Disability Income Objectives
This page covers the following location(s) in NaviPlan:
Set Goals - Disability Income - Disability Income
Set Goals - Disability Income - Client Objectives
Set Goals - Disability Income - Client Objectives - Assumptions
Set Goals - Disability Income - Client Objectives - Lump Sum Needs
Set Goals - Disability Income - Client Objectives - Annual Income Needs
Set Goals - Disability Income - Client Objectives - Additional Annual Income
Set Goals - Disability Income - Client Objectives - Income Available
Set Goals - Disability Income - Client Objectives - Asset Availability
Planning Objectives :: Procedures :: Screen Notes :: Related Information
Planning Objectives
Note: If you selected the Client(s) are already retired option during plan creation, some of the details on this page may be missing and/or inapplicable.
How does NaviPlan handle disability income goals?
- There are three distinct phases to disability income planning in NaviPlan:
- Enter existing disability insurance policies. This can be done by going to the Insurance Coverage page.
Note: Expenses attributed to disability insurance premiums entered in the Disability Insurance Details dialog box appear under Other Expenses in the Expenses dialog box on the Cash Flow page. Modifications made to disability insurance policy premiums are reflected in both locations. - Define the disability insurance goal and determine income needs during disability. By default, NaviPlan uses the goal and expense analysis method to calculate needs.
- Review results to see if existing policies meet income needs by generating the Insurance Policy Summary report.
- For analysis purposes, only one client can be disabled at a time. In a joint plan NaviPlan calculates the need for each person independently.
- The disability insurance analysis takes into consideration 100% of education goals, 100% of Major Purchase goals, and 100% of the retirement goal.
- Note: If there is a projected shortfall in retirement, NaviPlan will solve for the retirement goal by creating a new non-qualified Retirement Fund with additional savings being added. The amount added is the amount needed to cover all shortfalls during the retirement phase and is included in the overall insurance need. To verify this, run the Itemized Cash Flow Projection Report (Quick Actions - Reports - Insurance - Disability Insurance - Itemized Cash Flow Projection).
- NaviPlan assumes a disability occurs at the end of the current year. The disability analysis period begins on January 1 of the next calendar year and ends at retirement.
What considerations should I make before creating a disability income goals for my clients?
- If the retirement age is greater than the disability insurance analysis period, the average deficit calculation may include years that have a zero value for disability payments.
For example, age 70 is entered in the Override the Retirement Age for Disability Analysis field and age 65 is entered in the Analyze Disability To field on this page.
- If the retirement age is less than the disability insurance analysis period, NaviPlan will pay out disability benefits until age 65, even though the client is retired. However, once the client is retired, deficit coverage (i.e., asset liquidations) is invoked to cover any cash flow deficits. So from age 55–65, asset liquidations will cover any shortfalls as a result of disability and, therefore, additional coverage will not be recommended.
- If the retirement age is equal to the disability insurance analysis period, the deficit calculations will be neutral.
- By default, the benefits period for disability insurance ends at age 65. The benefits period for a particular disability insurance policy can be overridden on the Insurance Coverage page.
How do the different analysis methods differ?
- Disability income analysis can be based on either a goal and expense analysis method or an income coverage analysis method.
- The Goal and Expense Analysis method analyzes the amount of insurance needed to maintain standard of living. NaviPlan calculates an insurance recommendation that accounts for the goals and expenses defined in the plan. The parameters of the goal and expense analysis can be changed to cover needs.
- The Income Coverage Analysis method analyzes the income, the lost income due to disability, and any lump-sum needs or expenses that would occur as a result of the client’s disability. NaviPlan calculates a recommended amount of insurance to replace the lost income and to cover any additional lump-sum needs that are defined.
- Note: The Income Coverage Analysis method is designed to be used as a standalone disability income analysis and assumes the Estate Planning defaults of a Simple Will and ignores estate strategies because data entered for the disability income analysis does not require the entry of other plan data.
Understanding insurance goals in NaviPlan
- Insurance goals behave somewhat differently than other screens in NaviPlan. Each page in the Disability Income category corresponds to an insurance goal; one for <client> and one for the co-client.
- Within each page, you will find a series of subtabs. Each subtab contains information and fields relating to a single aspect of the disability income goal. Review and modify data for each of these subtabs to fully-model a disability income goal for your clients.
- When you have completed this process for the client, repeat it for the co-client and follow the same steps to model a situation in which both clients die, if applicable.
Procedures
Before learning more about entering disability income goals, please indicate which analysis method you are using.
I am using the Goal and Expense Analysis Method.
How do I model disability income goals in case <client> or <co-client> dies?
Follow these steps to enter a disability income goal in the event that one client dies
Assumptions subtab
- Review the data under the Adjust Milestones section. To modify the Disability Retirement Age or Disability Life Expectancy fields, select the appropriate Override option and enter new data.
