How to Protect Your Retirement Against Disability


Last posted by Bill Olmstead |

There are 3 ways to ensure that in the event that you become too sick or injured to work, your retirement plans are not derailed. Many physicians, attorneys, and professionals have purchased their own individual disability insurance to protect their income. In the event that they cannot do their own-occupation, their disability insurance will put money in their pockets to live on, but what about their retirement savings? It is against IRS rules to contribute to a qualified retirement plan like a 401(k) if you are not working. Furthermore, any employer contributions to such a plan could also stop in the event you were disabled. There are three possible solutions to this problem, however, and they all have to do with using a disability insurance policy.

Solution #1 – Purchasing Optional Graded Lifetime Benefit Rider

Solution #1 involves the purchase of an optional policy rider to extend benefits from age 65 or 67 to lifetime. Lifetime benefits ensures that in the event of total disability, benefits do not stop at age 65 or 67 – they continue on as long as the insured remains disabled and living. The current policies that offer lifetime benefits do so on a graded benefit structure. This means that in the event of total disability, the insured will receive the full monthly disability benefit until age 65, followed by a lifetime benefit that is graded (or “reduced”) based on how old the insured was when their continuous, total disability began. For disabilities that begin on or before age 45, the lifetime benefit amount will be 100% of the policy’s monthly disability benefit. When the continuous, total disability begins after age 45, the lifetime benefit amount will be reduced by 5% for each year after age 45 when disability began. For example, consider an insured who purchases a disability policy with a $10,000 monthly benefit – if he or she was totally disabled by age 45, he or she would receive their $10,000 monthly benefit until age 65, followed by a $10,000 lifetime benefit while they continued to be disabled and living. If instead total disability began at age 50, the lifetime benefit would be equal to 75% of the policy’s monthly benefit, or $7,500 (it is reduced by 5% for each of the 5 years after age 45 that the disability began).

Graded lifetime benefits are one way to ensure that income is present for retirement in the event that one hasn’t had enough time to save before a disability occurs.

Solution #2 – The Lump Sum Disability Benefit Rider

Solution #2 is the Lump Sum Disability Benefit rider1, available on the ProVider Plus individual disability insurance policy available through the Berkshire Life Insurance Company of America. This patented feature can help offset for many of the financial opportunities you may have missed out on due to disability – with one of those being the potential for significantly reduced retirement savings. The Lump Sum Disability Benefit rider is an optional rider that pays a lump sum benefit after the end of the policy’s benefit period. At the end of a benefit period – say, age 65 – the insured will receive 35% of all benefits paid for total and/or residual disability paid over the life of the policy. An insured qualifies for the Lump Sum Disability Benefit when he or she receives benefits for total and/or residual disability equal to 12-times the policy’s monthly benefit, and maintains his or her coverage until the policy expiration date if they recover from disability. The lump sum benefit rider can help you achieve many of the financial goals you may have written off in the event of a disability, which may include benefits to help provide income during retirement when disability benefits from the insurance company have ended.


Solution #3 – Retirement Protection Plus Program

The final solution uses a specific type of disability insurance policy to protect the contributions someone is already making to their retirement plan. This Retirement Protection Plus Program can be purchased as a standalone policy, or as an optional rider to your individual disability policy. In either case, you can protect up to 100% of your retirement contributions, as well as 100% of your employer contributions, up to a maximum of about $50,000 a year for most people. In the event of total disability, a trust is established for the benefit of the insured. The monthly benefits are deposited in the trust for use after age 65. These assets are invested in a grouping of investment options which are selected by the insured, and are subject to the returns of the market – just like their 401(k) or other qualified plan. Retirement Protection plus is another option for someone who wants to continue their retirement savings in the event of disability, and who wishes to have the opportunity of market-like returns on their asset.

If you’ve taken the first step to protect your income from an accident or illness, be sure you’re considering the next step – what happens when my disability coverage stops paying, and how will this affect retirement? Then talk to your disability insurance agent to make sure that you have retirement protected as well as today.

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