There are three methods to guarantee that in the event you come to be too ill or injured to do your job, your retirement plans are not significantly affected. Many physicians, attorneys, and other professionals have obtained an individual disability insurance policy to protect their income. If they are unable to work in their own-occupation, their disability insurance will put cash in their wallets to live on, but what about their retirement nest egg? It is against IRS regulations to make contributions to a qualified retirement plan like a 401(k) if you aren’t actually working. Additionally, any employer contributions could also stop if you become disabled and cannot work. There are, however, three possible solutions to this scenario and they all have to do with using a disability income insurance policy. Let’s discuss your options to protect your retirement income.
Purchase the Graded Lifetime Benefit Rider
The first solution to protecting your retirement involves purchasing the Graded Lifetime Benefit rider that extends your benefits from age 65 or 67 to lifetime. Lifetime benefits make certain that if you become totally disabled, benefits do not stop at age 65 or 67 – rather they continue as long as the insured person remains disabled and living. Current policies that offer lifetime benefits typically do so on a graded benefit structure.
This indicates that in the event of a total disability, the policyholder will get the entire monthly disability benefit until they turn age 65, and then followed by a lifetime benefit that is graded (or “reduced”) dependent on the age of the insured when their continual, total disability began.
For any disabilities that begin on or prior to age 45, the lifetime benefit dollar amount will be 100% of the disability policy’s monthly disability benefit. When the ongoing, total disability starts after age 45, the lifetime benefit amount will be decreased by 5% for each year after age 45 when the total disability began.
For instance, take into account an individual who buys a disability policy with an $8,000 monthly benefit – if he or she was totally disabled by age 45, he or she would receive the $8,000 monthly benefit until they turn 65, followed by an $8,000 lifetime benefit while they continued to be disabled and alive. However, If their total disability began at age 50, the lifetime benefit would be equal to 75% of the disability policy’s monthly benefit, or $6,000 (it is reduced by 5% for each of the five years after age 45 that the disability began).
Graded lifetime benefits are one way to make sure that income is available for retirement if you haven’t had enough time to save before a disability happens.
Elect the Lump Sum Disability Benefit Rider
Another method to protect your retirement would be the Lump Sum Disability Benefit rider, which is available with many disability income insurance policies. This option can help balance out for any of the financial opportunities you may have lost out on due to your total disability – with one of those being the possibility for substantially diminished retirement savings.
The Lump Sum Disability Benefit rider is an additional rider that pays a lump sum benefit after the end of the policy’s benefit period. At the end of your benefit period – suppose, age 65 – the policyholder will get 35% of all benefits paid for total and/or residual disability paid over the life of the policy.
An insured person is eligible for the Lump Sum Disability Benefit when he or she receives benefits for total and residual disability equal to 12-times the policy’s monthly benefit and keeps his or her insurance coverage until the policy’s expiration date if they should recover from disability. The lump sum benefit rider can help in achieving many of the financial goals you may have considered lost in the event of a disability, which could include benefits to help provide income while retired when the benefits from the insurance company have ended.
Select the Retirement Protection Plus Program
The final solution to protect your retirement uses a particular kind of disability insurance policy to shield the contributions a person is already making to their retirement program. This Retirement Protection Plus Program can be purchased as a separate policy, or as a rider to your individual disability insurance policy. In both cases, you can cover up to 100% of your retirement contributions, as well as all your employer’s contributions, up to a maximum limit of about $50,000 a year for most individuals. Should the policyholder become totally disabled, a trust account is then set up for the benefit of the policyholder.
The monthly disability benefits are deposited in the trust account for and can be used after age 65. These benefits are invested in a grouping of investment options which are chosen by the policyholder and are subject to the market’s earnings of the market – similar to a 401(k) or other qualified plans. Retirement Protection plus is another option for somebody who wants to continue their retirement savings if they become totally disabled but wants to have the opportunity of market-like returns on their asset.
If you have decided to take the first step to protect your income from loss due to an accident or illness, be sure you consider the next step – what happens when my disability coverage stops, and how will this affect me during retirement? Then talk to your disability insurance agent to make sure that you have your retirement protected as well.