Written by: Corey Janoff
This post was originally published on our previous blog website on April 18, 2017 and has since not been revised and/or updated.
When most people are asked what their most valuable asset is, a common response will be, “My house!” Or, if they don’t have a house, “My car!” Or maybe something else such as a Nolan Ryan rookie card. While these are all good answers, all of these people are overlooking their most valuable asset.
For the majority of people, their most valuable asset by far is their ability to work and earn an income. A 25-year-old making $50,000 per year will earn over $3.9 million over the course of their career (assuming they work until 65 with a 3% annual wage increase to adjust for inflation). A 35-year-old making $200,000 per year will earn over $15 million by the time they retire at age 65. For most people, they will never own an asset nearly as valuable as their career earnings.
What Happens if You Couldn’t Earn Income Anymore?
For most people, if their income stops, that puts them in a financial bind. According to a 2012 survey by Life Happens (a non-profit organization for disability and life insurance awareness), 50% of Americans couldn’t meet expenses after just one month without a paycheck. If you have done a good job of building up an emergency reserve equal to 3-6 months of living expenses, you can survive for a little while without income. But if you are out of work for longer than a few months and you have used up all of your savings, then what? What if you are unable to every work in your occupation again due to an injury or illness?
Will family help you out? If you are fortunate to have family members that are financially capable of supporting you, that is fantastic. But how long will they be able to support you for? Do you really want to put that burden on your family?
What are the Chances I will Actually Get Disabled?
Everybody knows someone who is disabled. And I’m not talking about people born that way. Everyone knows someone who was once an able-bodied individual and then incurred or developed an injury or illness that hindered their ability to work. Most people feel sympathy for that individual, but they consider that person to be extremely unlucky and don’t think something like that will ever happen to them.
Well, becoming disabled is probably more likely than you think. A disability is anything health related that limits your ability to do your job. According to the Council for Disability Awareness, a typical healthy 35-year-old that works an office job has more than a 20% chance of becoming disabled for greater than 90 days during their working career. And there is a 38% chance that the disability will last for five years or more. If you are not in great health, or you use tobacco, those odds increase.
Most people assume it won’t happen do them. Most people don’t expect their house to burn down, but they purchase homeowners insurance anyways, just in case. So why not purchase an income protection policy?
A disability could be of varying degrees. There are the extreme scenarios, such as a college buddy of mine that became paralyzed in a surfing accident, but those are rare. It is more likely that an illness will hinder your ability to perform your job at full capacity.
Do you know anyone with multiple sclerosis (MS)? Parkinson’s Disease? How about arthritis, back pain, joint pain, or other musculoskeletal disorders? Odds are, they have difficulty doing their job, or are unable to work full-time. Everyone knows someone who has battled cancer. Did that individual continue to work full-time while they were going through chemotherapy? Or did they have to take some time off during treatment cycles? How about mental health issues? Do you know someone with depression or anxiety? Maybe someone who lost a loved one, had difficulty coping, and it affected their job? I could go on, but you get the idea. There is a plethora of things that can impair people’s ability to work at full capacity, or prevent them from working altogether.
Won’t the Government Take Care of Me?
Do you really want to rely on the government to support you if you are sick or injured? The average Social Security Disability Benefit received in 2016 was $1,166/month. And in order to qualify for Social Security disability benefits, the disability has to prevent you from performing any gainful occupation and be expected to last at least 12 months. So you have to be pretty darn disabled to qualify. And if you are that disabled, $1,166/month probably won’t even cover your out-of-pocket medical bills, let alone regular living expenses. It also takes a long time to get approved for a claim. I know one gal who has been trying for two years to get her disability approved.
Doesn’t My Employer Provide Disability Insurance?
Some employers do, but not all. If you are fortunate enough to have employer-provided disability insurance to replace your income if you cannot work anymore, that is great news. I would encourage you to get a copy of the policy from HR and read through it to make sure you understand the details of the coverage to see if it is adequate for you.
Some employer-provided disability insurance plans are better than others. I have reviewed many benefits packages for clients and found some less-than-stellar disability plans. Some employer based policies have a cap on monthly benefits, such as $3,000/month. Some plans only pay for a few years. Some plans will only pay if you are unable to work in any occupation – So if an injury or illness prevents you from doing your job, but you are capable of bagging groceries at Wal-Mart or licking stamps at the post office, you aren’t getting paid a dime from your company insurance policy.
Even if you have a good plan at work, it can be prudent to secure some supplemental coverage outside of work (assuming you can qualify for coverage based on health history and medical underwriting). Employers can change their benefits package or cancel their disability benefits altogether. Also, if you switch jobs in the future and become self-employed or move to an employer without disability benefits, you are on your own.
My Employer’s Coverage is Capped, but I Could Reduce my Expensed if I Get Disabled
That sounds great on the surface, but how easy will it be to reduce expenses? Do you plan to move into a home that is less expensive? Buy more spaghetti and less steak at the grocery store? Pull the kids out of sports and other activities? No more vacations?
Keep in mind, when you are disabled, expenses will probably increase. Think about the out-of-pocket medical expenses. If it is a really debilitating disability, you may have some assisted living expenses. Also, if you are totally disabled, you probably are no longer employed, which means you lose your health insurance at work. And out-of-pocket health insurance for a disabled individual can be pretty pricey.
Lastly, most disability plans stop paying around age 65, so unless you plan on dying by then, you still need to save for retirement.
Protecting Your Income is Important
Most people don’t think twice about insuring their home or their car. Many people don’t think twice about insuring their cell phone or laptop computer! Surprisingly, most people do not insure their incomes. So if they become sick or injured and are unable to do their job, that’s it. No more income.
Ask yourself, “What if that happened to me?” How would you survive without income? What changes would you have to make in your lifestyle? How would that affect your spouse, children, parents, or siblings? Kind of depressing to think about.
If you rely on your income to pay your bills, put food on the table, and do the things you enjoy, then you need to protect your income. Disability insurance will do that for you.
And don’t wait to get it. The ability to secure a disability insurance policy is based on health. And the cost is based on age and health. So it’s easier to qualify for when you are younger and healthier. It is less expensive when you are younger and healthier. Rarely do people get younger and healthier over time. So sooner rather than later is the time to get a policy that protects your income if you are unable to work.
Readers, do you know anyone who is or was disabled? How did they cope? Did they have a disability insurance policy? Send us your thoughts or questions in the Contact Us section.
