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Disability insurance is a must
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It is impossible to have a comprehensive financial plan without including risk management components to it. Think of your overall plan as a pyramid, and you can look at the base of the pyramid as the steps you have taken to ensure the foundation stays in place in order for you to continue building, and at the same time protecting it from tipping over throughout events that may transpire in your life.
In an effort to protect yourself from a loss resulting from damage, theft, or lawsuit, you have purchased auto insurance. To protect yourself against an enormous cost that can result from a fire, earthquake, or other such scenario, you purchased homeowners insurance. To protect your savings in an event you need to be taken to the emergency room or incur other such hospital expenses, you purchased health insurance.
You may think that since you have all of the above you are well protected, but chances are you are forgetting something big.
What is the one thing you have that makes it possible for you to even pay your car payments, mortgage, living expenses? The answer is your ability to work. Your ability to work is itself the greatest asset you have, because everything you have depends on it. You need to ask yourself one question, “Who pays you if you are too sick or injured to work.”
What is the purpose of putting all of your money into stocks, 401K, IRA, and money markets if all of that will be liquidated immediately to pay for your living expenses if you can’t work?
“Disabled? Me? Never!”
The major single cause of foreclosure is due to a serious medical problem. You read that right, according to the most recent data, 48% of foreclosures are due to disability. For a 25 year old, chances of a disability for at least 90 days before reaching age 65 is 2 out of 5. Average length of disability lasting longer than 90 days is 2 years and two months. When was the last time you took a 2 year vacation?
For a 30 year old, 3 out of 8. Average length of disability lasting more than 90 days is 2 years and 8 months.
For a 40 year old, 1 out of 3. Average duration of disability lasting longer than 90 days is 3 years and 6 months.
If you save 10% of your income each year, a disability can wipe out 10 years of your savings every year.
Chances are you have a group disability insurance policy at work. The most common percentage of income covered is 60%. Since it is the company that is paying the premium, the amount you will receive monthly if you suffer a disability will be taxed, and you will see approximately 40% of your income. Can you maintain your current standard of living off of 40% of your income?
The solution is to see if you can qualify for supplemental disability insurance, which can fill in the gap and replace the majority of your income, as well as keep up with inflation every year.
Let’s assume you don’t have any disability coverage, and you have the choice to pick one of two jobs.
Job A pays $100,000 a year, but if you become sick or hurt and can’t work, you get $0
Job B pays $97,471, and if you become sick or hurt, they will pay you $60,000 a year, every year, until you are good enough to work, or until age 65.
The person who chose Job B purchased disability insurance with his salary.
If you would like to learn more about disability insurance, or would like me to review what you already have to see if it is adequate for you, feel free to contact me.
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