Keeping Your Retirement Off The Disabled List

When people become disabled and can no longer work, their main concern is finding enough money to live comfortably. Often, they neglect to think about funding retirement, even though contributions to 401(k) and other pension plans stop while they're off the job.

A few disability insurers are looking to correct that deficiency. Within the past year, UNUM Life, Paul Revere Life, Chubb Life, and Provident Life & Accident have begun offering policies--separately, or as a rider to a regular disability plan--that give you a monthly or annual sum for retirement expenses. UNUM will even set aside money for a spouse until age 65 if the policyholder dies.

ADDS UP. Consider a 37-year-old with a $235,000 salary whose 401(k) contributions are $12,219 a year--70% out of pocket and 30% from the employer. If the exec must stop working for five years, say, because of an illness or accident, he or she would sacrifice $402,619 in cash buildup by retirement, assuming a 7.5% return, figures Philip Davis, president of Corporate Compensation Plans in Danbury, Conn. The worker would also forfeit $433,509 from a defined-benefit pension plan, bringing the total to $836,128. Even if the disability didn't last five years, the person could lose a significant cash buildup.

But for premiums starting at $496 per year for a nonsmoker--less than 3% of regular disability coverage cost--a policy would pay $30,798 a year, tax-free, says Davis. Unfortunately, laws prevent consumers from placing the payout into their 401(k). That means they can't get an employer's matching contribution. But they can invest the money in a variable annuity or other vehicle that tries to offer the tax-deferred growth of a 401(k). In the above case, if the worker deposits the payout in an investment netting 7.5%, by retirement, he or she will have $944,000.

HONOR SYSTEM. The coverage is offered through groups at corporations and to individuals, mainly those who make $100,000 or more a year. A potential problem is that the cash goes to the worker and not directly into a retirement fund. So if the person isn't diligent about saving, it might get frittered away. Another drawback: Holders of some policies can't collect until they've been away from the job for a year.

Odds are you won't need to collect: Only 15% of workers suffer a disability of at least five years before age 65. So ask yourself: Is the peace of mind worth the price?

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