You’ve done a good job of saving money over the years by watching your budget, living within your means, investing your money carefully, and putting in place risk management strategies for protection, like good homeowner’s insurance, comprehensive car insurance, a solid disability insurance policy, and life insurance. You put your children through college, and they are working with good jobs. Life is good and you can see a prosperous retirement ahead. Then, you get the call. Your son had a back injury at work that damaged his spinal cord. Yes, he will collect workers’ compensation, but the financial strain it places on his young family is significant. Modifications are needed to his home to allow him to move around, as he will be confined to a wheelchair. His wife has to leave work to take care of him, further causing financial stress. Meanwhile medical bills are rapidly piling up.
You may feel that the story above could never happen to your family. And even if it did, your children have workers’ compensation and disability insurance at work, right? Don’t assume that they do or that it’s enough. Unfortunately, people seldom look carefully at their employer provided disability insurance – especially young people. Often, it covers a lot less than people think with a definition that is difficult to meet. Frequently the benefit provided is not adequate. Many employers use coverage that has a monthly cap, so even though the coverage is 60% of salary, only the base salary applies and there is a cap that is much lower than an employee expects to receive. In addition, if the employee pays the premiums with pre-tax deductions from salary, the benefits are not tax free, further lowering what is received.
Here are the facts: 1 in 4 of today’s 20-year-olds will become disabled sometime before they retire. And accidents are not usually the cause for the disability. Back injuries, heart disease, arthritis, and other illnesses cause the majority of the claims . Most are not work related, so worker’s compensation does not apply. In addition, workers’ compensation only covers time away from work if the disabling illness or injury was directly work-related. In 2016, only one percent of American workers missed work because of an occupational illness or injury.
When we are preparing our own retirement plans, we often don’t think about our adult children. But a disability that happens to one of our children impacts us financially, as we do everything we can to help our loved ones. What is the easiest way to help? Ensure that your adult children have a good disability policy in place. A policy that has a liberal definition of disability so that it doesn’t take an act of Congress to qualify. A policy that includes coverage for a partial disability, with a commonsense definition, as partial disabilities are more common. A policy that is portable so that your son or daughter can take that insurance policy along if he or she leaves that job and moves to another employer with inadequate or non-existent disability insurance benefits.
Not convinced? Here are some additional disability statistics. A 2014 study of consumer bankruptcy filings identified the following as primary reasons: medical bills (26%), lost job (20%), illness or injury on part of self or family member (15%). A 2013 study of bankruptcy filings in Washington state found that cancer patients were 2.65 times more likely to go bankrupt than people without cancer, with younger (under age 50) cancer patients having the highest rates of bankruptcy.
Young people do not think about these statistics or consequences and what is almost ironic is that a private disability policy written by one of the reputable insurance providers for a young adult is very inexpensive. The premiums on a good non-cancellable disability insurance policy (non-cancellable by the provider meaning they cannot raise rates over the years or cancel coverage) are very affordable. A 25-year-old who purchases a disability policy can keep those same premiums throughout their lifetime and those premiums are priced at the 25-year old rates! Unfortunately, few young people consider any of this, so I tell my clients who are pre-retirees or in retirement to let their sons and daughters know and urge them to buy disability coverage while they are young and healthy. Or you can buy it for them to protect your own nest egg.
Life insurance is a similar consideration. The chances of premature death are much less than a disability claim, but if your adult children have their own children, chances are good they think their employer provided insurance is good enough. The problem is employer provided insurance is often only 2-5 times the salary of the employee and unfortunately, this amount is grossly inadequate for a growing young family who depends on the income of the provider. How much life insurance is necessary? In general, add up the current and the long-term obligations. For example, paying off the mortgage, daycare and transportation expenses for the now single parent, college funding, the lost income that is needed for other expenses to live, funeral expenses, and outstanding credit card debt and student loans. Don’t forget to factor in the contributions to a retirement account that the now deceased parent would have been making. Now, add up this amount. Chances are good the surviving parent will want to use some of the money to pay off liabilities like the mortgage, debts, and funeral expenses, but use the remaining balance to invest in a very conservative investment to live off the interest. It doesn’t take long to see how inadequate the employer coverage is.
If your son or daughter dies prematurely and leaves children – your grandchildren – you will want to help. Again, such an unthinkable event will wreak havoc with your own retirement and financial well-being. An easy way to solve these problems? A very inexpensive but robust term life insurance policy on both young parents’ lives to protect the surviving spouse who must now carry the financial burdens alone. For young people who can afford it, a whole life policy may also make sense.
Ideally, your adult children will think of these risk management vehicles on their own, but to protect them — and yourself — it is best to have a serious discussion. Emphasize the importance of planning for the worst and refer them to a trusted financial planner who can help them mitigate these risks while it is inexpensive.
–Michelle Gessner, CFP®