My previous couple of posts described the use of a pyramid as a metaphor for fiscal fitness (see The Pyramid as MetaphorPart 1 and Part 2). Insurance is a central component at the base of the foundation. Without it, everything else you build into your financial life is at risk. When people think about insurance, they often think of health and life insurance. One of the most overlooked forms of insurance is also one of the most important so we’ll cover it first. The odds of a disability during your working life are much higher than premature death. The National Association of Insurance Commissioners found that a 35 year old male employee in the U.S. has a 1 in 5 chance of experiencing a disability keeping him out of work for longer than 90 days. A woman of the same age has an even greater risk. She has a 1 in 3 chance of missing work for more than 90 days due to disability.(1)

Many employers offer some type of disability insurance which typically replaces 60-70% of your income after the elimination period (length of time before benefits begin). This is where that cash fund (see post on this topic) comes into play. Can you pay bills for the extent of the elimination period? Can you pay bills on only 60-70% of your income? Private disability insurance is also available if your employer (or if you are self-employed) does not provide coverage. This insurance can be primary or supplement your employer coverage in order to cover a larger percentage of your income. This is a big topic and well covered in this comprehensive article. Note that this is a topic for everyone whether single or coupled. Private insurance can be expensive but the potential losses associated with a long term disability are far costlier.

One option that couples have, depending on their circumstances, is to agree to be each other’s disability or supplemental disability insurance should the need arise. Are you and your partner in a financial position to help each other out if a disability occurs? If you decide to pursue this option, it should be incorporated into the Domestic Partnership Agreement (see post on this topic). Do be aware that providing financial resources to each other can run you afoul of the IRS gift regulations. There will be more on this in future posts. Currently, anyone can give up to $12,000 to another person each year without tax consequences. If the amount of support exceeds this limit, the receiving partner could provide consideration for the financial support such as pet sitting, accounting services for the gifting partner’s small business, cooking, etc. as long as any of these activities don’t disqualify you for any of your employer provided disability benefits. If gifting is not desirable for tax or other reasons, one alternative is to structure the assistance as a loan with repayment terms.

Have I given you food for thought? Please share your ideas or experiences related to managing the risk of disability.

Carol Christie is a Registered Investment Advisor and has a fee only financial coaching practice serving individuals and small businesses with a special focus on non-traditional couples.

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