Disability and Life Insurance and Your Children
No one depends on you financially as much as your children. You need an insurance plan that will protect them in the event you're no longer able to provide for them. That plan should include:
- Disability insurance, which pays you a monthly income if an accident or illness prevents you from working, and
- Life insurance, which pays a sum of money your family can use to replace your income if you die.
Things you should know about Disability Insurance:
Your chance of becoming disabled is greater than you probably realize Its a sobering fact: If you are under 65, your chance of becoming disabled for 90 days or longer is twice as likely as your chance of dying. If you were unable to work for a few
weeks, months or even years, what would happen to your family?
Thinking Social Security? You may want to think again...
Social Security doesn't provide adequate coverage, in most cases. Social Security does pay some disability benefits -- but qualifying for them is much harder than most people realize. Social Security typically pays disability benefits only if you are diagnosed with a fatal illness, or if your physical or mental disability makes you unable to do any kind of work for at least 12 months. Even then, you won't receive any Social Security payments for the first six months after you become disabled. You can create a much more effective safety net for your children by purchasing a disability insurance policy of your own.
Your disability benefits could be tax-free.
Usually, if you pay for disability insurance with after-tax dollars, any benefits you receive will be tax-free. Since taxes won't be taken out of your disability insurance payments, you don't need to replace 100% of your gross income in order to maintain your current take home pay. (That's good, because insurers don't sell policies that replace 100% of your income; most disability coverage replaces only up to 60% - 70% of your gross income because insurance companies want you to be motivated to get well and return to work).
To figure out how much disability insurance you need, consider all of your monthly expenses. In addition to the basics (food, shelter and clothing), be sure to include expenses like doctors' bills for the kids' regular check-ups, and the cost of day-care, school tuition, and extracurricular activities, etc. What expenses would increase if you were disabled? What expenses would disappear? How much income could you count on from other sources, like savings or investments, or an employer-sponsored group disability policy? Consider all of these factors to determine the amount of disability coverage necessary to protect your family.
Things you should know about Life Insurance:
You may not have enough.
Your biggest expense for years to come will be all the costs associated with raising your children. It's important to make sure your family could meet that expense if you died tomorrow. In fact, each breadwinner in your family should have life insurance coverage.
In evaluating your life insurance needs, you should make sure the policy is big enough to cover immediate financial expenses -- like funeral costs and outstanding loans -- plus ongoing household living expenses like mortgage and utility payments, as well as bills for food and clothing. You probably also want enough coverage to meet big future expenses like your children's college tuition.
You may want to designate primary and secondary beneficiaries.
If your spouse is the primary beneficiary of your policy, consider designating your children as secondary beneficiaries. This may make the process of collecting on the insurance policies quicker in case something happened to both parents at the same time. (And while we're on that subject, you and your spouse should both consider having wills that name a guardian for your children and a trustee to manage the life insurance money for them if anything happens to you.)
Resources & Tools
PROTECTION AFTER DIVORCE -- COBRA, the Consolidated Omnibus Budget Reconciliation Act, protects ex-spouses even after one of them remarries, for a fixed period of time, as well as employees who lose their positions. COBRA establishes a time line for picking up coverage (which must be religiously observed), and it is very expensive.
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Life Insurance and Divorce