Page 157 of the book they mention the analysis of an individual with life insurance paying a salary equivalent of 2 years and disability insurance paying 3 months
The wife not wanting to work for the next few years but able to earn a lot.
In the solution they say family needs life insurance but not necessarily disability insurance
I would have seen this exactly the opposite.
Any thoughts?
if the individual is young, and thus is “able” why would he need disability insurance?
Thanks for getting me to crack open a book which I have been unable to do for months… I agree, what you wrote doesn’t make much sense to me. I wonder if Schweser updated their answer. In the 2017 books, the example you describe is on p.160 and gives this somewhat contradictory and not greatly worded answer:
“Long-term disability is needed as the family is at risk if the husband cannot work for an extended period of time.” Sounds like they need it, but then the next sentence goes on to say “This is mitigated by the potential for the wife to return to work.”
I don’t really know what to make of that, except maybe the graders want you to acknowledge both?
thanks for your input… I actually have the 2017 books but ordered them early… perhaps they changed them afterwards?
I am looking at the answer on page 160 (I ordered the books early as well and am looking at the 2017 version) and they state “Long-term disability IS NEEDED as the family is at risk if the husband cannot work for an extended period of time. This risk is MITIGATED by the potential for the wife to return to work”
The question asks for you to discuss the insurance needs for the couple with respect to various types of policies. They need more of both life and disability as their current employer coverage is inadequate.
They still need disability as the husband is the primary bread-winner. However, they do not need to go out and buy a LTD policy with 0 elimination period that insures 100% of salary with a 5% COLA until age 65 or something - that would be prohibitively expensive and unnecessary as the wife could go back to work and earn money to help shore up what the disability would not cover. That is the point they are trying to make. They can self insure part of this risk as the wife is capable of working.
Families usually always need some sort of disability policy - even if both parties are capable of earning money. The degree to which you would ensure may change depending on the circumstances.
This chapter is very painful to read. Don’t like the wording, not very concise.
for me it’s still fuzzy. @ bfry what is COLA ?
If the wife can go back to work full time in 2 years they need disability insurance in the short run as she does not want to go back to work now but life insurance already covers those 2 years she doesn’t see herself working.
Per research online, A Cost of Living adjustment (COLA) rider is an important feature in a disability insurance policy because it helps your benefits keep pace with inflation during a claim. I assume this will add cost to the LT Disability.
From my understanding, you always need life insurance as long as your PV of Human Capital is high (you are still at a younger age), and your current financial capital is not enough to cover your expenses. You also need LT Disability, which covers the area that life insurance doesn’t cover. In the case you mentioned, this family doesn’t need an expensive LT Disability, as bfry pointed out, “such as 0 elimination period that insures 100% of salary with a 5% COLA until age 65 or something”, given the wife can return to work immediately.
You might or might not need the ST Disability based on your own situation. In this case, as the wife is able to return to work immediately if needed, the ST disability that covers 3-month period is not necessary.