Disability Insurance

What Is Disability Insurance?
As its name suggests, disability insurance is a type of insurance product that provides income in the event that a policyholder is prevented from working and earning an income due to a disability.

KEY TAKEAWAYS

• Disability insurance is a type of insurance protecting against loss of income due to disability.

• Disability insurance is available through both public and private programs.

• Some of the variables affecting the cost of disability insurance include the strictness of requirements for qualifying under the plans; the amount of income to be replaced; the length of time in which benefits are paid; the medical history; and the length of time policyholders must wait before beginning to collect those benefits.

How Disability Insurance Works
Oftentimes, insurance products will protect against a specific loss, such as when a property and casualty insurance plan reimburses the policyholder for the value of stolen property. However, in the case of disability insurance, this compensation relates to the lost income caused by a disability.
For example, if a worker earned $50,000 per year prior to becoming disabled, and if their disability prevents them from continuing to work, their disability insurance would compensate them for a portion of their lost income provided that they qualify. In this sense, disability insurance essentially covers the opportunity cost of the now-disabled worker.

Real-World Example of Disability Insurance
As a rough estimate, disability insurance typically costs about 2% of the annual salary of the person being insured. Of course, the actual amount will depend on the insurance carrier and on policy features such as those discussed above. Different individuals will have different preferences in terms of how much they are willing to pay in exchange for greater or poorer protections from potential disability.
To illustrate, consider two hypothetical workers. Worker A is a professional working in a highly specialized field. It took Worker A ten years of post-secondary education to become qualified in their field, and this has allowed them to generate a relatively large income of $250,000 per year. Worker B, on the other hand, is a high-school graduate who regularly switches between jobs and earns about $30,000 per year.
Worker A knows that, if they become disabled, they may still be able to work in another field, but this would very likely require a significant loss of income. For this reason, they decide to purchase a relatively expensive disability insurance plan that has a flexible definition of disability.
Because of Worker A’s high income, they can easily afford their relatively high premiums. Worker B, on the other hand, decides to opt for a plan with lower premiums even if that plan has a stricter definition of disability. In addition to having fewer resources available to pay for premiums, Worker B is also less reluctant to work in an area outside of their current occupation, since the nature of their work is less specialized.

Financial Refresh Live Q&A

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Fund Your IRA, Cut Your Taxes

There’s still time to make a 2020 IRA contribution and lower your tax bill.

As you get ready to tackle your 2020 tax return, make sure you haven't overlooked one of the best ways to cut your tax bill and secure your future — funding a traditional IRA. (There is no upfront tax break for funding a Roth IRA.)

You can actually make an IRA contribution for the 2020 tax year up until the time you file your tax return, which is due April 15, 2021. But why wait? If you have some extra income – say, from a stimulus check – go ahead and deposit it into an IRA account now before you forget. You'll also give the money a little more time to grow, which you'll appreciate when you retire.

And what about those tax savings? Well, depending on your income, you may be able to deduct your IRA contribution on your 2020 return. To contribute to a traditional IRA, you or your spouse must have earned income from a job. But, otherwise, you may be able to deduct contributions to an IRA even if you or your spouse are covered by another retirement plan at work. Plus, starting last year, seniors age 70½ and older with earned income can contribute to a traditional IRA, too.

Here's some more good news: The IRA deduction is an "above the line" adjustment to income, meaning you don't have to itemize your deductions to claim it. It will reduce your adjusted gross income (AGI) dollar-for-dollar, lowering your tax bill. And your lower AGI could make you eligible for other tax breaks, which are tied to income limits.

Who Qualifies

If you're single and don't participate in a retirement plan at work, you can make a tax-deductible IRA contribution for 2020 of up to $6,000 ($7,000 if you're 50 or older) regardless of your income. If you're married and your spouse is covered by a workplace-based retirement plan but you're not, you can deduct your full IRA contribution as long as your joint AGI doesn't top $196,000 for 2020. You can take a partial tax deduction if your combined income is between $196,000 and $206,000.

But even if you do participate in a retirement plan at work, you can still deduct up to the maximum $6,000 IRA contribution ($7,000 if you're 50 or older) if you're single and your income is $65,000 or less ($104,000 if married filing jointly). And you can deduct some of your IRA contribution if you're single and your income is between $65,000 and $75,000, or if you're married and your income is between $104,000 and $124,000.

Spouses with little or no earned income for 2020 can also make an IRA contribution of up to $6,000 ($7,000 if 50 or older) as long as their spouse has sufficient earned income to cover both contributions. The contribution is tax-deductible as long as your household income doesn't exceed the limits for married couples filing jointly.

Double Tax Break

Some low- and moderate-income taxpayers get an extra break for contributing to an IRA or other retirement account.

In addition to the usual IRA deduction, you may qualify for a Retirement Savers tax credit of up to $1,000 for contributions to an IRA or other retirement tax plan. (A tax credit, which reduces your tax bill dollar-for-dollar, is more valuable than a deduction, which merely reduces the amount of income that is taxed.)

The actual amount of the credit depends on your income. It ranges from 10% to 50% of the first $2,000 contributed to an IRA or other retirement account. To be eligible, your 2020 income can't exceed $32,500 if you're single; $48,750 if you're the head of a household with dependents; or $65,000 if you're married filing jointly. The lower your income, the higher the credit. But you can't claim the Retirement Savers credit if you're under 18, a student, or can be claimed as a dependent on someone else's tax return.

