Taking Care of Business

Lesson 1
Janice Brown Davidson, single mother of two in her late 20s, manages an in-store boutique at Lacys
Department Store.
She earns $60,000 a year before taxes (thats her gross income)
Pays 20% in taxes ........................................................................ $ 12000
Net annual income (after taxes) .............................................................. $ 48000
Net monthly income is ..................................................................... $ 4,000
Fixed monthly living expenses are ........................................................... $ 2,400
Discretionary monthly living expenses are ...................................................... $ 1,600
Current emergency savings are .............................................................. $ 13,000
She has an employer-paid disability benefit through the department store where she works. Lacys
provides at its own expense a long-term disability insurance benefit that pays 60% of an employees
gross salary up to a maximum of $5,000 a month
1. Would a policy that pays 40% of her gross salary provide enough income to cover Janices fixed
monthly expenses if she became disabled and couldnt work?
$5000*.4=$2000
2000<2400: It would not be enough to cover Janices fixed expenses of $2400
2. If yes, how much could she set aside each month after fixed expenses are paid? If no, how much of a
shortfall would she have, and how would she cover it?
She would have a shortfall of $400, which she would need to cover by taking money out of her
emergency savings.
3. Now assume that Lacys offers employees an option to increase their disability coverage through the
companys group insurance plan. Janice would have to pay $10 per month to increase her disability
benefit to 60% of her gross monthly income. If she were to suffer a long-term disability, how much
monthly income would Janice receive through this program?
5000*.6=3000
Janice would receive $3000/month through this program.
4. Would the new total cover her fixed monthly expenses?
3000>2400: Yes, it would cover her fixed expenses of $2400
Would she be able to put anything into savings and other discretionary spending?
Yes, she would have $600 left to put into savings and discretionary spending.
Discussion points
This scenario illustrates that disability insurance is designed to help people make ends meet when they
are unable to work due to a disability. Typically, it does not replace 100% of a persons pre-disability
income. Why do you think this is the case?
When someone isnt working, the company will have to hire someone new to cover the work for the
person on disability, so they may not be able to afford paying two people full salary for one job.
Therefore, the person receiving disability will not receive their full pre-disability income.
If Janice became disabled and her employer did not offer any disability insurance coverage, how long
could she have paid her fixed expenses before her emergency savings would have run out? What does
that tell you about the role of disability insurance?
13000/2400=5.42
She could have paid her fixed expenses for 5.42 months. This tells me that disability insurance is crucial
to financial stability. For example, if she was disabled for 6 months and didnt receive disability, she
would not have enough savings to cover her fixed expenses for that time period, and she might have
had to take on debt to cover her expenses. The role of disability insurance is to make sure someone has
enough to cover fixed expenses if something catastrophic does happen.