This is a story about disappearing disability income benefits. One of the worst tragedies that can befall an executive, professional or business owner is an extended period of disability as a result of accident or illness.
A new MKA client, whom we shall call the Empress, was earning in excess of $200,000 per year. She has three children in school with lots of college tuition bills within sight. She has some savings, but nowhere nearly enough to stop working and provide for her family, even with her husband’s income.
MKA is working on a retirement program for her and her top executives, and as part of it, we asked to look at her long term disability coverage. It provided 60% to a maximum $5,000 a month to age 65 if she was unable to return to work after 180 days. It also reduced the benefit by certain retirement plan benefits as well as both hers and her family’s disability Social Security Benefits which total about $2,600 per month.
For starters, 60% of $200,000 per month is $10,000 per month – so out of the box her $5,000 benefit is a 30% benefit. Next, the $5,000 will be reduced by $2,600 to $2,400 or 14%, which (because she did not (1) pay the premium out of pocket or (2) pay income tax on the premium) will be taxed – further reducing the net. Certainly a financial disaster!
All of a sudden, what the Emperor thought was a 60% income replacement benefit was lurking around the 10% mark. After becoming disabled is not the time to discover this.
In another MKA situation, we found that a client had a $3,000 a month cap with full Social Security offset, which at his age and earnings would be at least $3,000 per month. Zero benefit. This emperor was certainly naked, and would not be able to afford clothes.
At MKA we do a full analysis of existing contracts and provide a report with solutions that increase both the benefit and the value of the benefit. Generally, simply increasing the group long term disability policy maximum does not result in improvement worth the additional cost.
For further information contact Barry Koslow, JD at bkoslow@mkaplanners.com or 781-939-6060.
To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this communication, including any attachments, was not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax related interest or penalties.
Securities offered through Advisory Group Equity Services, Ltd., member FINRA/SIPC. 444 Washington Street, Suite 407, Woburn, MA 01801. 781-933-6100.
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