The statistics are alarming: Nearly one-in-three Americans will become disabled for more than 90 days at some point during their working careers.¹ Yet, most workers don't give a second thought to the need for disability insurance.

Many think they are covered through their employer's benefit plans or sick leave policy, but this is often not the case. In fact, less than 40% of private-industry workers are covered by short-term disability insurance, while only 31% are covered by long-term disability insurance.²

Even if you have insurance through an employer-provided plan, you may not be getting all the coverage you need. Typically, workplace group plans are structured to replace only about 60% of your salary for a set period of time.

Could you and your family live on essentially half of your salary for a prolonged time frame? If you think you need more coverage, you may need to purchase a supplemental plan that will boost that replacement rate to 70% or 80% and increase the length of the payouts.

Finding the Right Coverage

What should you look for in a disability insurance policy? Here are some tips to help you find the right one:

Understand the various definitions of disability:

Some policies will cover you in the event you can no longer perform your "own occupation." Others will cover you only if you can no longer do "any occupation." Both tend to be expensive policies. A more wallet-friendly option will cover you for a "loss of earnings" disability. It is designed to make up the shortfall between what you earned before you were disabled and what you earn after.

Define your time period:

The average long-term disability claim is 31.2 months, or just under three years.³ Policies can be purchased for various time horizons, including up to your normal Social Security retirement age or for life. Bottom line: The longer your desired horizon, the larger the premiums.

Premiums will go up with age:

The older you are, the more you can expect to pay for your policy. Looking into disability coverage while you are younger could save you in the long run.

Shop around:

The coverage, riders, and premiums can vary widely from company to company. If you are shopping without the help of an independent agent, be sure to check out the policies from several firms and compare them carefully. You should also carefully review the strength ratings of the various insurers you consult -- if the company you choose gets into financial trouble, you could find yourself holding a policy that pays out far less than you were promised.

Should you need a referral to a local insurance agent, you are always welcome to contact us at Capital Advantage, Inc. for referrals to local, trusted resources.

¹ Social Security Administration, Fact Sheet, March 2011.
² American Council of Life Insurers, 2010 Life Insurers Fact Book, November 2010.
³ Gen Re, 2010 Gen Re Disability Fact Book, December 2010.

This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Capital Advantage, Inc., a local member of FPA.

Understanding
Employee Stock Option Plans

The boom days of the 1990s may be over, but stock option programs continue to be popular with public and private companies. Employees certainly can benefit from them, if they take some time to learn the basics.

In the dot-com boom years of the 1990s and early 2000s, many companies made liberal use of employee stock option plans (ESOPs) to both reward and retain valued staff, from executives to temporary administrative help. While the current economic climate has produced fewer "company stock millionaires" these days, stock option programs continue to be popular with public and private companies. And employees certainly can benefit from them, if they take some time to learn the basics.

 What Is a Stock Option?

If you've been granted stock options, you've been given the right to purchase shares of your company's stock at a certain price under certain conditions set by company management.

1. If you have immediate options, you can purchase your allotted shares at any time.
    
2. If your options are vested, you can only purchase a set number of shares after you've worked at the company a certain period of time.
    
3. If your options are performance-based, they will vest once certain goals are met.

The two most common types of ESOPs are incentive stock option (ISO) and nonqualified stock option (NSO) plans. Usually, key executives are granted ISOs, while less senior employees are given NSOs. The chief difference between the two is tax treatment.

1. An ISO can be taxed under long-term capital gains, assuming the employee holds the stock for at least two years from the option grant date and one year from the exercise date. They are also taxed only when the stock is sold, making them tax-deferred plans. Note that ISOs can trigger the alternative minimum tax (AMT).
    
2. NSOs are taxed as both income and capital gains -- and the tax is owed once the options are exercised. This is an important consideration to anyone who is thinking of exercising options. If you don't have enough cash on hand to cover the tax bill, you may need to sell shares you've just purchased to cover the costs.

Exercising Options

Most stock options have an exercise period of 10 years; that is, you have 10 years from the time you receive the options to actually purchase the stock. You are not obligated to buy any shares, particularly if your company's stock price is trading below your set exercise price. If you don't make a purchase during the exercise period, your options will expire worthless.

Companies have the flexibility to exchange option grants if its stock has been negatively affected by market activity. For example, if your stock options are priced at $25 a share and your company stock has been trading at only $20 a share for a prolonged period, the company may exchange your $25 strike price options for a new set that gives you a lower strike price.

If you are participating in an ESOP, be sure to consult with your Capital Advantage, Inc. financial advisor and/or tax professional who can help you decide when to exercise your shares and how to deal with the tax consequences.

This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Capital Advantage, Inc., a local member of FPA.

When should you begin collecting Social Security? The answer depends in part on how long you think you'll be around to collect it.

A growing number of Americans have been forced to delay their planned retirement date due to job and savings losses suffered during the past five years. According to a survey, 40% of U.S. workers said they have resolved to retire later due to concerns about outliving their savings and fears of rising health care costs.¹ Postponing retirement not only means working longer, but also delaying when you start collecting Social Security. Currently, workers can begin collecting Social Security as early as age 62 and as late as age 70. The longer you wait to start collecting, the higher your monthly payment will be. Your Social Security monthly payment is based on your earnings history and the age at which you begin collecting compared with your normal retirement age. This normal retirement age depends on the year you were born.
 

Those choosing to collect before their normal retirement age face a reduction in monthly payments by as much as 30%. What's more, there is a stiff penalty for anyone who collects early and earns wages in excess of an annual earnings limit ($14,160 in 2011).

For those opting to delay collecting until after their normal retirement age, monthly payments increase by an amount that varies based on the year you were born. For each month you delay retirement past your normal retirement age, your monthly benefit will increase between 0.29% per month for someone born in 1925, to 0.67% for someone born after 1942.

Which is right for you will depend upon your financial situation as well as your anticipated life expectancy. Anyone with a good pension or substantial savings may want to delay a bit. Similarly, if you're in no hurry to retire, you may want to continue working longer and collect later.

Likewise, those with a family history of longevity who expect to live a long time stand to gain more by delaying. If you think it unlikely to survive beyond age 78, you may want to start collecting at age 62. And if you expect to survive beyond age 82, you might consider a delayed collection.

Whenever you decide to begin collecting, keep in mind that Social Security represents only 38% of the average retiree's income.² So,you'll need to save and plan ahead -- regardless of whether you collect sooner or later.

¹ Towers Watson, October 2010.
² Social Security Administration, "Fast Facts & Figures About Social Security," August 2011.