Advisor Blog

More of a financial planning bent for this blog entry...

We spend quite a bit of time with clients and prospective clients trying to understand each particular situation and gauging risk tolerance. Evaluating risk is critical part of what we do when we undertake an investment management assignment and we do our best to help clients understand their risk profile and our approach to managing risk.

Most clients also receive professional help in evaluating and mitigating risk for their other significant assets - life insurance, homeowners insurance, auto insurance, etc.

One asset that often goes under evaluated if not neglected altogether in terms of risk assessment is one's ability to earn an income. This is particularly worrisome for professionals who have achieved significant income and built a lifestyle (incurred fixed costs) around the assumption of the uninterrupted continuation of a certain level of income.

For many professionals, it may be that your potential for earning an income for the duration of your career is your single greatest asset, having greater value than your home, your 401(k) or your investment portfolio.

Someone who is earning $100,000 per year at age 40 and will work for another 25 years, assuming a steady state, will gross $2.5 million over those 25 years. As if this weren't compelling on its own, what if the figures were $150,000 for a 45 year old ($3.0 million) or $200,000 for a 35 years old ($6.0 million)? In working with clients, the challenges become 1) thinking about the ability to earn an income as an asset that needs to be protected and 2) what to do about protecting this asset.

Typically, this is where someone discussing disability insurance will launch into the statistics of becoming disabled during a career, using all sorts of fascinating information. The thing to know and understand about these statistics is that no one - insurance companies, industry associations, The Center for Medicare and Medicaid Studies - has a good grasp of well-defined data that the industry adheres to in reporting disability statistics, unlike homeowners and auto insurance. No less than The New York Times had this take on the odds of disability in a recent article:

The Odds of Disability Are Themselves Odd.

The fuzziness of the statistics makes your assessment of how well you are mitigating risk for this asset even more critical.

Odds and statistics aside, common sense tells us that we should protect this valuable and significant asset. Challenge #1 (above) - solved.

So how do we do protect this asset? Most of us sign up for short-term and long-term disability insurance through a group policy from an employer and be done with it. Check - challenge #2 solved and disability insurance is off the "to do" list.

Or is it?

It is imperative that you request, read and understand your employer's group disability policy if this is what you are relying on for disability insurance. Why? Because when one needs the policy is the single worst time to find out how good or bad it really is.

First and foremost, group policies generally have a fairly strict definition of "disability," which is likely designed to provide benefits for the most severe cases and this makes sense - the only way an insurance company can assume such risk from a pool of employees is to be in a position to not have to provide benefits very often and when they do have to provide benefits, see to it that the benefit is a modest amount.

Also, if the group disability insurance is paid for by an employer, the benefit you may receive is taxable... to you. This further reduces your benefit amount.

And these are just a couple of the provisions of group policies that may make them not nearly as effective as supposed.

The moral, particularly if you are a well-paid professional, especially one with a specialty or sub-specialty practice, is to please ask for, read and understand your workplace group policy if you are relying on this for disability insurance. And then make a sober assessment if you are adequately covered.

And if you are covered by disability insurance in some other manner, the same applies: please read and understand your policies.

We're happy to help you understand and evaluate your existing group or individual policies and mitigate identifiable risks.