Find out how to insure your biggest asset: your future income.
Today’s topic is insuring your biggest asset.
A listener named Marv e-mailed me with this request:
I purchased a long-term disability insurance policy several years ago after a friend of mine fell off a ladder and was disabled for a long time. However, I had trouble finding objective advice on how to research an insurer and what kind of policy was appropriate for me. I'm sure I got the coverage I wanted, but I didn't have many choices to do adequate comparison shopping. To this day, I don't hear much about this topic.
You’re wise, Marv, to have gotten yourself disability insurance. It’s the most important insurance coverage to have. It’s also one of the most overlooked (see Money Girl's episode on insurance policies for other important insurance policies). And you’re right, it doesn’t seem to get much attention given how important it is.
Insuring Your Biggest Asset
Disability insurance insures what’s extremely likely to be your biggest asset: your future income. That’s the reason disability insurance is so important. It’s more important than life insurance, health insurance, and auto insurance.
If you depend on your income to pay your bills, you need disability insurance. And if you happen to be independently wealthy and don’t need to work, you can stop listening to this episode right now. You don’t need disability coverage.
The Risk of Disability Is Real
If you’re unable to work because of a disability, disability insurance pays you your income. The odds of becoming disabled are surprisingly high. According to the Social Security Administration, a 20-year-old worker has a 30% chance of becoming disabled before retirement age. (1) By way of comparison, the chances of a 20-year-old dying before age 65 are only 17%. (2) This is the reason that disability insurance is more important than life insurance. Because the odds of becoming disabled are so high, disability insurance is expensive. Premiums can be as much as 1 to 3% of your annual income.
And it’s not safe to count on Social Security covering you in the event that you become disabled and can’t work. Social Security provides disability benefits only if you’re unable to work for a year or more and can’t perform any job whatsoever. It’s also really common for disability claims for Social Security to be denied.
If you’re unable to work for a short period due to a disability, you can use your emergency fund to pay the bills. But if you’re out of commission for a longer period of time, disability insurance becomes vital.
How to Pick The Right Coverage
So here are a few tips on how to choose disability insurance that’s right for you:
First, find out if your employer offers disability insurance. You may discover that you’re already covered or can get the insurance at an affordable group rate. If your employer doesn’t offer disability coverage or if you’re self-employed, find out if any professional associations you belong to offer the coverage.
Second, if you’re given a choice of long-term or short-term disability coverage, go for long-term coverage. You’re much better equipped to deal with a short period without your income than a long one. Also, if you don’t already have an emergency fund equal to three-to-six months’ worth of living expenses, now’s the time to start saving one up.
Third, when choosing disability coverage, you’ll want to pick a plan that covers you through age 65, that cannot be cancelled by the insurer, and that adjusts with the cost of living.
Fourth, if you plan to become self-employed or leave your job to raise your kids, look into getting your own non-cancellable disability coverage before you leave your job. You need to earn an income to be eligible to purchase coverage, but once you have your own non-cancellable coverage, you don’t lose it if you quit your job.
What Is Uncle Sam’s Cut?
And here’s one last tip: Find out how much of your pay your disability benefit would replace if you were disabled. If you have disability coverage through your employer, it’s not unusual for the benefit to cover 66 2/3% of your pay. Be aware that if your employer pays for the insurance for you, you’ll have to pay tax on any disability benefits you receive, which will reduce how much you get even more. If this situation applies to you, it’s a good idea to look into getting your own supplemental disability policy to replace the amount of your benefit you would have to fork over to Uncle Sam. [[AdMiddle]
So here’s wishing you good health and an income that’s well protected.
Social Security Administration, Disability Benefits, Publication No. 05-10029, January 2006
Table 10. National Vital Statistics Report, Vol. 47, No. 28, December 13, 1999