retirement

  • ALL ABOUT DISABILITY INSURANCE

    It’s hard to work when you’re this banged up.

    It’s time once again for a very important exciting insurance post! Yay, I’m glad you are as excited about this as I am, because today I am writing (and you will be reading) all about:

    Disability Insurance

    Woot woot!

    Yeah, I know, totally what you wanted to hear about today, more insurance talk. But trust me, you’ll want to read all the way through on this one.

    I think most people have a decent idea of how the main types of insurance work. Health insurance helps you pay for doctor’s visits, medicine, and care for when you are ill or injured. Life insurance is meant to protect your loved ones and pays your beneficiaries when you pass away. Auto and Home insurance help pay for repairs to your home or vehicle when they are damaged or destroyed. The uses for these types of insurance seem reasonable and you probably have some of these types of insurance, especially where mandated, in the case of auto insurance, or home insurance if you have a mortgage.

    I’d argue that disability insurance is just as important as these other types of insurance, but if you’re like most of the population you don’t have it and you haven’t really thought about buying any, unless you’ve already experienced a situation where you could have really used it.

    Disability Insurance – The basics

    At the most basic level a disability insurance policy will pay you if you become injured or too ill (disabled) to work.

    How much money you receive, when, and for how long are all defined in the specific policy you purchase. As well as the types of illnesses and injuries that are covered.

    One side note: disability insurance is different from worker’s compensation insurance. Worker’s comp will pay if you get hurt or injured in a work-related accident or injury. Disability provides insurance for when you are injured or ill and can’t work due to a personal accident like and auto accident, or long-term illness such as cancer.

    Why Disability Insurance?

    So, why should you consider disability insurance? With all types of insurance, it makes sense to understand the W questions first. What exactly does this insurance cover? Who is protected and who receives a benefit by having the insurance? Why should you specifically purchase it?

    What: As we’ve discussed above, disability insurance pays you in the case you can’t work for an extended period of time due to an accident or illness.

    Who: Typically, the person who owns the plan is the person covered and the one who receives the benefit from the insurance company if they can no longer work. This is different from life insurance where the insurance company pays your beneficiary when you die.

    Why: This is the W question for which everyone’s answer is different. You need to ask yourself another series of questions or discuss them with a financial planner to understand if having disability insurance coverage is right for you.

    What would happen to you or your family if you could no longer work for an extended period of time? Are you the sole income provider in your family, or would a spouse be able to provide if you could no longer work? Do you have enough money saved or are you close enough to retirement that you would be able to live comfortably if you had to quit working today?

    The statistics on disability are pretty sobering, some estimates state that the average employee with a long-term disability or illness will miss 2.5 years of work. Another study found that of patients diagnosed with cancer, 42% depleted their life savings within 2 years. According to the Social Security Administration, almost 1 in 4 of today’s 20-year-olds will become disabled for a period of time before they reach the age of 67.

    The Two Main Types of Disability Insurance: Long Term and Short Term

    When it comes to the types of Disability Insurance it’s kind of like an old school sundae bar with two flavors, chocolate or vanilla, and a bunch of toppings you can sprinkle on top. The two flavors are long term and short term, and the toppings are the different riders that allow you to adjust the policies to best fit your situation.

    The benefit period (how long you receive payments if you become disabled) for short term disability insurance can last anywhere from 90 days up to two years, while a long-term policy can last 5-10 years or longer. And most plans are designed to be in effect until you reach the age of 65.

    Am I good if I have employer provided disability insurance?

    Some of you out there may be wondering about disability insurance you receive as part of a group plan benefit from an employer. This is great because you at least have some coverage as a benefit of employment, but there are some questions to ask and things to look out for. The first is that since it is an employer benefit which your employer pays for and provides to you, any benefits you receive will be taxed. This differs from a policy that you pay for yourself where you would receive the benefits tax free.

    If your company disability policy covers employees on their full monthly salary up to $5,000 per month, rather than receiving $5,000 dollars, you might receive around $4,000 depending on your tax rate. And that $4,000 might be enough to cover your expenses, but it pays to know that beforehand, so you aren’t relying on receiving the full $5,000 and coming up short.

    Another wrinkle to investigate with employer provided plans is what occupations they cover. Most employer plans have “any occupation” coverage rather than “own occupation” coverage. This means that as soon as you are able to work in “any occupation” you may stop receiving your disability benefits, even if you are not well enough to go back to doing the work you were doing before.

    As an example, if you were a surgeon that contracted a disease that caused hand tremors, you may be declared disabled to continue your current occupation, but the insurance company may decide that you are still able to work at another occupation where your disease would not affect your ability to do the job. If your disability coverage was “any occupation” then you could possibly be denied benefits since you could work in a job, even if it wasn’t the occupation you had before.

