United States
Hong KongSocial insurance: Social Security, Medicare, workers compensation
Social Security provides retirement, disability and survivor benefits; Medicare provides health coverage from 65; workers compensation covers work-related injury; unemployment insurance covers involuntary job loss. Each leaves gaps private cover fills.
Private insurance recommendations only make sense on top of what already exists. This is what already exists.
Social Security
Three benefit types, funded by payroll tax, based on covered earnings and credits.
- Retirement. From 62 at a reduced rate, full at the full retirement age, increased to 70.
- Disability. For a disability expected to last at least a year or result in death, under a strict any-occupation style definition.
- Survivor. For a widow or widower, dependent children, and in some cases a parent caring for young children.
Forty credits - roughly ten years of work - generally establishes eligibility for retirement benefits. Disability requires fewer credits at younger ages.
Why the disability definition matters
Social Security disability is strict. It requires inability to engage in substantial gainful activity, considering age, education and work experience.
A surgeon who cannot operate but could teach will not qualify. That is precisely the case an own-occupation private policy covers, and it is why the two are complementary rather than duplicative.
A surviving spouse caring for young children may receive substantial benefits, and the calculation ignores them at the cost of over-insuring. It is the resource candidates most often omit.
Taxation of benefits
Up to 85 per cent of Social Security retirement benefits can be taxable, depending on provisional income - adjusted gross income plus tax-exempt interest plus half the benefit.
Which is a planning point rather than a technicality: withdrawals from a traditional IRA raise provisional income and can make more of the benefit taxable, while Roth withdrawals do not. That interaction is heavily examined.
Workers compensation
State-run, employer-funded, covering work-related injury and illness - medical costs, wage replacement, disability and death benefits.
It is generally the exclusive remedy, meaning the employee cannot sue the employer. Benefits are usually received tax free, and they only apply to work-related injury, which is a smaller share of disability than people assume.
Unemployment insurance
State-administered, for involuntary job loss, time limited and income limited. Benefits are taxable.
The planning point is that it replaces a small fraction of income for a short period, which is the argument for the emergency fund rather than a substitute for it.
The gaps to fill
Social Security disability is hard to qualify for and modest. Medicare does not cover long-term care. Workers compensation only covers work-related injury. Unemployment is small and brief.
Every private product in this domain exists because of one of those four sentences.
Dollar limits here are indexed annually and several were changed by recent legislation. Confirm the current figure before relying on it, and expect the exam to test the rule rather than the number.
Common questions
What does Social Security provide?
Retirement, disability and survivor benefits, funded by payroll tax and based on covered earnings. Forty credits, roughly ten years of work, generally establishes retirement eligibility.
Why is Social Security disability not enough?
The definition is strict - inability to engage in substantial gainful activity considering age, education and experience. A professional who could work in another field will not qualify.
Are Social Security benefits taxable?
Up to 85 per cent can be, depending on provisional income - adjusted gross income plus tax-exempt interest plus half the benefit. Traditional IRA withdrawals raise it; Roth withdrawals do not.
What does workers compensation cover?
Work-related injury and illness - medical costs, wage replacement, disability and death benefits. It is generally the exclusive remedy and benefits are usually tax free.
Should survivor benefits appear in a life insurance calculation?
Yes. A surviving spouse caring for young children may receive substantial benefits, and omitting them leads to over-insuring. It is the resource most often left out.