How to protect your most important asset with disability insurance

Five years ago, when my wife and I were expecting our first child, I quickly took out term life insurance policies. However, it was only last month that I protected my human capital from disability.

I am not alone either. Most people take life insurance as a no-brainer to protect against loss of income in the event of death, but few consider protecting their human capital in the event of illness or injury.

But I’m actually much more likely to become disabled in my professional career than to die – and so are you.

In fact, the Social security administration estimates that 91.2% of women and 85.6% of men will live to age 67. Meanwhile, the same report predicts that a 20-year-old has a 26.8% chance of being disabled for at least 12 months before reaching retirement at 67.

(Note: The definition of disabled in this report is much stricter than what you would see in a Group or Individual Policy.)

Once you become disabled, the Advice on disability awareness reports that the average long-term disability absence lasts 34.6 months – almost three years!

In other words, our chances of enduring a period when we are disabled and unable to work are much more likely than the chances of dying instantly. And when you’re in the early or middle part of your career, there are few assets (if any) more valuable than your ability to earn an income.

Why I procrastinated in obtaining disability insurance

When I envisioned worst-case scenarios like losing my limbs or going blind, I always thought I could still do some (if not most) of the things I do in my job today. I have a fairly non-hazardous occupation without the physical labor or heavy machinery that I imagine to be involved when I think I become severely disabled.

As for all the other bad things – from car crashes to slipping on ice – I’m a human like everyone else. This means that I suffer from an optimistic bias, or the tendency to believe that bad things are more likely to happen to other people.

When you hear statistics about negative life events, you naturally think that it probably isn’t going to happen to you. With that in mind, the price of disability insurance seems sky-high (and no, it’s not cheap, but we’ll get to that in a moment).

What I didn’t think of while delaying purchasing a disability insurance policy is that terrible, debilitating but not always fatal illnesses like cancer don’t care about your age or profession. While I was unlikely to be involved in some sort of forklift accident in my job as a financial advisor, I could easily have been diagnosed with an illness that kept me from working.

In fact, I saw this thing happen to a client after he was diagnosed with an illness that forced him to quit his job at an inconvenient time.

Without the disability policies he bought outside of his employer, his family would have seen a dramatic reduction in his lifestyle at best. At worst (and probably more likely), they couldn’t have made ends meet.

Being close to his experience motivated me to finally take action. I pulled myself together and put in proper disability coverage.

Disability Insurance Considerations

If you’re like me, it may take a while for you to close a policy due to the high costs, the myriad of options within different policies, or the underlying optimism that you won’t become disabled. . Here are some things that can help you in your decision.

1. If you are relying on a paycheck, you must have disability coverage.

Your need is especially pronounced if you are married or have children, as others are likely to depend on your contribution to the household.

The need for disability decreases once you accumulate enough retirement savings to pay if a disability requires you to retire early. If you have children, the need for disability insurance also decreases once they no longer need your financial support.

2. Don’t worry about a short term policy.

You’d be much better off creating and adding money to your emergency fund rather. If you already have an emergency fund with several months of living expenses, you can essentially self-insure for short-term disability.

Not only is this approach cheaper, but it offers greater flexibility and liquidity. Long term disability insurance picks up where the short term left off and can cover you from a few years to a lifetime. I recommend looking for a long term policy that pays benefits up to age 65.

3. Find out what you can afford and get a long term policy within your budget.

Disability policies come in all shapes and sizes. When you work with a good fee-based financial advisor, they can give you highly personalized coverage based on what you can afford.

If you’re still concerned about the cost, there are ways to get cheaper coverage. You may consider reducing the amount of monthly benefits, shortening the benefit period (the length of time you receive benefits in the event of disability), eliminating cost of living adjustments, extending the benefit period Deficiency (the length of time you must be disabled before benefits are paid) and soon.

4. Don’t underestimate the amount of coverage you need.

Most people think of coverage based on their current spending trends, but your medical expenses can skyrocket if your disability forces you to quit your job and your group health insurance coverage is terminated. You may also need to purchase medical equipment or supplies, or in some extreme cases, renovate your home to accommodate a disability.

Child care costs are also likely to increase if your children cannot drive themselves. With young children, the simple act of switching from two pairs of competent hands to one may require hiring help with children or other household chores like cooking, cleaning, laundry, and housekeeping. the lawn.

5. Don’t assume your employer’s plan is sufficient.

According to Bureau of Labor Statistics, about a third of employers offer a disability policy. Many people don’t buy their own disability insurance policies because their employer is the one paying for the coverage, but these plans replace only a very small amount of income and don’t have the length of time to protect themselves. the average absence of several years from work.

Employer plans tend to offer a short term policy covering 60% to 70% of your salary with a cap of $ 1,000 / week for up to three months. In some cases, employers will offer access to a long-term group disability insurance policy covering 50% to 70% of your salary with limits between $ 5,000 and $ 10,000 per month.

In either case, these payments are usually only calculated from your base salary while excluding any commissions or bonuses. If you pay your policy premiums with after-tax dollars, the benefits you receive will be tax-free. Premiums paid in pre-tax dollars, usually through your employer, may make benefits taxable when received.

Your employer plan alone is insufficient. Also, plan to purchase your own disability insurance policy.

6. Consider buying through your employer or a trade association.

Purchasing coverage through a group plan can save money. Some employers allow you to purchase long-term insurance (over and above the amount of coverage they offer, which is usually not enough) as an optional benefit.

In this case, it is worth buying the maximum coverage through the employer’s group plan, as it will be much cheaper than an individual policy. Likewise, some professional associations (AICPA, for example) offer a handicap group adapted to their profession, which is a good starting point.

Otherwise, you should work with an insurance broker to find a policy with features and prices that meet your specific needs.

Remember, disability is more likely than death

Apart estate planningDisability insurance is the biggest loophole in most people’s financial plan. You are more likely to become disabled in your working life than to die. This is true even if you are not working in a dangerous position.

Accidents happen not only at work but also at home – and illness can strike anyone. If you are comfortable purchasing life insurance, you should not hesitate to purchase disability insurance.

Chances are, this is the policy you’ll need if something goes wrong.

Don’t leave a gaping hole in your own otherwise complete financial situation. Use it as the sting you might need to stop procrastinating and start protecting your most important asset.

About Antoine L. Cassell

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