If you are disabled, insurance—in the form of Social Security, Workers’ Compensation or group or individual disability income policies—may provide financial assistance to keep you from poverty. But these programs will most likely not be enough to provide a healthy financial future.

Disability insurance programs, whether from government agencies or insurance companies, aren’t intended to replace 100 percent of income, because doing so creates a moral hazard; individuals might find it more profitable to qualify for, and remain on, disability than to continue working. Consequently, most disability insurance programs limit benefits to a percentage of gross income, usually between 60 and 70 percent. These benefits are often tax-free and may be sufficient to meet current living expenses. But it’s not a 100-percent replacement of income.

Consider also that the real costs of living with a disability can be significantly greater than the previous costs of living. And these extra expenses—for therapy, rehabilitation, medication etc.—may be ongoing for the rest of one’s life.

Thus, while disability insurance, from any source, can prevent immediate financial ruin, an extended period of disability can derail lifelong financial objectives, particularly ones that require saving, like a down payment for a home, college education for children or retirement. How can you protect your saving when disability insurance doesn’t fully replace your income?

Incorporate savings protection into disability insurance planning.

If you are currently saving, you may be able to preserve your ability to continue saving, by adding riders to existing insurance protection. A rider is an amendment or addition to an existing insurance policy. Most riders add specialized benefits for an additional cost. Two examples are Retirement Contribution Insurance and Whole Life Waiver of Premium.

Retirement Contribution Insurance

For those who have individual long-term disability insurance, your plan may offer a retirement protection rider. For an additional premium, the insurance company ensures that, in the event of a qualifying disability, contributions to a defined-contribution qualified retirement plan (such as a 401[k], IRA, ESOP or SEP) will continue at current levels. This amount may include an employer’s matching contributions as well.

To be eligible for this benefit, the insurance company may require proof that you are currently contributing to a qualified plan. The amount of coverage is selected by the insured but usually capped at the level of last year’s contributions (although the rider may have cost-of-living provisions to increase contributions over time).

In group policies, these retirement contributions are deposited directly to the existing employer-sponsored plan. In contrast, benefits from a personally owned individual policy are placed in an irrevocable trust. These funds are invested according to the individual’s direction, in options provided by the insurer. Because these contributions are made to a trust instead of a qualified retirement plan, distributions of interest, income or capital gains are subject to taxation on an annual basis. Taxes can be paid out of the trust from the accumulated assets. This trust is not a pension; it is a personal accumulation account funded as a result of a disability.

This arrangement does not create a moral hazard, because while it increases the overall disability benefit, it does not allow the insured immediate access to the additional funds.

Whole Life Waiver of Premium

Not everyone has access to an employer-sponsored qualified plan. And even among those who do, not everyone chooses to place all their savings in them. For “non-qualified” savings, individuals may want to consider adding a whole life insurance waiver of premium rider to their policies.

With a whole life waiver of premium rider, the insurance company guarantees ongoing premium payments in the event of a long-term disability. These payments not only keep the insurance benefit in force, but also increase the cash values according to the terms of the policy.

An example: A 35-year-old male non-smoker has a whole life policy from a highly rated mutual insurance company with an annual premium of $10,000. If he suffers a permanent disability at age 40, the insurance company will continue to credit 10,000 annually in premium to his policy. To age 65, this adds up to $250,000 in premiums paid by the insurance company, and, using current assumptions, projected cash values of almost $600,000. And these premiums would continue to be paid for the life of the insured.

Some insurance companies permit waiver of premium to be combined with conversion agreements on term policies. A conversion agreement gives the policy owner options to exchange some or all of the existing term protection for a cash-value policy without additional underwriting. In a qualifying period of disability, the policyowner could convert from term to whole life (or a similar permanent policy) and accumulate cash values—with the premiums paid by the insurance company.

Unlike disability income insurance, the accumulation benefits from whole life insurance waivers of premium are not tied to earnings. A disability accumulation amount with whole life insurance may be as large as one’s budget and human life value will allow.

Waiver of premium benefits may be further maximized through additional purchase- or guaranteed-increase option riders. Once a policy is established, these riders give the policy owner options to obtain more coverage at specified times (such as every three years), or if “life change” events occur (marriage, birth or adoption of a child, a home purchase etc.).

These policy configurations make it possible to secure the right to significant amounts of permanent life insurance (and the accompanying waiver of premium benefits), even if current finances will only allow for either term insurance or smaller amounts of permanent coverage.

This article was prepared by an independent third party. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9 Fl., New York, NY 10017, 212-541-8800. Securities products/services and advisory services offered through PAS, a registered broker/dealer and investment adviser. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Wealth Advisory Group LLC is not an affiliate or subsidiary of PAS or Guardian.

PAS is a member FINRA, SIPC.

Neither Guardian, PAS, Wealth Advisory Group, their affiliates/subsidiaries nor their representatives render tax or legal advice. Please consult your own independent CPA/accountant/tax adviser and/or your attorney for advice concerning your particular circumstances.

2018-64048 Exp. 8/20

2018-68549 Exp 8/20

Submitted by Elozor Preil