What is your most important asset? Stocks? Bonds? Real Estate? You may be surprised to hear that it is none of the above. Your biggest financial asset is…. You!
For almost everyone who is still working, their largest asset is their ability to produce an income. Most people don't think of their income in terms of an "asset" such as a car, cash in the bank, or equity in their home. Your income is generally the sole contributing support for all your other assets. Yet, a disability could occur at any moment due to illness or injury and your income could stop.
Thus you need to protect this valuable asset. One of the best ways to accomplish this is with an important type of insurance called disability income insurance. Disability income insurance is the protection against loss of income caused by a disability.
Where will you get the money you will need to help pay expenses that won't stop while you're not working, such as the mortgage or rent, food, clothing, utilities, children's school expenses, and bills that you normally pay from your income? A disability income insurance policy is designed to help you pay for these expenses while you are unable to work.
Do you already have disability insurance?
You may already be covered by disability insurance through your employer. This may be short-term coverage, long-term coverage, or both. Short-term coverage typically pays for a period of 13 to 26 weeks. Long-term coverage pays a monthly benefit that begins after the short-term period expires. If you have one type only, you may wish to consider adding a private policy for the type of coverage that your employer does not provide.
A large number of American workers don't have long-term disability insurance or believe that what they have is inadequate. There are two reasons why people don’t have long-term disability insurance:
#1: They believe it won't happen to them
You might think “bad things” only happen to other people. Well, to the other person, you are the other person.
Nearly 50% of all mortgage foreclosures in this country are caused by disability and only 2% are caused by death.1 When someone gets injured or becomes ill, they can't work. They lose their job and thus their income. The odds that you will suffer an injury that lasts 90 days or more before age 65 is an incredible 1 in 8.1
The reason why you are so likely to suffer a disability is exactly because you are so unlikely to die. Think about it. You hear about traffic accidents all the time, but very few fatalities. Airbags plus safer built cars mean you're less likely to die.
Modern medicine can do many things. Above all else, it can keep you alive. But that doesn't mean you'll never miss a day of work.
#2: They think it is too expensive
Without question, disability coverage is expensive. Annual premiums can be 3% to 5% of your annual salary. And that's why many people say “no” to disability insurance. Turn this argument around and it's the reason you need to buy disability insurance.
Group coverage is helpful, however, your employer may cancel the coverage, and if you leave your job, you typically lose the benefit.
One last point: It's important for you to pay the premium. Disability benefits will probably equal 60% of your pay. If your employer is paying the premium, you will pay taxes on the disability payments you receive which will reduce the overall benefit. If you paid the premium, then the benefit is tax free. Now you are close to replacing your after tax income.
If you would like to see how adding the cost of a disability income insurance product affects your retirement savings plan, please give Hengehold Capital Management a call – 513-598-5120 or via email at Casey@hengeholdcapital.com. Using our Retirement Confidence PlannerTM, we can run a few scenarios and let you see both the effect of adding this cost and not having this coverage if you or your spouse should become disabled and unable to work.
Date Posted: 03/31/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 23 states, and we’d love to help.
1. Disability Insurance Education - Disability Insurance Facts & Statistics