Your Greatest Asset
Most people don’t realize that their greatest asset is not their car, home or savings/retirement account. It is their ability to work…to earn an income. Without your income how will you pay your bills and save for the future? Disability Insurance, along with an emergency fund, helps minimize the impact a disability has on you and your family. It provides you important financial benefits at a period when your income is reduced or completely eliminated.
The statistics related to disability and the effect it has on families is devastating. The Senate Finance Committee reports that 70% of people between the ages of 35 and 65 will become disabled for three months or longer and 90% will occur “off the job”. In addition 50% of foreclosures and 17% of bankruptcies are due to disability. With 43% of US families spending more than they earn and 72% not having enough savings to meet short term emergencies, the need for disability protection is crucial.
Why Do I Need Disability Insurance?
QUESTION: Jenna on Facebook asks what disability insurance is and why a young, healthy married couple would need it. Dave explains.
ANSWER: Disability insurance pays you an income in the event that you become disabled. If you are 30 years old, you are 12 times more likely to become disabled than to die by age 65, and yet you would never consider walking around without life insurance. If your husband is hit in a car wreck by an uninsured drunk driver and loses his ability to work due to injuries and there’s no one to pay him—no one to sue, then you’re stuck because he can’t work. You’re obviously working, but you lose his income.
If you work outside the home and the same thing happened to you, your family would lose your income. You’ve got to make sure your income is replaced in the event of disability. You can get between 50% and 75% of your pay in disability coverage, and you only want long-term disability. Short-term is not needed. Short-term is your emergency fund, and you’re out of debt and you have control. That’s not the problem. The problem is when he’s a paraplegic and in a wheelchair from age 26 to 65. That creates a financial hardship that’s unbelievable.
You can’t get much more insurance than 50% to 75% of your income. That’s about what your take-home pay after taxes is anyway. It’s not too far off of replacing your income. If you do not have an earned income, then you wouldn’t qualify for disability insurance. There are also income caps, because they don’t want to insure a huge income. Disability insurance is also based as much on what you do for a living as how healthy you are. If you’re in a blue collar situation where you use your hands every day, you’re at much higher risk than if you fly a desk, so you’ll have a much higher rate.
You’re much better off to buy your disability insurance through your work or some kind of association if you can get it that way. You also need to check if it has some kind of own-occupation clause. That means if you can’t do your occupation, by definition, you are disabled. You also need to know the elimination period. The elimination period is the time between your doctor declaring you disabled and you starting to receive payments. The longer the elimination period—it’s like a deductible—the smaller the premium. For instance, a 180-day policy will be much cheaper than a 90-day policy. Some of the saddest financial situations I’ve seen are disabilities—not death.
QUESTION: Bill asks if he should have long-term disability and, if yes, how much for how long.
ANSWER: Yes, you should have long-term disability and carry it your entire life. You should carry all you can get – which is usually 60% – 70% of your income. Don’t buy disability insurance pre-tax. If you get it through work, pre-tax, then your disability income is taxable, and you don’t want that.