When evaluating how an accident or illness can threaten the ability to maintain an adequate income stream, most consumers overlook the impact that such an event would have on their ability to set aside money for their retirement years.
During a long term claim, it is not legally permissible to contribute to your employer’s qualified retirement plan (401k, 403b), since contributions are only allowed to be made when you’re earning an income. Individual Retirement Accounts (IRAs) also have similar restrictions regarding earned income.
This inability to continue to set aside money could severely reduce the amount of income you were hoping to have when you reach your retirement age.
To make matters even worse, the majority of disability policies provided by employers will stop paying benefits when you reach the age of 65, forcing the consumer to depend on a retirement fund that’s a fraction of the target amount.
To address this threat to your retirement years, several insurance companies have created individual disability insurance contracts that address this specific issue. Through these policies, an additional benefit amount can be set aside on your behalf every month until you recover or reach retirement age.
The benefits from this coverage are provided in addition to any disability coverage you have through your employer or may receive from any personal disability insurance policy coverage.
There are some differences in how these insurance companies determine how much protection they’ll provide during a claim. Some companies will provide a benefit amount equal to your current monthly contributions while others will provide a benefit equal to a percentage of your income, regardless of your actual contributions. This could benefit individuals not contributing the maximum amount due to life choices or cash flow needs.
In the event of a claim, the monthly benefit is invested in a separate fund, usually managed by a bank or other financial services company. The claimant has the ability to have the money invested in one of several options that mimic mutual funds. Each year, the growth on these investments will be viewed as taxable income, but any withdrawals at retirement age will be tax free.
Taking steps to ensure your ability to continue to set aside money for your retirement is often overlooked and not taking action to address this exposure could significantly impact your financial wellness and long term life goals for you and your family.