    The key is to understand the benefits and limitations of your employer provided policy so you can back it up with a policy of your own if needed.

    Key terms within Disability Insurance Policies

    The type of disability coverage you receive can vary quite a lot based on your preferences and how it is designed. These terms are defined in all policies while the riders below are options you can include if they make sense.

    Occupation Class: Insurance companies group professions into buckets based on incomes and how likely they are to make claims, similar to how they group individuals into segments based on your current health and habits for life insurance policies. The higher the occupation class, the more cost effective your disability coverage.

    Elimination Period: This is the period of time before you are able to start taking benefits. It is usually 90 days for most long-term policies.

    Benefit Period: How long you can retain coverage (typically till age 65) and how long you can receive benefits once you start (usually 5-10 years depending on the long-term policy).

    Disability Plan Riders

    There are many different riders that you can add to disability policies to adjust the terms and benefits you may receive. This is just a partial list, so make sure to do your homework on the riders available to you before purchasing a plan.

    Future Increase Option (FIO): This can give you the ability to increase the benefit based on increased earnings, without undergoing another medical exam.

    Catastrophic coverage (CAT): Long-term disability insurance will typically cover 60% of your salary, however with a catastrophic disability benefit rider you could receive up to 100% of your salary if you are unable to perform 2 or more functions of daily living (dressing, bathing yourself, etc), total and permanent loss of sight or hearing, or cognitive impairment.

    Residual/Partial: Allows a partial benefit to be paid if you are not totally disabled but are in a situation where you lose 15%+ of prior year earnings.

    Cost of Living Adjustments (COLA): Provides cost of living adjustments for claim payments to keep up with inflation.

    Own Occupation: Can be considered totally disabled if you are unable to perform the duties of your occupation, even if you are employed in another occupation.

    Retirement Protection Plans (RPP): You could receive contributions to your retirement plans in addition to the disability income benefit.

    Student Loan Protection: Benefit would pay student loan payments as well as the disability income benefit.

    Well, those are the basics on disability insurance, a less understood topic that I think more people should learn about so they can adequately protect themselves.If you would like some more guidance in this area I recommend seeking out a fee-only financial planner to help figure out if protecting yourself with long term disability insurance is the right decision for you. If you would like to talk to us at Steady Climb Financial Planning, give us a call. We are happy to help.

  • IS THE HSA THE BEST RETIREMENT ACCOUNT?

    As we head into the last quarter of the year, many of us are coming up on the time to re-enroll in our employer benefit programs. This leads nicely into a discussion of one of the best retirement accounts available. A secret retirement account, that wasn’t designed as for retirement savings in the first place. The Health Savings Account.

    Where did the HSA come from?

    The Health Savings Account (HSA) was created in 2003 as a way to help those with high deductible health insurance plans save for future healthcare costs. These plans were created for people that didn’t expect to need as much health insurance throughout the year. The health insurance company offers a less expensive plan, but the catch, is there is a higher deductible if you do get sick and need to get healthcare. The HSA is an account for someone with this type of plan to save money to use for future healthcare expenses in a tax-advantaged account.

    Retirement accounts are designed to save you on taxes, but you do have to pay them at some point. With a traditional IRA or 401(k) you get to contribute pre-tax dollars, but the withdrawals are taxed as ordinary income in retirement. With a Roth IRA or 401(k) the reverse is true, you pay taxes now and can withdraw the funds tax-free in retirement. So why is the HSA one of the best retirement accounts available?

    The beauty of the HSA is that you get to deposit pre-tax dollars into your account and as long as you have qualifying medical expenses, you can withdraw your money tax-free. This is the only account where you can both contribute and withdraw tax-free. 

    HSA basics

    • 2018 Individual Contribution limit: $3,450
    • 2018 Family Contribution limit: $6,900
    • Contributions are made with pre-tax money, and can be made by you and your employer.
    • Contribution limits apply to the money contributed by you and your employer.
    • You can open an HSA if you have a high deductible plan at any time in the year.
    • If you switch to a high deductible plan during the year, you get a prorated contribution limit. So, if you’re single and switched to a high deductible plan in September, and have it through the end of the year, your contribution limit would be $1,150 (4/12 x $3,450).
    • Money can be withdrawn tax free when used for qualifying medical expenses.
    • After the age of 59 ½ money can be withdrawn for any purpose and is taxed at ordinary income tax rates; essentially the HSA can function the same as a traditional IRA.

