What is your biggest asset?
When I ask this question to prospective clients, most respond that it is their house. Others say it’s their retirement savings account. I contend that your biggest asset is your ability to earn money over your lifetime.
Without that, all of your other assets disappear.
You probably have insurance on your home and car, and maybe even your mobile phone or your refrigerator. Why wouldn’t you also want to insure your earnings as well?
Often, we are too short-sighted in this area. When it comes to protection against loss of income, most people’s immediate thoughts go to life insurance, which provides income benefits in the event of death.
While this is certainly important, fewer people consider protecting their ability to earn money in the event they become sick or injured.
But the truth is, we’re far more likely to become disabled throughout our working career than we are to die.
To put that into perspective, the Social Security Administration estimates that over 90% of women and 85% of men will live to the age of 67. However, the same study reports that beginning at age 20, the average individual has more than a 25% chance of being disabled for at least 12 months before reaching the age of 67.
Are you prepared to lose your income for 12 months?
When I thought of disability, I always imagined losing an arm. Or someone with a spine injury or debilitating disease. While these instances are all true, disability is caused by far more common activities.
According to the Council for Disability Awareness, the most common cause of long-term disability is actually musculoskeletal disorders (29%).
Just think — you could make one wrong move and pull a muscle in your back (and really, who hasn’t had this happen!) You could tear a hamstring while exercising, or develop carpal tunnel syndrome from work. I knew someone who broke both her wrists skiing! The fact that regular activities can impact your ability to do your job and earn an income should be frightening.
If you rely on a paycheck to provide for your family and you don’t have disability insurance in place, your first order of business — if you have any intention of covering your ass(ets) — should be to establish coverage.
Start with Your Employer
According to the Bureau of Labor Statistics, about one-third of employers offer a disability policy. These plans typically cover 60 – 70% of an employees salary for a short-term — generally three months. Short-term disability is a great place to start your coverage. Just know that it ends when you leave your job, and because the employer is providing this benefit for you, any payout is treated as taxable income.
Some employers also offer long-term disability that covers a percentage of income (usually 50 – 70%) for a longer period of time. This is great, too. It may be optional insurance that you can only add during open benefits enrollment, however, since you are paying for the insurance, any payout is non-taxable.
On the surface, these are low-cost (sometimes no-cost) benefits to the employee.
However, since these plans only replace a small percentage of income for a limited time, they provide insufficient protection for any long-term loss of income.
Find Additional Coverage
In addition to your employer’s regular benefits, some allow you to purchase additional long-term insurance.
In many cases, it’s worth purchasing the maximum coverage through your employer’s group plan because it may be substantially cheaper than an individual policy. Another perk, since you pay directly to the insurance company, means you can usually keep it, even if you leave your job.
In the event your employer doesn’t offer a long-term option, you can look to professional associations and individual policies for plans tailored to your needs.
Determine the Appropriate Amount of Coverage
When it comes to disability insurance, most people base the necessary amount of coverage on their current spending. What’s being left out of that calculation is the fact that disability can cause medical expenses to skyrocket and if a disability causes you to quit your job, you’ll likely have to change your medical insurance as well.
On top of that, your need may be significantly more pronounced if you’re married or have children because your disability might necessitate hiring help with the kids or other household chores.
Don’t Leave Your Financial Plan Incomplete
Aside from estate planning, disability insurance is the biggest gap in most people’s financial plan.
That’s despite the fact that you’re more likely to become disabled in your working life than you are to die — even if you don’t work in a hazardous position.
Illness can strike anyone at any time and a disability policy will be what you need if it happens to you or your loved ones.
Don’t leave a gaping hole in your own otherwise comprehensive financial picture. Use this post as a gentle nudge to stop procrastinating and start protecting your most important asset.
Think your chances of becoming disabled are slim? Take this quiz to find out your chances.
Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.
Your Financial Mom blog posts are not meant to be legal, accounting or other professional service advice. Content represents the opinion of the author only. Pathfinder Planning LLC is not responsible for the accuracy or validity of content contained in third-party comments.