CASE STUDY: Disability Risk to Retirement Income

Current Situation:
An unexpected disability carries the risk of loss of potential earnings, limiting your ability not only to earn current income, but also to make contributions to a defined contribution plan such as a 401(k) or 403(b). Add to that the resulting reduction in Social Security benefits, and a disability can have a devastating impact on retirement assets.

Possible Solution:
RetireGuard: A specially designed disability insurance policy that can be used to protect executives and business owners against an inability to continue both qualified and non-qualified retirement plan contributions.

How it Works:

1. Upon the disability of an executive, the policy pays a monthly benefit into a trust.
2. The amount of the benefit equals what the executive had been contributing to a qualified or non-qualified plan. Employer matching contributions may also be covered. Maximum limits apply.
3. The trustee invests the accumulating benefits according to the instructions of the disabled executive.
4. At age 65, the accumulated assets are distributed to the executive.
5. In the event of death prior to age 65, the trust assets would be paid to the executive's beneficiary.

Benefits

1. Plans may cover both a single individual or a group of individuals.
2. Once initiated, a policy premium is fixed over the life of the contract.
3. Plan covers both qualified and non-qualified retirement benefits.
4. Premium cost for the policy is a fraction of those for policies that protect employment income.
5. A disability program can be designed to combine protection for both income and retirement contributions in one policy, if desired.

Risks/Considerations:

1. Trust appreciation and distributions may be taxable.*
2. Health issues may prevent an individual from qualifying for a plan.
3. A participant must qualify for the claim at time of disability.

CASE STUDY EXAMPLE—SARAH JENKINS
Sarah Jenkins is a 35 year old executive at XYZ Company. She contributes $875 per month into her company’s 401(k) plan, representing annualized payments of $10,500 per year. If she were to continue payments until age 65, assuming a 6.5% gross annual investment return, Ms. Jenkins would have accumulated $967,905 for retirement. However, at age 45, Ms. Jenkins becomes totally and continuously disabled.
DISABLED WITHOUT RETIREGUARD:	Ms. Jenkins discontinues contributions to her 401(k) plan, although her existing account assets continues to earn interest. Assuming a 6.5% gross annual investment return, by age 65, Ms. Jenkins' retirement fund would total $538,787. Given the rising costs of long-term care, even at modest rates of inflation, this amount may not be sufficient to last through Ms. Jenkins' retirement.
DISABLED WITH RETIREGUARD:	Beginning 180 days after the onset of her disability, RetireGuard makes monthly payments of $875 into a trust account. Assuming 6.5% gross annual investment retur n, by age 65, Ms. Jenkins’ retirement fund would total $937,880.

 

*Neither Mesirow Financial nor its employees provides tax advice.
Please consult with your tax advisor. The material is for informational purposes only. Although this strategy may involve tax, legal, and accounting information, we are not offering such advice and suggest you consult your tax professional and advisors. RetireGuard is underwritten by Massachusetts Mutual Life Insurance Company. Rates change on a monthly basis. Insurance services provided by Mesirow Insurance Services.