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Financial Planning Cases 11-1 The Johnsons Consider Buying Disability Insurance Dual-income households often have overlapping health care benefits. For example, both Harry and Belinda Johnson's employers provide partially subsidized family health insurance plans as employee benefits. The Johnsons chose to be covered under Belinda's policy because it provides more protection and is less expensive. Belinda's coverage is fully paid for, and she can add Harry to the plan for only $150 per month. Harry can then drop his health plan through his employer and sign up instead for other benefits such as disability income insurance, flexible benefits coverage, education reimbursement, and/or contribute more to his 401(k) retirement plan. The bad news is that many employers assess an average surcharge of $100 per month when spouses can get health care from their own jobs. Although Belinda's employer offers a generous employee benefit program, it does not provide disability income protection other than 8 sick days per year, which may accumulate to 20 days. Harry also has no disability income insurance. Although both have worked long enough to qualify for Social Security disability benefits, based on information they have received from the Social Security Administration, Belinda has figured that Harry would receive about $1,020, and she would receive about 1,360 per month from Social Security. Harry and Belinda realize that they could not maintain their current living standards on only one salary. Thus, the need for disability income insurance has become evident even though they will be challenging to afford such protection at this time. Advise them on the following points a. Use the Run the Numbers worksheet to determine how much disability insurance Harry and Belinda each need. Since it has been more than 10 years since they started working full-time, their incomes have risen about 4 percent annually. Belinda's after-tax income now is $95,000 and Harry's is $57,000. Round your answers to the nearest dollar Disability insurance (Harry); $ Disability insurance (Belinda): $ 3,730 6,577 RUN THE NUMBERS Determining Disability Income Insurance s The determination of dubiity rourancenoots best w your un monthly income from this for dubity and other sources of oublty income the out" godt Decision Factor 1. Cumont monthly startar income yyy 31 11.5d What Policy Provisions Best Meet Your Needs? Once you have estimated your level of need, you can begin searching for a disability income insurance policy. These policies are complicated so avoid relying on the verbal assurances of the agent selling the policy. Do your own analysis, and also seek the advice of a financial planner before making decision. Look first for the major policy provi sions discussed in the following five paragraphs. 1. Waiting Period Disability income policies will have a waiting period between the onset of the disability and the date that disability benefits begin. Because disability in come benefits are paid monthly, the first check will not arrive until 30 days after the end of the waiting period. 2. Benefit Period The benefit period in a disability income policy is the maximum period of time for which benefits will be paid. It begins when the elimination period ends. The benefit period is usually stated in years but may instead state a specific age when benefits will cease. Most disability income policies will not pay past age 65. 3. Degree of Disability Policies can be written on an "own-occupation" or any occupation" basis. An own-occupation policy will provide bene- fits if you can no longer perform the occupation you had at the time you became disabled. An a c tion policy will provide full benefits only if you cannot perform any occupation. In effect, an any occupation policy is an income replacement policy, as it makes up a portion of the difference between what you were earning prior to becoming disabled and what you can cam while disabled. Own-occupation policies are more generous and therefore, cost more 4. Residual Clause Aresidual is a feature of own-occupation polo cies that allows for some reduced level of disability income benefits when a par tial, rather than full disability occur. Consider the case of France LaDeus, a criminal lawyer in Columbus, Ohio, who purchased a diutality policy offering benefit of 000 per month Francore later deded e ckend w ood to cut back her wodood by 50 percent, thereby taking a 50 percent pay cut. Her disability policy hadar heroend si 500 050 53.000 per month during her disa 5. Cost-of-Living Adjustments You are wise to seek out a policy with a cost of living cause that will increase your benefit amount to keep up with inflation. You might also consider buying a policy that limits benefits to a percentage of income rather than a specific dollar amount per month. With such a policy, your potential monthly benefit would increase automatically as your income increases. 