Life and Health Insurance
Foundation for Education
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| The Smith Family - An Example | ||
For a sense of how a disability can impact a family's finances, consider Don and Pat Smith. Don and Pat live in a Midwestern city and are the parents of a nine-year-old boy. Don, 35, earns $45,000 a year selling cars. His monthly take-home pay is $2,129. After staying home several years to care for their son, Pat is now a part-time receptionist in a local dental office. She brings home $800 a month.  Don and Pat are able to support their lifestyle until Don becomes ill due to Parkinson's disease and can no longer work. Suddenly, there is a dramatic reduction in the Smith's income. Don isn't eligible for Social Security disability. (To be eligible, Don would have to demonstrate that he is unable to engage in any gainful work that exists in the national economy, regardless of whether such a job exists in the area in which he and Pat live.) Don has no prior military or civil service that might qualify him for other government disability programs. He does not qualify for workers' compensation benefits because his illness is not job-related. The specifics of what happens next depend greatly on whether Don's employer offers group disability benefits, whether these benefits are short-term (STD) or long-term (LTD), whether the policy includes a cost-of-living adjustment, and how the group policy defines disability. If Don's employer does provide group LTD, Don would be entitled to benefits under his employer's policy -- probably up to 60 percent of his gross salary, or $2,250 a month. Of this amount, he would have to pay $338 in federal income taxes and $112 in state income taxes, since his group premiums were paid with pretax dollars. To continue his family's group medical policy, he may have to continue his medical benefits under COBRA, which would require him to pay for the full cost of his coverage (previously his employer shared the cost). Under this scenario, the Smith's monthly income (including Pat's current salary) would drop almost 50 percent. If Don's employer didn't provide any disability benefits, the Smith's would have had no choice but to almost immediately begin spending down whatever savings they might have accumulated up to that point in their lives and hope that Don could return to work soon. What could Don have done to better protect his family’s finances? Let’s assume, for a moment, that his employer did offer a group LTD benefit, covering 60% of his gross salary. Through automatic payroll deduction, Don could have increased his coverage to 75% of his salary at an additional cost of roughly $8 to $10 a month. That would have increased his after-tax monthly disability payments from $1,800 a month to $2,250. If Don didn’t have any coverage options through work, he could have purchased an individual policy on his own through a local insurance advisor. If he bought it when he was 30 and healthy, he could have purchased a policy with a $2,000 monthly benefit (with no taxes withdrawn because the premiums would have been paid with after-tax dollars) for a monthly premium of roughly $42. |
