So, you just graduated college and got your first “real” job. You know, the job with the 401k and health insurance benefits. Maybe there might even have some life insurance and disability income insurance bundled in there as well. That’s phenomenal, give yourself a pat on the back and realize you’re on the right track.
However, financial planning doesn’t end with your employee sponsored benefits. A lot of people who are in the 25-35 age bracket are starting to buy homes, get married, establish their families with kids and the dog named Rocks (my childhood dog’s name).
A vast majority of these people think that their employee benefits will cover their families should a catastrophe strike. You may not want to hear this and you may not believe it, but to make this simple, they won’t.
They really, truly will not, and they will cause your family to make some very tough decisions. Most company sponsored life insurance is 1-3 times your annual salary. Let’s suppose you make fifty thousand dollars per year, and you have a mortgage and a baby on the way. If you didn’t come home yesterday how soon would that life insurance last for your family? How many months until your significant other is scrambling to pay the bills? Kids are expensive, so is home ownership, and these expenses are compounded when one half of the bacon stops getting fried.
When calculating life insurance needs, I consider all debts plus human life value. Human life value is your economic value to your family. To put it another way, if you were 30 years old making fifty thousand per year, assuming you had no salary increases, and were to work until 65 that would mean 1.5 million dollars would pass through your hands. 1.5 million dollars that your family would lose out on if you didn’t come home. That’s a risk I’m certainly not willing to take.
Another shortfall when it comes to employee benefits is disability income insurance. A lot of companies offer this for practically nothing. The first rule of financial planning always take the free money or the free benefits. Another rule to understand is there’s no such thing as a free lunch. So, what cost will it be to you to take the free disability insurance? Who’s paying for it? Let’s look under the hood.
Your employer is paying for the benefit “altruistically”. Maybe they’re giving it as a retention tool to keep employees on their roster or maybe they’re giving it to reduce overall taxes for themselves. The key part to understanding this complex equation is if they are paying for the benefit in full and you don’t pay for it on the front end then you will pay for it on the back end in taxes, should you ever elect the benefit. Now that we understand this let’s break it down a little further.
Disability income is typically capped at 60% of your income.
So, for the example above the person making fifty thousand per year, 60% would bring them to thirty thousand. This thirty would then be taxed at your marginal tax rate (https://www.taxformcalculator.com/state-tax/new-jersey/30000.html) bringing your total take home pay to $25,810.
Approximately half of what you normally take home!
Most Americans find to much month at the end of every paycheck, could you imagine what would happen if their paycheck were cut in half? Luckily, we have solutions to this. First, live in a bubble and never leave your house. This would mitigate any possibilities of incurring a disability, although the vast majority of disability claims are for illness so this may not make sense.
All joking aside.
This isn’t very feasible. The second, and more practical option, buy a personally owned disability policy. Because you pay for this with “after tax dollars” you will receive the benefit tax free. This is the most economical way to bridge that gap.
More than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age (https://disabilitycanhappen.org/disability-statistic/).
If I were to tell you to get on a plane to Bermuda but there was a 25% chance that the plane crashed into the ocean would you get on? I wouldn’t!
We have to start taking control of our lives and create a solid foundation to our financial plan. So that if something were to happen, we can continue living, we can continue working towards our goals and dreams. Don’t just put your head in the sand and think that you will be one of the lucky 3 out of 4 people who doesn’t incur a disability because, that other one person thought they were going to be in that group as well.
Another reason to buy individually owned disability and life insurance policies is because nobody can take them away from you. A study done by the Bureau of Labor Statistics shows that on average between ages 18-52 we have 12.3 jobs. (https://www.bls.gov/nls/questions-and-answers.htm#anch41). This means that over 12 times we would lose and gain new insurance, if we’re lucky enough to go to a new employer that offers these benefits. As well as, typically, our health deteriorates as we age. Two of the most important things that underwriters look at when putting a numerical value to your monthly premium is 1) age and 2) health. So, if it gets more expensive as you get older and you get less healthy as you age as well, then wouldn’t it make sense to get something in place while you’re young and healthy?
Do yourself, and your family a favor and go to https://lifehappens.org/ they are a third party non profit who believes in the idea of being adequately covered. There are calculators on there that compute the amount of disability and life insurance coverage that you or your family would need if the worst-case scenario were to play out. I always like having my clients do this so they can put in their own numbers and see how underinsured and overexposed they truly are. It’s always a real eye opener. If you want to solve this problem reach out to me directly:
Carrier Pigeon: https://www.pigeongram.com/
Stay blessed and grateful!