6. Guaranteed Renewability Clause Ask for a policy with guaranteed renewability that also is noncancelable. Then the insurer will not drop you should your health decline Financial Planning Cases 11-1 The Johnsons Consider Buying Disability Insurance Dual-income households often have overlapping health care benefits. For example, both Harry and Belinda Johnson's employers provide partially subsidized family health insurance plans as employee benefits. The Johnsons chose to be covered under Belinda's policy because it provides more protection and is less expensive. Belinda's coverage is fully paid for, and she can add Harry to the plan for only $150 per month. Harry can then drop his health plan through his employer and sign up instead for other benefits such as disability income insurance, flexible benefits coverage, education reimbursement, and/or contribute more to his 401(k) retirement plan. The bad news is that many employers assess an average surcharge of $100 per month when spouses can get health care from their own jobs. Although Belinda's employer offers a generous employee benefit program, it does not provide disability income protection other than 8 sick days per year, which may accumulate to 20 days. Harry also has no disability income insurance. Although both have worked long enough to qualify for Social Security disability benefits, based on information they have received from the Social Security Administration, Belinda has figured that Harry would receive about $1,020, and she would receive about 1,360 per month from Social Security. Harry and Belinda realize that they could not maintain their current living standards on only one salary. Thus, the need for disability income insurance has become evident even though they will be challenging to afford such protection at this time. Advise them on the following points a. Use the Run the Numbers worksheet to determine how much disability insurance Harry and Belinda each need. Since it has been more than 10 years since they started working full-time, their incomes have risen about 4 percent annually. Belinda's after-tax income now is $95,000 and Harry's is $57,000. Round your answers to the nearest dollar Disability insurance (Harry); $ Disability insurance (Belinda): $ 3,730 6,577 RUN THE NUMBERS Determining Disability Income Insurance s The determination of dubiity rourancenoots best w your un monthly income from this for dubity and other sources of oublty income the out" godt Decision Factor 1. Cumont monthly startar income yyy 31 11.5d What Policy Provisions Best Meet Your Needs? Once you have estimated your level of need, you can begin searching for a disability income insurance policy. These policies are complicated so avoid relying on the verbal assurances of the agent selling the policy. Do your own analysis, and also seek the advice of a financial planner before making decision. Look first for the major policy provi sions discussed in the following five paragraphs. 1. Waiting Period Disability income policies will have a waiting period between the onset of the disability and the date that disability benefits begin. Because disability in come benefits are paid monthly, the first check will not arrive until 30 days after the end of the waiting period. 2. Benefit Period The benefit period in a disability income policy is the maximum period of time for which benefits will be paid. It begins when the elimination period ends. The benefit period is usually stated in years but may instead state a specific age when benefits will cease. Most disability income policies will not pay past age 65. 3. Degree of Disability Policies can be written on an "own-occupation" or any occupation" basis. An own-occupation policy will provide bene- fits if you can no longer perform the occupation you had at the time you became disabled. An a c tion policy will provide full benefits only if you cannot perform any occupation. In effect, an any occupation policy is an income replacement policy, as it makes up a portion of the difference between what you were earning prior to becoming disabled and what you can cam while disabled. Own-occupation policies are more generous and therefore, cost more 4. Residual Clause Aresidual is a feature of own-occupation polo cies that allows for some reduced level of disability income benefits when a par tial, rather than full disability occur. Consider the case of France LaDeus, a criminal lawyer in Columbus, Ohio, who purchased a diutality policy offering benefit of 000 per month Francore later deded e ckend w ood to cut back her wodood by 50 percent, thereby taking a 50 percent pay cut. Her disability policy hadar heroend si 500 050 53.000 per month during her disa 5. Cost-of-Living Adjustments You are wise to seek out a policy with a cost of living cause that will increase your benefit amount to keep up with inflation. You might also consider buying a policy that limits benefits to a percentage of income rather than a specific dollar amount per month. With such a policy, your potential monthly benefit would increase automatically as your income increases. 6. Guaranteed Renewability Clause Ask for a policy with guaranteed renewability that also is noncancelable. Then the insurer will not drop you should your health decline

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