I recall a commercial by an insurance company that highlighted disability insurance planning. It showed people in their normal daily lives with a voiceover saying today’s a great day to be in an accident, such as a five car pileup. Our wish for you:
“If you become disabled your lifestyle will not be fatally compromised; you will stay in your home, retirement and other goals will stay on track; your business, if you own one, won’t have to be sold to cover expenses.” –Adapted from The New Life Advisor, Nick Murray, 2001
Before I became a financial professional, I had surgery that disabled me for a number of weeks. I was fortunate enough to receive a couple of disability checks through my group policy at work. They came 30 days after I thought they would arrive and were about 70% of what I expected. I now know that I should have had my wishes documented if something had gone wrong during surgery. What should you have in place if faced with a similar fate?
Consider your body
Daily we face the possibility of becoming mentally or physically incapacitated. There are a couple of documents to make sure you have in place: a power of attorney for healthcare (durable power of attorney for healthcare) and a durable power of attorney for finances.
Your durable power of attorney for healthcare appoints someone you trust to be your health care agent (sometimes call attorney-in-fact for healthcare or healthcare proxy) to see that your doctors and other healthcare providers give you the kind of medical care you wish to receive. It is crucial that you appoint someone who understands your wishes and will carry them out faithfully. From personal experience, I have seen the importance of selecting someone that has emotional capacity for the role. That may or may not be your next of kin.
Your agent may be called upon to make hard choices. The more he or she understands about your wishes and desires regarding medical care of the better.
Consider your money
A durable power of attorney for finances allows you to name someone you trust (called your attorney-in-fact for finances) to handle your finances if you can’t. Every state recognizes this type of document. If you become unable to manage your finances and you haven’t prepared a durable power of attorney, your spouse, closest relatives, or companion will have to ask a court for authority overly some of your financial affairs. This procedure can be time-consuming and expensive. In contrast, preparing a durable power of attorney is simple and inexpensive-if you do become incapacitated, the document will likely appear as a minor miracle to those closest to you
Your attorney-in-fact has only the financial authority you grant him or her in the document. Normally, an attorney-in-fact has authority handle all regular financial matters, such as depositing checks and paying bills. Beyond the basics of routine financial maintenance, it’s up to you to decide what you want to authorize. Whatever powers you give the attorney-in-fact for finances, he or she must act in your best interests, keep accurate records, keep your property separate from his or hers (unless you specify otherwise in the power of attorney document), and avoid conflicts of interest. There are two kinds of durable powers of attorney for finances: those that take effect immediately and those that don’t become effective unless someone certifies that you are incapacitated. You may feel strongly that your attorney-in-fact for finances should not take over unless and until you are incapacitated. This is called a “springing” power of attorney that doesn’t take effect until a person you’ve named in your document affirms, in writing, that you can’t manage your finances.
Disability insurance to provide cash flow
Many people say they are living paycheck to paycheck. If that is the case, how would you live if the paychecks stopped? Disability insurance is complex. The following is meant to highlight key issues as I seem them. It’s important to work with a licensed professional to tailor a plan to your needs.
If you work for an employer that offers disability coverage, I recommend you take advantage of it. Typically I’ve seen employers offer both short-term and long-term disability. Short-term typically covers periods of say two weeks to 90 days. Typically on the 90th day the long-term care coverage kicks in. It’s important to know exactly how much money you will receive. I have not seen a policy that provides complete replacement of your paycheck. It’s so you would have a disincentive to come back to work. Group policies are less expensive than individual policies. In fact you may have some health conditions that would prohibit you from getting a disability policy outside of your employer.
A non-group policy adds on to the coverage, allowing you to maximize your disability cash flow. Ideally you will be able to replace somewhere near 70% of your salary in total. Ask your agent or HR representative about the impact of taxes. I believe it’s important to add a cost-of-living adjustment of 3% to 4% to your disability insurance policy.
Do you have a plan for using your disability insurance?
The Chicago Skyway, had a billboard ad that said “if there’s an emergency do you have a plan?” The plan should start with a dry run in your mind of what you would like to happen should you become incapacitated. If your resources suggest that you can’t afford disability insurance or your assets are deemed sufficient, it still important that you put your health and financial directives in place. This way your wishes are documented so that they can be upheld. I know, I would hate to wake up out of a coma to find out medical procedures have been done and I was broke. If you don’t have a disability emergency plan, let’s get started? Want to be able to have 24/7 access to your policies and directives? Take a test drive of our financial organizer.
This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with a qualified legal advisor.