What Insurance Do You Need?

Many people who thoughtfully protect their families against the loss of income from a breadwinner's death fail to think about what would happen if that breadwinner were unable to earn a living because of a disability. In fact, long-term disability may worsen a family's financial situation more than a wage earner's death because income stops, but expenses continue.

Consider Bob and Ann Jackson. Bob and Ann, who live in a Midwestern city, are parents of a 6-year-old girl. Bob, 31, earns $32,000 selling computers. His monthly take-home pay is $1,994. After staying home several years to care for their daughter, Ann is now a part-time saleswoman in a local boutique. She brings home $338 a month.

Life is uneventful for the Jacksons, until Bob becomes so ill that he can no longer work. Suddenly there is a dramatic reduction inn the Jacksons' income. Because they live in a rental apartment, they have no mortgage disability insurance to cover basic housing costs. Bob isn't eligible for Social Security disability. (To be eligible, Bob would have to demonstrate that he is unable to engage in any gainful work that exists in the national economy, regardless of whether such a job exists in the area in which he and Ann live.) Bob has no prior military or civil service that might qualify him for other government disability programs. He does not qualify for workers' compensation benefits because his illness is not job-related.

The specifics of what happens next depend greatly on whether or not Bob's employer offers group disability benefits, whether these benefits are short term (STD) or long-term (LTD), whether the policy includes a cost-of-living adjustment, and how the group policy defines disability.

If Bob's employer does provide Group LTD, Bob would be entitled to benefits under his employer's policy--probably 60 percent of his gross salary, or $1,600 a month. Of this amount, he would have to pay $193 in federal income taxes and $100 in state income taxes. To continue his family's group medical policy, he will have to pay the portion of his health insurance premium that was previously paid by his employer. Under this scenario, the Jacksons' monthly income (including Ann's current salary) would be almost 30 percent less than their former income. Will this be adequate or not? The Jacksons may save money with Bob staying at home (he is no longer commuting to work, for example), and Ann may adjust to the situation by becoming the principal wage earner. Thus, the employer-provided group disability policy may well be enough.

However, not all employers provide disability benefits. What if Bob is employed by a small firm that has no group disability benefits at all? Or what if the Jackson's situation is such that they need more than they would get under the group policy? Under such circumstances, an individual disability income insurance policy might be just the right answer.