Wendy Wise Discovers Her Greatest Financial Risk

In our last two sessions, Wendy opened a Safe Harbor Roth IRA for tax year 2011 and took a $50,000 loan from her 401k plan to fund a tax-favored investment. Today, we’ll explore her greatest risks; short and long-term disability. What would happen if she could not work for an extended period? As a single mom, she has no one else to lean on financially. So we made a plan that looks like this: First, she agreed to bank and hold a minimum of 20 sick days – the maximum allowed per year with her employer. This would give her a month’s pay from her pharmacy company. In addition, Wendy took advantage of her employer short-term group policy that would pay her 80% of her salary for months 2 – 6. After six months, she opted for long-term group disability insurance which would pay out 70% of her salary to age 65. If she is disabled longer than six months how will she pay for her health and life insurance premiums? Not her employer. After six months, Wendy will have to assume most of this burden herself. Wendy must choose to either insure or pick up at least some of these costs.

If disability forced her from work as it does for one in four 20-year old Americans today before they retire[1], Wendy would face two cash flow problems if she becomes disabled: First, she’ll experience a pay cut and second, she’ll face insurance premiums without employer contributions which now account for 80% of her health insurance costs. What can she do?

I advised Wendy to elect a disability waiver of premium for both her disability policies. Further, since her long term disability pays her only 70% of her current income, I advised her to purchase a private long term disability policy that would cover her remaining income gap and elect a waiver of premium here too. This way she at least maintains her standard of living and she’ll be more likely to fund the threat of bearing 100% of her health insurance premiums.

I also pointed out that beginning at age 50, permanently disabled and Social Security fully insured workers are entitled to Medicare. This would lower her costs substantially. Further, qualifying for Social Security disability income would more than offset the premiums she would be required to pay for Medicare. Because she has a waiver – and an excellent policy – she would pay no disability premiums until she returns to health and full time work in her profession.

Bottom line is that for a small sum, Wendy can well insure all her major financial risks; income loss, higher healthcare costs and above all, outliving her money even before retirement. Wendy now has one less thing to worry about. She is becoming more financially secure and independent every month! Thanks to a little planning time, Wendy, now, is all the wiser.

COMING UP:

By April, Wendy will share her 2011 tax filing with you. You’ll be able to see her old and new income tax liabilities. This alone may amaze you! Stay tuned.