How to Protect Your Retirement
by Bill Olmsted
There are 3 ways to ensure that in the event that you become too sick or injured to work, your retirement plans are not derailed. Many physicians, attorneys, and professionals have purchased their own individual disability insurance to protect their income. In the event that they cannot do their own-occupation, their disability insurance will put money in their pockets to live on, but what about their retirement savings? It is against IRS rules to contribute to a qualified retirement plan like a 401(k) if you are not working.
Furthermore, any employer contributions to such a plan could also stop in the event you were disabled. There are three possible solutions to this problem, however, and they all have to do with using a disability insurance policy.
Solution #1 - Purchasing Optional Graded Lifetime Benefit Rider
Solution #1 involves the purchase of an optional policy rider1 to extend benefits from age 65 or 67 to lifetime. Lifetime benefits ensures that in the event of total disability, benefits do not stop at age 65 or 67 - they continue on as long as the insured remains disabled and living. The current policies that offer lifetime benefits do so on a graded benefit structure. This means that in the event of total disability, the insured will receive the full monthly disability benefit until age 65, followed by a lifetime benefit that is graded (or “reduced”) based on how old the insured was when their continuous, total disability began.
For disabilities that begin on or before age 45, the lifetime benefit amount will be 100% of the policy’s monthly disability benefit. When the continuous, total disability begins after age 45, the lifetime benefit amount will be reduced by 5% for each year after age 45 when disability began. For example, consider an insured who purchases a disability policy with a $10,000 monthly benefit – if he or she was totally disabled by age 45, he or she would receive their $10,000 monthly benefit until age 65, followed by a $10,000 lifetime benefit while they continued to be disabled and living. If instead total disability began at age 50, the lifetime benefit would be equal to 75% of the policy’s monthly benefit, or $7,500 (it is reduced by 5% for each of the 5 years after age 45 that the disability began).
Graded lifetime benefits are one way to ensure that income is present for retirement in the event that one hasn't had enough time to save before a disability occurs.
Solution #2 - The Lump Sum Disability Benefit Rider
Solution #2 is the Lump Sum Disability Benefit rider, available on select individual disability insurance policies available through the Berkshire Life Insurance Company of America. This patented feature can help offset for many of the financial opportunities you may have missed out on due to disability – with one of those being the potential for significantly reduced retirement savings. The Lump Sum Disability Benefit rider is an optional rider that pays a lump sum benefit as you get closer to retirement age - say, 60 or 65 years old- the insured will receive 35% of all benefits paid for total and/or residual disability paid over the life of the policy.
Solution #3 - Retirement Protection Plus Program
The final solution uses a specific type of disability insurance policy to protect the contributions someone is already making to their retirement plan. This Retirement Protection Plus Program3 can be purchased as a standalone policy, or as an optional rider1 to your individual disability policy. In either case, you can protect up to 100% of your retirement contributions, as well as 100% of your employer contributions, up to a maximum of about $50,000 a year for most people. In the event of total disability, a trust is established for the benefit of the insured.
The monthly benefits are deposited in the trust for use after age 65. These assets are invested in a grouping of investment options which are selected by the insured, and are subject to the returns of the market - just like their 401(k) or other qualified plan. Retirement Protection plus is another option for someone who wants to continue their retirement savings in the event of disability, and who wishes to have the opportunity of market-like returns on their asset.
If you’ve taken the first step to protect your income from an accident or illness, be sure you’re considering the next step – what happens when my disability coverage stops paying, and how will this affect retirement? Then talk to your disability insurance agent to make sure that you have retirement protected as well as today.
1. If you choose to have an optional rider on your policy your premium will increase.
2. 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.
3. Retirement Protection Plus is not a pension plan or a substitute for one. Optional riders are available for an additional premium.
William Olmsted holds a Financial Representative contract with The Guardian Life Insurance Company of America based out of New York, NY.
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.
Forms 18ID, 18UD, 18GI, 1400, 1500, and 1600 underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. In New York: These policies provide disability insurance only. They do not provide basic hospital, basic medical or major medical insurance as defined by the New York State Insurance Department. For policy forms 18ID, 1400, 1500, and 1600 the expected benefit ratio is 50%. For policy forms 18UD, 18GI, 18UD-F, and 18GI-F, the expected benefit ratio is 60%. The expected benefit ratio is the portion of future premiums that the company expects to return as benefits, when averaged over all people with these policy forms.
2017-51634 Exp 01/20