Focus on Personal Finance
What If You Become Disabled?
A disability plan that meets your income needs is a must.

The phone rings and it's the spouse of a client. You almost know what's coming next. Your client's had a terrible accident. He's going to live, but he may never work again. And you had that discussion with him just last month about how much he's lacking in disability coverage. What's the family going to do?

In this article, we'll try to guide you through this type of event to a happier ending, by giving you our insights into what you can do to avoid a repeat of the outcome described above.

IT CAN HAPPEN TO YOU

As part of every comprehensive plan, you should examine the events in life that could interrupt or destroy your wealth-building process. Premature death, debilitating illness, disability and long-term care are just a few.

Statistics show that working professionals are much more likely to become disabled than to die during those peak earning years between ages 35 and 60. Whether that disability is temporary or permanent, or partial or total, if you're not prepared for it, it can become a permanent financial reversal from which you'll never recover. Therefore, in addition to adequate cash reserves to fund even a temporary disability, you should carefully examine both the amount and quality of your existing disability insurance coverage.

A disability can shut off your income for an extended time. It may even force you to close your practice. We've found that, after a disability, it typically takes at least two-thirds of your before-tax income to fund your financial goals, including wealth-building for your retirement years.

A combination of up to three types of coverage -- selected based on your specific needs -- can fund your income-replacement. They are:

Disability overhead expense. This type of insurance, known as DOE, is a reimbursement plan designed to cover business expenses during the total or partial disability of a professional or businessperson who's an owner or partner.

Group/association long-term disability. This master disability insurance contract, or LTD, is issued to an employer or association. It covers some or all employees/members, and provides long-term benefits on a group basis. Benefits are usually paid up to age 65. These plans typically provide 50% to 60% of salary (subject to a maximum benefit cap) and are reduced by income that comes from other sources.

Disability income. Known as DI, this type of coverage provides a portion of income lost as the result of a total or partial disability caused by either an accident or an illness.

Whatever coverages you choose, purchase policies only from the most highly rated insurance companies.

READ THE FINE PRINT

Choose a policy that covers you if you're not able to work as an ophthalmologist. You might be able to go back to work as a medical doctor or teacher, but your income may be a fraction of what it was before the disability.

Also, be sure your disability contract provides for guaranteed insurability (the right to increase your coverage as your income rises, without regard to any changes in your health or hobbies).

Because many disabilities aren't total, make sure your contract contains a residual benefit provision that provides for proportionate payments based on your reduced income resulting from a less-than-total disability. The best contracts don't require a period of total disability for this provision to be operable.

And finally, make sure that a "waiver of premium" option is included as a part of your life insurance contracts, so that in the event you're disabled you won't have to continue to pay your life insurance premiums.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and G. Kemler Donaho, CLU, are president and principal, respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group provides personalized fee-only financial planning, investment management and business consulting services.