    How to use an HSA as a retirement account

    If the HSA was created for healthcare expenses how do you use it as a retirement account? The key lies in a little bit of planning ahead. With an HSA you are allowed to withdraw money from the account to pay for qualifying healthcare expenses. You can withdraw the money any time after the expense occurs and you don’t have to withdraw it in the same calendar year or within a period of time after the expense occurs.

    You can allow the money in your HSA to grow by paying for healthcare expenses with after-tax dollars today, and reimbursing yourself from the HSA in the future.

    By paying out of pocket, you allow your HSA contributions to continue to grow tax-free until you withdraw them. That could be another 30-40 years of tax free growth! 

    Example

    Let’s say I have a high deductible health plan for my family. That means I can contribute $6,900 into an HSA for the year. I estimate that my healthcare expenses that aren’t covered by insurance are around $500 per year. I can pay those costs with after-tax dollars and keep that $500 in my HSA to keep growing tax free. I just have to keep track of my healthcare expense receipts to withdraw the money at a later date.

    If you happen to lead an exceptionally healthy life and don’t need to spend much on medical expenses, your HSA turns into a quasi-IRA after you turn 59 ½. You can withdraw your money tax-free for healthcare expenses as before, or you can withdraw it and pay income tax as you would with a traditional IRA. 

    Your HSA always belongs to you, not your employer. Even if you decide to switch away from a high deductible plan, you can still use your HSA for medical expenses and the money you contributed can continue to grow.

    Don’t forget!

    There are a few things to keep in mind when researching your HSA. More employers are starting to contribute to employee HSA’s so take that into consideration when deciding whether and how much to contribute. Most HSA’s require you have a certain balance in the account before you can allocate funds to investments. The amount varies, but is typically around $1,000.  Some HSA providers don’t offer the option of investing in low-cost index or mutual funds, so do your research on the available investments before opening an account. The fees vary between HSA’s and some employers will cover the cost. If you leave an employer or they decide to switch to a new HSA provider be sure to check on the fees, it may make sense to open an account with another provider.

    What do you think? Is the HSA is the best retirement account available?

  • HOW CAN A FINANCIAL ADVISOR HELP

    Need a hand with your finances?

    Starting out your initial financial decisions are relatively simple. Try to save more than you spend, set aside a sensible amount for emergencies, and invest the rest for longer term goals. As you grow and advance in your career the decisions tend to become more complicated. As you near retirement the decisions become even more important, and delaying major decisions can have huge consequences down the road.

    Balancing saving for education and family vacations, choosing between different health and life insurance plans, and managing tax and estate planning issues are just a few of the issues to tackle.

    A qualified financial advisor can provide support and guidance as your financial situation becomes more complicated. Building a financial plan, providing answers to challenging financial questions and helping you implement the action steps in your plan are three key ways that a financial advisor can help. 

    Building Your Financial Plan

    One of the top benefits of working with a financial planner is creating a written financial plan. Most of us have a general sense of our goals and what we are doing to achieve them, but taking the time to clearly define and write down what we want and how we will achieve is an extremely worthwhile exercise, but it can be a challenging task to do on your own. 

    Building a financial plan involves analyzing your financial situation (job, savings, investing, debts) and your goals (family, home, travel, retirement) to create a to-do list to make your goals a reality. The process of creating a written plan helps reduce the anxiety that comes from having a hazy picture of your finances and wondering if you are on track or not. Creating an accurate map of your current situation is the best way to identify the next step on your financial journey.

    Answering Challenging Financial Questions

    An advisor can provide answers to the questions that often paralyze us into indecision: 

    • Am I saving enough for retirement?
    • Can I afford college tuition for my kids?
    • Should I pay off my mortgage early?
    • Am I on the right track?
    • Can I afford to start a family?
    • How do I manage my student loans while still investing?
    • How much insurance do I need? 

    If you have any of these questions or concerns you could benefit from meeting with a qualified financial advisor. During the process of creating a financial plan an advisor can provide guidance and answers to these questions as well as other important life decisions.

    Implement the Plan and Adjusting Along the Way

    Creating a written financial plan is a great first step that can help you gain a clear understanding of your current situation and the actions you need to take. Just as important, is following through and accomplishing the tasks identified in the plan, as well as making adjustments when things change.

    Having regular check-ins with a financial advisor can ensure you remain on track towards your goals. Providing ongoing guidance when new situations pop up such as the birth of another child, an unexpected career move or any of the other things that life might throw your way. An advisor can help you make the necessary adjustments so that these changes don’t derail your plan.

    Would you benefit from having professional advice when it comes to planning and achieving your financial goals? A financial advisor can guide you along the path to grow and protect your assets, and secure your future.