The biggest risk to your clients’ financial plans isn’t market volatility

Consider two partners, both 30 years old, with a combined household income of $200,000. One becomes disabled at age 35. The average individual disability claim lasts about three years, so by age 39, they’re back to work. Three years. A temporary setback.

But during those three years, retirement contributions stopped. Savings built over a decade were drawn down to cover living expenses. Assets that would have been compounding at peak contribution years were liquidated instead.

When the disability ends, the financial plan has not just absorbed a short-term income hit. It has been permanently altered. A three-year disability in a couple’s mid-thirties can produce a retirement shortfall in the millions, once you account for depleted accounts, interrupted compounding and lost contributions over the remaining decades of their careers.

Health risk is a financial risk

New research from the LIMRA Retirement Income Institute shows that consumers rank healthcare costs, long-term care needs and caregiving responsibilities as their top threats to long-term financial security, ahead of market volatility, inflation and recession. Yet health-related income risk remains largely outside the financial planning conversation.

The research finds that as life expectancy increases, Americans are spending up to 10-12 years managing chronic illness or disability. The conditions driving that trend are not exclusive to retirement age. Cardiovascular disease affects more than half of adults over age 40. Cancer diagnosis is most common around retirement age, but it can strike during the working years as well. For households still building toward retirement, a health event that disrupts income during that period compounds the financial damage well beyond what the loss of a paycheck alone would suggest.

Unlike market risk, health-related financial risk tends to worsen over time. According to the LIMRA research, health events often last for years, create ongoing financial strain and arrive at a point when individuals have fewer options to adjust. A plan designed to weather a bear market may not be designed to weather a three-year income disruption in a client’s peak earning years.

Why the standard disability income conversation falls short

Disability income insurance has traditionally been framed around a single question: if you cannot work, how do you replace your paycheck? That framing is accurate, but it understates the financial exposure. The more consequential question is what a multiyear income disruption does to a retirement timeline, a savings trajectory and a long-term financial plan.

The coverage gap reflects how narrow the current conversation tends to be. At least 51 million working adults rely solely on Social Security for disability coverage, according to the Council for Disability Awareness. Social Security disability benefits were not designed to replace the income of a mid-career professional, and for most households, they do not come close.

Clients who have employer-sponsored group coverage often have not examined what it delivers. Common gaps that go unreviewed include:

• Benefits that may be taxable when premiums are employer-paid, reducing the effective replacement rate.
• Group policies frequently exclude bonuses, commissions and overtime, which can represent a significant portion of a high earner’s income.
• Coverage is tied to employment. A client who loses a job loses disability protection at the same time.
• Benefit periods are often shorter than clients assume, leaving a gap through what can be the most financially damaging phase of a long-term claim.

For most clients, the assumption that existing coverage is sufficient has never been tested against their actual financial obligations.

Connecting income protection to long-term outcomes

Agents and advisors who position income protection within the context of retirement outcomes and long-term financial goals are having more complete planning conversations. The question is not whether a client can get by without a paycheck for six months. It is whether their plan can absorb a multiyear income disruption without permanent damage to long-term financial security.

A three-year disability at age 35 costs more than three years of income. It costs a household decades of compounding growth.

Several planning questions can help shift the conversation from monthly cash flow to long-term outcomes:

• What happens to your retirement timeline if your income stops for two or three years?
• Which parts of your plan depend on uninterrupted earnings?
• How would you fund your long-term goals if you had to pause contributions during your peak earning years?
• Have you reviewed whether your current disability coverage includes bonuses and commissions, and how benefits would be taxed?

Planning ahead to hold under pressure

Income protection is not a line item in a financial plan. It is what allows the plan to function when income stops. Agents and advisors who frame disability income coverage in terms of retirement outcomes, wealth preservation, and long-term financial security, rather than paycheck replacement alone, build strategies that remain intact even if income stops.

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