Protecting Your Retirement Income – Part 1

Graded Lifetime Benefits Rider

In previous posts we’ve talked about the importance of protecting your investment in your education and your career with an individual disability insurance policy. A vast majority of doctors and dentists purchase individual disability insurance policies to protect their financial security and standard of living in the event they become disabled and can no longer practice. However, one factor that many healthcare professionals may not take into account is the effect that a disability may have on their retirement. Most standard disability insurance policies pay benefits until the policyholder reaches retirement age – often age 65. However, that is where the financial protection of a standard individual disability insurance policy ends.

As long as you have an adequate individual disability insurance policy, your income will be sufficiently replaced during your employable years. However, many people overlook the fact that even with adequate income protection during the term of your policy, a disabling condition can still seriously derail your efforts to financially prepare for your retirement years. If you had the foresight to obtain an individual disability insurance policy early in your career, you’ve likely been planning for your retirement as well by contributing to a qualified 401(k) plan or similar retirement vehicle.

However, you may not have considered the following scenario: at 50 years old you are suddenly no longer able to continue practicing dentistry due to debilitating back and neck pain. You’ve been contributing to your 401(k) for the last 20 years with employer-matched contributions. Your claim is approved by your disability insurer, but because you had to quit your job, not only is your employer no longer matching your contributions, but you can no longer contribute either because IRS rules prohibit contributions to a qualified 401(k) plan if you are not working. Your 401(k) is 15 years short of where it needs to be for retirement, and your disability insurance benefits stop at age 65. How do you continue planning for your “retirement” years?

Fortunately, there are several options available to you. First, many disability insurance companies offer a graded lifetime benefits rider. In exchange for an increased monthly premium, this rider extends your benefits from the standard policy term of age 65 or 67 to lifetime. With this rider, if you become disabled, you will receive your full policy benefits until age 65 or 67 (depending on your policy). After that, you will receive a certain percentage of your full benefits for the remainder of your lifetime, based upon the age at which you became disabled.

With many policies, the baseline age for graded lifetime benefits is 45 years old. Meaning, if you become disabled at or before age 45, your monthly benefits after age 65 will still be 100% of the monthly benefits you received before age 65. If, however, you become disabled after age 45, you will still receive 100% of your monthly benefit until age 65, but your monthly benefit amount after age 65 will be reduced by 5% for each 5-year period after age 45 that the disability began.

Using the example above, if you had a policy that pays $10,000 in monthly benefits and became disabled at age 50, you would receive $10,000 a month from age 50 until age 65, and $9,500.00 a month for the remainder of your lifetime. If you became disabled at age 55, you would receive $10,000 per month until age 65, and then $9,000 per month for the remainder of your lifetime.

This rider is one solution for the difficulties that a disabling condition can pose to your retirement planning. It offers a secure source of income to supplement any retirement savings you’ve already amassed. However, it is not the only solution to the retirement income issue created by a disability. In the next few posts, we will evaluate two additional options: the lump sum rider and retirement protection insurance.


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