National Safety Council, Injury Facts 2004 Ed.
- 43% of all 40-year-olds will suffer a disability for at least 90 days, prior to age 65.
2005 Field Guide to Estate Planning, Donald Cady
- About one in seven people can expect to be disabled for at least five years or more, prior to retirement. One in five workers will be out of work for a least a year during their working career.
Commissioners Disability Table, 1998 Health Insurance Assoc of America
Should you protect your income from loss due to a disability? It’s important to consider what impact a loss of income might have on you and/or your family. Do you have emergency funds set aside? Disability causes nearly 50 percent of all mortgage foreclosures, compared to 2 percent caused by a death2. According to MarketWatch, half of all personal bankruptcies, affecting 2 million people annually, were attributable to illness or medical bills3. The average household in the U.S. has credit card debt of $93004.
Are you average or do you have a year's worth of income (after taxes) set aside to cover emergencies? How long could you and/or your loved ones manage without your income? In testing to determine if you are disability proof you might want to consider your other assets such as your retirement accounts. If disabled, you can withdraw funds from your retirement accounts without penalty5. But depending on the length of your disability and the amount you have saved for retirement, this could result in a reduction in your retirement savings.
Whether and how we provide for an unexpected event can have a remarkable effect on how we recover from that event. There’s a happy ending to my friend Michael’s story. While he was never able to fully recover complete use of his leg as a result of his hip injury, he is able to walk. During physical therapy he met his wife. They have 5 children and he is a stay-at-home dad. His disability income, paid monthly for 15 years, continues, and while things didn’t turn out quite like he expected, he and his family have a full and rich life that is financially secure. It goes without saying that things might have looked much different had he not opted for disability insurance. Because there are so many events in life that we can’t plan for, it makes sense to protect ourselves from the things we can.
- The Principal Financial Group
- Health Affairs: The Policy Journal of the Health Sphere, February 2005
- MarketWatch: Illness and Injury as Contributors to Bankruptcy, Health Affairs Web Exclusive
- Council on Disability
- Consult your Tax Advisor
© 2007 Leslie A. Smith/Coronado Financial Group, LLC. All rights reserved.
Author Bio
Leslie Smith, is a Financial Planner and Principal of Coronado Financial Group, LLC, a state Registered Investment Adviser. She has over 20 years experience in financial planning, investment management and insurance. Prior to starting her own practice she was a Vice President with BankAmerica Investment Services, Bank of America. She holds the following registrations: series 7, 26, 24, 63 and 65 as well as a CA Insurance license #0777261. Contact her at 650-571-8132 or info@coronadoadvisors.com. Financial Planning services offered through Coronado Financial Group, LLC. Securities offered through AIG Financial Advisors, member NASD, SIPC.
“Money and success don't change people; they merely amplify what is already there.” – Will Smith
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