Question:
If I have long-term disability insurance coverage through my employer, do I need my own policy, too? Why do I even need long-term disability? I have health insurance, and I have life insurance. It seems to me that I could save some money by dropping this coverage.
Answer:
We believe almost everyone who works and earns a living needs disability insurance. If you suddenly became disabled and were unable to work, could you still meet your financial obligations? Could you get by without having to use savings or borrow from relatives? If not, you’ll want to make sure that you have adequate disability insurance coverage that is designed to pay your expenses while you are disabled and cannot work.
Because you have to meet a strict definition of disability to qualify for benefits from government programs (e.g., Social Security), you shouldn’t rely on them as your only sources of income, should you became disabled. Instead, we suggest that you find out if you have group disability insurance through your employer.
It may be paid for by the company, or you may pay part of the premium. If disability coverage is not available at work, or if you are self-employed, you should consider purchasing an individual policy from a private insurer. Generally, most policies pay between 50% and 70% of your gross income and can last anywhere from a couple of months to age 65.
First, how much disability insurance do you have through your employer? What other financial resources do you have? Other resources might include your savings, property or assets you could sell, or borrow money on those assets, and/or your spouse’s income. Now ask yourself, if the combination of your employer-sponsored disability insurance and your other resources should be enough to pay your bills if you suddenly become disabled.
Unless you’re independently wealthy, chances are good that your personal financial resources won’t carry you through a long-term disability. Also, the money you’ve saved is probably earmarked for goals other than disability–your retirement or your children’s education, for example. You might have to deplete these accounts to pay your bills.
Some employers do not offer long-term disability insurance. If your employer does, look closely at the policy. Review the monthly benefit and the length of the waiting and benefit periods. Is the monthly payment enough to pay your bills? The typical group policy covers 60 percent of your income, up to a maximum amount. Is income defined as your base salary, or does it include commissions and overtime?
How long is the waiting period in your employer’s disability policy? This is the length of time before any benefits are paid to you. Often, an employer’s disability policy coordinates with the company’s sick pay policy. You may have to use all your paid sick days before the disability policy begins to pay benefits. You should also plan to have cash available to cover any gaps in coverage.
If you decide to supplement your employer-sponsored policy with one of your own, make sure the two policies coordinate in ways that work for you. For example, if you need to increase the monthly benefit, be sure your own policy pays concurrently with your employer-sponsored policy.
Question:
My company has a profit-sharing plan rather than a 401(k). How do these plans work? Is this still a good retirement savings vehicle?
Answer:
A profit-sharing plan is a defined contribution plan in which your employer has discretion to determine when and how much the company pays into the plan. The amount allocated to each individual account is usually based on the salary level of the participant (employee).
Your employer’s contributions to your account, and any investment earnings, accumulate on a tax-deferred basis–the IRS taxrd these benefits as part of your regular income only when you begin receiving distributions from the plan. Typically, this is after you retire or terminate employment. Whether you can make withdrawals while you are still employed depends on the terms of your plan. For example, some plans permit withdrawals after you’ve attained age 59 ½; after you’ve been a participant for some specified period of time (usually at least five years), or in the event of a financial hardship. (As an alternative to a taxable withdrawal, you may be able to borrow up to 50 percent of your vested account balance, if your employer permits plan loans.)
Be aware if you take distributions before age 59½, they are subject to a 10 percent penalty tax, unless an exception applies. The penalty tax does not apply to distributions you receive after you terminate employment, if your separation occurs during or after the year you reach age 55. The penalty tax also does not apply in the case of distributions made due to a qualifying disability; distributions that qualify as substantially equal periodic payments; amounts you roll over to an IRA or another employer plan; distributions up to the amount of unreimbursed medical expenses; distributions made under a qualified domestic relations order (QDRO), or distributions after your death.
Each plan has a trustee who is generally responsible for managing the plan assets and for preparing various financial and tax documents. Other administrative duties are overseen by a plan administrator, who frequently hires a third-party administrator to perform most administrative functions. Most plans contain a vesting schedule, often between three and six years, during which time an employee becomes fully vested in the plan. If you were to leave the company prior to full vesting and move your account elsewhere, you forfeit all or a portion of the account’s accumulated value. Profit-sharing plans are usually funded using mutual funds, variable annuities, or life insurance. In certain cases, you may have the authority to direct the investment of the assets in your profit-sharing account. The summary plan description, available to each eligible participant, spells out the details of your plan.
At Henssler Financial we believe you should Live Ready, which includes understanding the retirement vehicles available to you. If you have questions regarding your company’s retirement plan, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
