What is your most important financial asset? Your portfolio? Stocks? Bonds? Real Estate? You may be surprised to hear that it is none of the above. The biggest financial asset in your portfolio is you.
For almost everyone who is still working, your largest asset is your ability to produce an income. Most people don't think of their income in terms of an "asset.” An individual's income is generally the sole contributing support for all their other assets. Yet a disability could occur at any moment due to illness or injury and your income could stop.
Most of us rarely consider the fact that we could become disabled. Yet being unable to work could result from any number of circumstances. Cancer, heart disease, worsening medical conditions like diabetes, injuries caused by an accident, and behavioral health illnesses are just a few examples of common situations that can lead to significant time out of work.
Why you might need disability income insurance
Consider what might happen if you suffered an injury or illness and couldn't work for days, months, or even years. If you're single, do you have other means of support? If you're married, you may be able to rely on your spouse for income, but you probably also have many financial obligations, such as supporting your children and paying your mortgage. Could you meet those obligations using only your spouse's income? What if you're self-employed or own a business? Can your business continue to provide you with needed income if you're not able to actively participate?
But how much disability insurance should you have? The answer typically depends on three factors:
- How much income you'll need if you become disabled
- How much money you can afford to spend on premiums
- How much insurance you'll be able to purchase under the insurance company's guidelines
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.
You also need to understand how you will be taxed when you start receiving the income from your insurance plan. The income you receive from disability income insurance may or may not be taxable. The taxability of disability income insurance benefits depends on what type of benefits you receive, whether the premiums were paid with pretax or after-tax dollars, and who paid the premiums (you or your employer). Talk with your HCM advisor to help you sort through these tax related questions.
How much insurance should you buy?
Once you've decided that you need to buy more disability income insurance, you should aim to cover a significant portion of the income that you will lose if you become disabled. The insurance company determines the maximum amount of disability income insurance you can purchase based on your income, health, age, and the amount of other disability benefits to which you're entitled.
If you would like to see how adding the cost of a disability insurance product affects your retirement savings plan, please call us. Using our Retirement Confidence PlannerTM, we can run a few scenarios and let you visually see both the effect of adding this cost and then, not having this coverage if you or your spouse should become disabled and unable to work.
If you’d like to explore this strategy further, please contact Casey at [email protected] or 513-598-5120.
Date Posted: 05/05/2016 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 at 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.