Real Estate vs Stocks

Which earns better returns: the stock market or real estate investments? And while we’re asking this grandiose question, which is the safer investment option?

You probably have an opinion already as to the answer to both of these questions. It’s good to have opinions about important questions. And these certainly are important—they directly affect your investment portfolio, retirement account, and more.

But opinions are never as useful as facts.

A team of economists from the University of California, Davis, the University of Bonn, and the German central bank, set out to answer these questions by analyzing a stunning amount of data collected over a 145-year period of time.

To better compare apples to apples, with each asset type, they adjusted for inflation and included all returns, not just appreciation. Dividend income was included for equities, and rental income was included for residential real estate.

Their findings, in short: Residential real estate was the better investment, averaging over 7 percent per annum. Equities weren’t far behind, at just under 7 percent.

Then came bonds and bills, each with a far lower rate of return (surprising to no one).

Returns on investments from 1870-2015

Rental income proved an important factor—roughly half of the returns on real estate investments came from rental income, while the other half came from appreciation.

Stock investments and investment property each performed differently in various countries, of course. Here’s a comparison of each of the 16 countries when considering real estate vs. stocks:

Keep in mind, these are long-term return averages over the course of many decades. In real time, these returns bounced up, down, sideways, and in circles.

From 1980-2015, the stock market, on average, performed significantly better than real estate investments. Across the 16 countries studied, stock investments earned an average annual rate of return of 10.7 percent, decisively beating the real estate market’s solid 6.4 percent.

Should we all sell our rental property and move our money into a Vanguard account? Of course not. But the reasons are multiple and a bit nuanced.

But the most interesting case for real estate investing lies in its risk-reward ratio.

Throughout modern history, residential real estate has actually boasted an extremely high rate of return with low risk. Take a look at volatility for real estate vs. stock for the past 145 years:

First, real estate investing is expensive. Until the past 10 years, with the advent of crowdfunding, you couldn’t invest your extra $100 a month in a tangible asset (unlike the negligible purchase price of some stock shares).

Even if you leverage to the hilt and borrow the maximum mortgage allowed at a low interest rate, that still usually puts you at 20 percent down payment, plus thousands of dollars in closing costs. Which says nothing of credit requirements, income requirements, and/or lenders’ requirements for investing experience.

In other words, real estate investing has a high barrier to entry.

It’s also difficult to diversify your investment portfolio for those very same reasons. If each asset requires $20,000 in cash to purchase it, then it takes a lot of money to build a broad, diverse real estate portfolio.

Investment property is also notoriously illiquid. You can’t buy it and sell it on a whim—it typically takes months to do either one.

Stocks may be a roller coaster, but in the long run, the good times outweigh the bad.

They also balance rental properties well. And when equities go down, residential real estate almost always goes up.

Real estate is illiquid compared to equities. You can buy and sell mutual funds, ETFs, etc. at a moment’s notice. Investment property isn’t quite so easy to get in and out of.

Stock investing also offers truly passive income. Ultimately, rental income can never be as passive as dividend income (even with property management handling general upkeep).

It’s much easier to diversify your investment portfolio with stocks, as well. You can spread $500 across thousands of companies, in every region of the world, in every industry, at every market cap. You’d be lucky to get away with only putting down $5,000 on a single rental property!

Residential real estate offers excellent returns with low volatility and huge tax advantages. I love rental properties. But that doesn’t mean there’s no place for equities in your portfolio.

If you invest well, rental real estate will start performing for you immediately. Equities will take longer; but the long-term returns will grow in value for you at prodigious rates.

Is Disability Insurance Too Expensive?

How Long Could You Afford To Live Without A Paycheck?

You rely on your income to fund every aspect of your life. If you are like one of the millions of Americans who unexpectedly becomes unable to work each year due to illness or injury, the last thing you want to worry about is how to continue paying your bills without an income.

A common misconception about disability income insurance is that its sole purpose is to cover against catastrophic events resulting from accidents.

In fact, illnesses like cancer, depression, and multiple sclerosis far more often impact your ability to work and support yourself and your family.  Individual disability income insurance is designed to protect your income if you cannot work due to illness or injury. 

Did you know?

90% of disabilities are caused by illness

10% of disabilities are due to injuries

1 in 4 of today’s 20-year-olds will become disabled before retiring

Why you need disability income protection before you’re sick or injured

Apply While You’re Healthy. You get the most favorable terms by buying individual disability income insurance before you need it. Once you’re too sick or injured to work, you usually can’t get the protection you need.

Lock in Pricing. Once you have your non- cancellable and guaranteed renewable policy, the amount you pay each month is guaranteed, and the insurance company can never cancel your coverage as long as you make your payments on time.  

Secure Coverage While on the Path to Your Career. If you’re studying to become a professional such as a doctor, dentist, or a lawyer, you can apply for insurance before you graduate, with options to increase coverage as your income grows.

Customize Your Coverage. You can select options to customize your protection. These options can let you increase coverage as your income grows and help keep pace with the cost of living. You can even buy coverage to help you replace your retirement plan contributions or protect your ability to repay student loans during a period that you can’t work due to sickness or injury.