Paycheck Protection is a crucial piece of any financial plan. How will your plan continue without your paycheck?
Paycheck Protection or Disability Insurance is a key piece for every financial plan. This layer is the foundation that your risk management strategy is built on.
Imagine the havoc to your finances if your paycheck were to stop next payday! A disability can happen to anyone with little or no warning.
Disability insurance is the layer that protects your paycheck. It can shield you from the need to tap your savings and prevent you from having a financial firesale to make ends meet. Even if you could make it work for a while would you be able to continue at your current lifestyle?
Doesn’t my employer provide this protection for me?
Depending on your job, the size of the company and the benefits package they provide you might have some level of protection at work? Some do, some do not.
Even if you do have an employer plan, many have some serious pitfalls that are overlooked if you don’t know how to dig in. This is made worse for folks that earn a higher income.
- There is a max percentage or dollar amount offered by the plan. If you are a high earner that max will probably leave a large gap in your protection.
- Most employer plans only cover your base compensation. If you are in a position that offers a generous bonus or commission comp you will have a big problem.
- If your employer pays the cost of this plan, the benefit to you is taxable as income. So you are already limited to a % of your base pay and now you have to pay taxes on that reduced amount. Can it get any worse?
What about the self-employed? How can they be protected?
Disability insurance for the self-employed can be a challenge. Many carriers will not make an offer for self-employed individuals. Disability policies are underwritten from a financial perspective just as much as a medical one. Many self-employed business owners don’t have the earnings to support the coverage they are asking for.
It is a lot like when a self-employed person tries to get a loan. Whether it is a mortgage or for a car or any other loan for business, you have to have the income to prove your worthiness. Since most small business and self-employed owners take full advantage of every deduction their tax returns don’t show as strong of an income as they are claiming to make. Most people don’t want to pay more taxes than they have to so they don’t. Not really thinking about how it impacts other areas.
Aside from the income gap, other aspects of self-employment can make things tough on a disability contract. For example, many of these folks don’t work regular hours. Some work from home. Income can have drastic swings from high to low to high again. How can they accurately assess the risk if it is always changing?
This doesn’t have to be a deal breaker though. There are programs out there that understand this and will make more favorable offers than the traditional companies.