- Review the data under the ROR on Disability Insurance Proceeds, Surpluses & Liquidations section. To modify the return rate for any of these items for the retirement and/or pre-retirement period enter new data.
Ongoing Expenses subtab
- By default, NaviPlan assumes that 100% of lifestyle and medical expenses will continue in a disability situation. To modify this assumption, enter a new value into the Percentage of lifestyle and medical expenses to cover field under Annual Expenses.
- Furthermore, for each of the expense types listed under the Expense heading you can clear the Use Defaults option and enter a new percentage to cover.
- By default, NaviPlan assumes that any education goals will continue in a disability situation and will still need to be covered at 100%. To modify this assumption, enter a new value into the % to Cover field under Education Goals.
- If there may be a cash flow surplus, you can indicate what percent of that surplus is to be spent and what percentage is to be saved using the Percent surplus spent and the Percent surplus saved field (respectively).
- When Assume surplus is spent is selected, NaviPlan projects the cash flow that would have occurred in pre-retirement if neither client had become disabled. Any pre-retirement surpluses resulting from this projection become additional pre-retirement expenses. This helps to prevent expenses from being understated.
- Use the Add Additional Expense button to model any additional expenses that apply in the event of disability.
Note: NaviPlan treats the Additional Expenses as monthly cash flow items, and not as annual expenses that occur on a specific anniversary. Although you enter the annual dollar amount, NaviPlan divides this amount by 12 to determine the monthly amount for calculation purposes. The monthly expense is assumed to end upon the End Date defined.
Additional Annual Income subtab
- Use the Add Annual Income button to model any additional incomes that will apply in a disability situation.
Lump Sum Needs subtab
- The Pay Off Outstanding Liabilities section will appear if a client has at least one outstanding liability. Each liability has an associated check box:
- If a liability's check box is selected, it is paid out at its outstanding balance on December 31 of the current plan year.
- If a liability's check box is cleared, the payments will continue to be removed from the client's cash flow.
- Note: The client or co-client may have sufficient cash flow to cover ongoing liability payments and may not want the liability paid out in the insurance analysis. If the client will not have sufficient cash flow to cover the ongoing liability payments, select the check box next to the corresponding liability so that it is paid out at the client’s death or disability.
- By default, NaviPlan assumes that any major purchase goals will continue in a disability situation and will still need to be covered at 100%. To modify this assumption, enter a new value into the % to Cover field under Major Purchase Goals.
- Use the Add Lump Sum Need button to model any additional needs that apply in the event of disability.
Asset Availability subtab
- This subtab displays all assets in the plan and allows you to indicate whether or not each asset is available to help cover needs in a disability situation.
- To indicate that an asset is available as of the date of retirement, select Available Starting at Retirement or Liquidate At Retirement (depending on the type of asset).
- To indicate that an asset is not available to cover disability needs, select Not Available.
- To indicate that an asset is not available to meet the estate’s settlement needs, select Not Available.
- If selected, it forms part of the deceased’s estate. If the asset is solely owned by the disabled and is not community property, this check box is automatically selected and cannot be cleared.
Note: The Education Specific Accounts container is present on this page for informational purposes only and cannot be modified. This list includes all 529 plans, Coverdell accounts, and UTMAs/UGMAs.
I am using the Income Coverage Analysis Method.
How do I model disability income goals in case <client> or <co-client> dies?
Follow these steps to enter a disability income goal in the event that one client dies
Assumptions subtab
- Review the data under the Adjust Milestones section. To modify the Disability Retirement Age or Disability Life Expectancy fields, select the appropriate Override option and enter new data.
- Review the data under the ROR on Disability Insurance Proceeds, Surpluses & Liquidations section. To modify the return rate for any of these surplus/liquidation types (or for the total) for the retirement and/or pre-retirement period enter new data.
Lump Sum Needs subtab
- The Pay Off Outstanding Liabilities section will appear if a client has at least one outstanding liability. Each liability has an associated check box:
- If a liability's check box is selected, it is paid out at its outstanding balance on December 31 of the current plan year.
- If a liability's check box is cleared, the payments will continue to be removed from the client's cash flow.
- Note: The client or co-client may have sufficient cash flow to cover ongoing liability payments and may not want the liability paid out in the insurance analysis. If the client will not have sufficient cash flow to cover the ongoing liability payments, select the check box next to the corresponding liability so that it is paid out at the client’s death or disability.
- By default, NaviPlan assumes that any major purchase goals will continue in a disability situation and will still need to be covered at 0%. To modify this assumption, enter a new value into the % to Cover field under Major Purchase Goals.
- Use the Add Lump Sum Need button to model any additional needs that apply in the event of disability.
Annual Income Needs subtab
- Use the Add Annual Income Need button to add any additional needs that apply in the selected disability situation.
- Use the Add Support for Dependent button to model the addition of an income source for any dependents.
