The Role of Income Protection in Your Financial Plan

What does financial security mean to you? Having a steady source of income is great – but what if you lose your earning power? The future is unpredictable, which is why income protection should be at the heart of every financial plan. May is Disability Insurance Awareness Month, and it’s the perfect time to think about the role that disability insurance plays in your long-term financial plan.  

The Foundation of Financial Security 

Unless you’re retired with ample savings or independently wealthy with a trust fund, you probably depend on a steady stream of income to stay financially healthy.  

Both small businesses and individuals should have enough liquid funds to cover about three to six months of expenses. If you’re running a small business, this is your cash reserve. If you’re an individual, it’s your emergency fund.  

In reality, business owners and individuals both tend to fall short of this – sometimes by a great deal. According to JP Morgan Chase, small businesses have an average cash buffer of 27 days, meaning they would only be able to pay cash outflows for 27 days before their cash balance ran out if they had no more cash coming in. That’s the average – 25% of businesses have fewer than 13 cash buffer days. 

Individuals are in a similar situation. According to U.S. News, 42% of Americans don’t have an emergency fund. Among those who do, the average fund is only $10,000. A Bankrate survey found that 69% of people would be worried about covering their immediate living expenses over the next month if they lost their primary source of income tomorrow. 

Unfortunately, income may dry up quickly for a number of reasons. Some are unexpected, like the COVID-19 pandemic that shuttered businesses and sparked layoffs. Natural disasters are another threat. And then there’s the risk of disability.  

Cancer, heart disease, injuries, and other disabilities may force people to stop working. For individuals and families, this may quickly lead to financial ruin. For small business owners, it may also jeopardize the business.  

Your Financial Situation Can Change in the Blink of an Eye 

No matter how great things seem now, your life could be turned upside down in the blink of an eye. To understand how precarious financial stability can be, consider the following cautionary tale. 

Kaylee owns a successful bakery. She’s also a single mom of a 13-year-old daughter and a homeowner. Her business has great reviews – she can barely keep up with the demand. She hires some help, but it’s her own cake-decorating skills that truly make the shop a success. 

One morning while walking into work, with her arms full of supplies, Kaylee tripped on a step. Her thoracic spine was fractured requiring immediate surgery and she suffered a terrible concussion. For months following the incident, she couldn’t work, and her bakery had to significantly cut back on production.  

Her bakery ran through its cash reserves, leaving her without enough for her employees’ salaries and her lease. Her personal finances quickly diminished as well. Between the lost revenue and medical bills, she ran through her emergency savings faster than she expected. 

Have You Insured Your Most Important Asset? 

Earning power is the greatest asset you have, making all other assets, including your home, vehicles and retirement savings possible. Without income, most people’s financial plans become a house of cards. 

Many people think that their risk of disability is low – especially those who work in white collar jobs. In reality, the risk is high – particularly because many disabilities are cause by medical conditions like cancer, heart disease or stroke. 

The Social Security Administration says one in four 20-year-olds will experience disability before reaching retirement age. Disability takes many forms and can affect anyone. 

Disability insurance provides protection. 

• Individual disability insurance provides protection for your personal finances. If you can’t work due to a disability, your individual disability insurance will provide a monthly disability benefit to replace part of your lost income. You can use this money however you need, whether that’s paying your mortgage or funding quality time with your family. 

• Business overhead expense insurance provides protection for small businesses. If the business owner experiences a disability, the policy will provide a benefit to cover many common overhead expenses, such as employee salaries, payroll taxes, and rent.  

Work-Based Disability Coverage May Not Be Enough 

If you’re self-employed or run your own business, you know you need to provide your own benefits – and that should include disability insurance. But if you work as a traditional employee, you likely count on your job for benefits, and you may receive group long-term disability insurance through work. This coverage can provide some help during an emergency but be warned – it may not provide enough protection. There are two factors to consider: 

• Take home benefit amount: Group LTD benefits are typically capped at a maximum, and if the company pays the premium, benefits are likely taxable. Group benefit caps are often set too low to protect high earners. Take a look at your policy to see what the monthly maximum benefit is. Then ask yourself – could you get by on that amount after taxes?  

• Portability: Group LTD benefits are tied to your job. If you switch jobs, you typically lose coverage. Securing new coverage may be more difficult if you’re older or have developed any health issues. Conversely, individual income protection plans are portable, so they follow wherever your job may lead. Also, if you pay the premiums, your benefits are typically not taxable. 

Individual disability insurance provides more robust, portable coverage, and that’s especially important for high earners. If you have group long-term disability insurance through work, you can add a supplemental individual disability insurance policy to ensure you have maximum protection. 

Is Your Financial Plan Complete? 

Did you know that Heffernan Insurance Brokers also provides financial services?  In addition to helping you secure the income protection insurance you need to protect your assets and safeguard your financial future, we can assist with retirement plan consulting and wealth management. Learn more.