What Are My Alternatives?
by Larry Laskin
If you have ever shopped for disability insurance, you may have been surprised at the cost. It is not cheap, and typically costs between 1-3% of your annual income depending on various factors such as age, occupation, benefit amount, and elimination period.
Many people mistakenly compare the cost for disability insurance to the premiums they are paying for their term life policy. For a young, healthy person, term premiums are very low. Most young, healthy people outlive their term life policies so the insurance company knows there is a very small chance they will ever have to pay out on it. With disability insurance, the chances of that same young, healthy person becoming disabled are much greater than dying before age 65, so the companies have to price the policies accordingly.
The question is, is there an alternative to paying the premiums for disability insurance?
1. I hear it all the time. “I can save the premiums and use that money in case of a disability”. Is that viable though? First of all, are you disciplined enough to really save the money each month.
Most people spend what they have in their savings or checking account. New furniture, that new tablet or whatever else it is that you want, if you have the money, you might be tempted to spend it.
Okay, so let’s say you really do put the money in some type of investment vehicle earning 8% annually. Let’s use an example of a 30-year old making $100,000 annually. He/she would qualify for $5,000 in monthly benefits and we’ll use an annual premium of $2,000. If this person became disabled at age 45, would he have enough to survive any type of long term disability? That $2,000 annual contribution earning 8% compounded annually, would equal $31,291.
In this example, he would have enough saved to last about 4 months. What about if the disability occurred at age 55? He would have $98,846 or about one year of a disability. This does not even take into account inflation and taxes, which would reduce the period of time the money would last.
Is this a viable option? Only for a VERY short period of disability.
2. You can always move in with your parents or in-laws. Have you ever heard the saying that guests are like fish? After a couple of days they start to stink. You may have the best relationship in the world with your parents or in-laws, but living together is whole other ball game. First of all, do they really have the space for you and your kids? What if the house was too small for everyone? It might get very cramped.
Speaking of kids, will they have to change schools in the middle of the school year? What about all of their friends? How are they going to feel when you take them out of the only environment they ever knew?
I love my children and we talk almost every day, but I also love the freedom that my wife and I have now that they are all out of the house. I also enjoy the financial freedom of not having to support them. If any of my children needed help, I would always be there for them and would even let them stay in my house if necessary. But I can tell you that I would be pretty upset if I found out that they did not buy sufficient disability insurance and that is the reason that they are now living with me.
Is this a viable option? Maybe, but I don’t think many parents would be very happy about it.
3. Your stay-at-home spouse can go back to work. This option might work, but there are some things you should consider. Is your spouse able to earn an income that would be sufficient to support the family? He/she may have been out of the workforce for some period of time and may not have marketable skills.
Will you need him/her to be home with you to assist you while you are disabled? What if you have small children? Will your spouse be able to earn the extra amount needed to cover the additional costs of day care? What if you are already counting on your spouse’s income to support your lifestyle?
Is this a viable option? Possibly, but not likely.
4. You can get a loan. Have you tried getting a loan for anything lately? It’s not as easy as it once was. Since the real estate crash, the banks have tightened their lending standards considerably. If you are not able to work and earn a living, it would be very difficult, if not impossible, to get any type of loan.
If you are lucky enough to have equity in your house, you might want to consider obtaining a home equity line of credit now. That way, the money would be available to you should you ever become disabled. But remember, you have to make minimum payments while you are disabled and you will have to pay back the loan at some point in the future. If you were disabled for any period of time, you would potentially have a significantly greater amount of debt than you had before the disability occurred.
Is this a viable option? Doubtful.
5. You can borrow money from your parents or in-laws. If they had the money, this could be an alternative to purchasing disability insurance. But would it be fair to them? They may have scrimped and saved for their entire lives to be able to live a comfortable retirement.
They may want to travel, have some of the nicer things that they could not afford before their retirement and possibly help the grand-kids with college or other expenses. How do you think they will feel if all of their hard work went to you and your family just because you did not plan properly? Personally, I would not be too happy about it.
Would this be fair to your siblings if you were never able to repay this loan back? You might be robbing them of some or all of their inheritance. This could cause animosity between all of you.
Is this a viable option? Possibly, but more than likely not a good one.
6. You can take money out of your retirement account. This might work, but there are some drawbacks. First of all, you only have one chance to save for retirement. Once you are retired, you are probably not going to want to work anymore.
That is the goal of most people. Once you take money out of a retirement plan, it is very difficult to ever get that money back into your account. What if you are permanently disabled, what are you going to live on at your normal retirement age? Social Security? I doubt that you will be able to live any decent lifestyle if you had to rely on the small payment that you would receive.
Another issue is that you will have to pay tax on the entire amount that you withdraw from the qualified retirement account, including federal and state (if your state has income taxes). If you are not totally and permanently disabled, you might also have to pay a 10% early withdrawal penalty to the IRS. If you are considered totally and permanently disabled, IRS code 72(t)(2)(A)(iii) allows for an exemption from the penalty.
Is this a viable option? Only if you had a significant amount saved in your qualified retirement account to last many years.
7. You can downsize your house. This might work, but where are you going to live? Rents in many areas are higher than the cost of owning a home. If you wanted to buy a smaller house, I doubt anyone would provide you with a mortgage if you were disabled even if you made a significant down payment.
How would your spouse feel about having to move out of the house that you raised your kids in? How will your kids feel if they have to move to a much smaller house? Will you be able to afford to stay in the same area where all of your friends and family live?
Is this a viable option? Not likely.
As you can see, there is really not any one good alternative to purchasing disability insurance. You may have to do two, three, or more of the above ideas to make it feasible. But each one has its drawbacks.
The best alternative is to purchase the proper amount of disability insurance. That way, if you ever did become disabled, you should be able to continue to live the same lifestyle that you are accustomed to without having to sacrifice anything.
This publication is provided for informational purposes only and should not be considered tax or legal advice. Please contact your tax or legal advisor regarding the tax treatment of the policy and policy benefits. You should consult with your own independent tax and legal advisors regarding your particular set of facts and circumstances. The information provided is not intended or written to be used, and cannot be relied upon, to avoid penalties imposed under the Internal Revenue Code or state and local tax law provisions.
The information displayed on this page are the opinions and views of the author, and are not necessarily the opinions and views of The Guardian Life Insurance Company of America (Guardian), or any company that is an affiliate or subsidiary of Guardian.
Laurence Laskin holds a Financial Representative contract with The Guardian Life Insurance Company of America based out of New York, NY.
2018-52303 Exp 01/20