Income Available subtab
- By default, this tab reflects the incomes shown on the Cash Flow page.
- Use Add Disability Income to enter any additional incomes that apply in the selected disability situation.
- Use Reset to revert any changes and reflect the incomes from the Cash Flow page.
Asset Availability subtab
- This subtab displays all assets in the plan and allows you to indicate whether or not each asset is available to help cover needs in a disability situation.
- To indicate that an asset is available immediately in a disability situation, select Available At Disability or Liquidate Immediately (depending on the type of asset).
- To indicate that an asset is available as of the date of retirement, select Available Starting at Retirement or Liquidate At Retirement (depending on the type of asset).
- To indicate that an asset is not available to cover disability needs, select Not Available.
Note: The Education Specific Accounts container is present on this page for informational purposes only and cannot be modified. This list includes all 529 plans, Coverdell accounts, and UTMAs/UGMAs.
How do I model disability income goals in case <client> or <co-client> dies?
- From the Disability Insurance Analysis to Include section, select the appropriate If <client/co-client> becomes Disabled option.
- From the Objectives section, enter the Percentage of lifestyle and medical expenses to cover for the selected disability situation.
Note: For disability income goals, non-qualified assets are available at the start of disability, qualified assets are available at retirement, and lifestyle assets are available for the estate.
- If the disability insurance coverage is to cover outstanding major purchase goals in the event of a disability, select Cover Major Purchase Goals for <client> and/or <co-client>.
- If the disability insurance coverage is to pay off all outstanding liabilities, select Pay Off Outstanding Liabilities for <client> and/or <co-client>.
Screen Notes
Annual Income Needs Details
Type
Classification or source of expense.
| Expense Type |
Description |
|
Alimony
|
Payments made to a spouse or former spouse where the payment is for the benefit of the recipient, and the payments are fully deductible to the payer in the year paid and taxable to the recipient. |
| Deductible above the line |
Used for deductible above-the-line expenses that are not included in other areas of the plan, such as moving expenses. By default, these expenses are fully deductible and deducted from total income to arrive at adjusted gross income (AGI).If entered elsewhere in the plan, it is not necessary to include in this category deductible above-the-line expenses related to items such as deductible contributions or deductible alimony paid, as NaviPlan will calculate these. |
| Deductible itemized |
Used for itemized expenses that are not captured in other areas of the plan, such as casualty or theft losses. It is not necessary to include state taxes in this category, nor, if entered elsewhere in the plan, deductible itemized expenses such as medical expenses, property taxes, and tax-deductible interest, as NaviPlan will calculate these. |
| Deductible subject to 2% limit |
Expenses that are deductible to the extent that they total more than 2% of AGI, for example, unreimbursed employee expenses or tax preparation fees. |
| Gifts to Charity |
For cash flow purposes, NaviPlan reports the full amount of the expense as charitable donations. For income tax purposes, NaviPlan considers these as donations to a 50% charity, the income tax reports include a Gifts to Charity deduction up to 50% of AGI. Amounts in excess of this limit are carried forward and used in the next available year.
For example, if the client has AGI of $100,000 and charitable donations of $60,000 that are 100% deductible, in cash flow NaviPlan will report an expense of $60,000, while the income tax reports will include gifts to charity of $50,000 with the remaining $10,000 carried over for use in the next available year. When entered as expenses, NaviPlan does not consider these amounts as gifts to charity for estate planning purposes. If these expenses should be considered as part of the client’s estate plan, they should be entered as part of a gifting strategy. |
| Lifestyle |
Regular expenses such as food, clothing, entertainment, utility, rental, and lease payments. This expense type is not tax deductible. |
| Medical |
Expenses incurred as a result of treatment from a recognized medical practitioner. This also includes prescriptions, ambulance charges, and non-government health plan contributions. Medical expenses incurred and not reimbursed qualify as itemized deductions if the total medical expense exceeds 7.5% of the client’s AGI. |
| Real Estate & Prop Taxes |
Any taxes that the client has paid on real estate, owned by the client, that was not used for business. This category includes foreign property. |
| Self-Employ/Bus |
Work-related expenses of self-employed clients. These expenses are deducted from self-employment income for tax purposes. The total may include expenses such as:
- Purchasing business assets that will be consumed in the year
- Amortizing a capital asset that will be used by the business over a number of years
- Providing taxable benefits to employees
- Contributing to defined benefit pension plans
- Paying union dues and professional fees
- The costs of maintaining an office or a vehicle for a self-employed individual
|
Future State of Residence
- This section will appear on the Assumptions tab (Set Goals section – Disability Income category– <client/co-client/both> Objectives page) when the following is true:
- Your client(s) plan to move to a new state in the future.
- You have entered the details of the move on the Income Tax page (Plan Management section – Assumptions category).
- You can use the Proceed with the change of state/residence as planned option to indicate whether or not your client(s) still plan to move in a disability situation.
Related Information
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