Disability Insurance To Protect Your Income
Today’s article is written for my friends and clients who are still working. Earning a living can be very gratifying, and for most people, it is also very necessary. What would happen if you could no longer work due to health problems or injuries? This particular financial catastrophe strikes far too many people each year. Perhaps you need income protection insurance. Most people know this as disability insurance, but I recently learned that people are more apt to purchase coverage if the agent refers to it as “income protection” as opposed to the dreaded “D” word. I still use the “D” word.
Trust me, I would rather be writing about making money and spending it on fabulous vacations, or at least about longevity insurance. However, a good financial plan, like a good sports team, requires the right combination of offense (investments) and defense (insurance). You are only truly financially secure if you can afford the lifestyle you’ve become accustomed to even if things do not go according to plan.
Why people are under-insured for disability:
I am well-aware that disability insurance ranks near the bottom of the list of things people want to spend money on. Besides it not providing any enjoyment, most people do not believe they really need the coverage. This is a perfect example of a behavioral bias (better than average effect) whereby people consistently underestimate the chance of bad things happening to them. The Council for Disability Awareness found that 64% of wage earners estimated their probability of becoming disabled for three months or more during their career at 2% or less. The reality is 27.5% of 22-year-old men (and 26.4% of women) will be disabled for some period of time prior to their Full Retirement Age (67).
Most young workers agree that they should have life insurance, even though the chance of a 22-year-old male dying prior to age 67 is only 8.5%. They are less likely to agree on the need for disability insurance even though the risk of becoming disabled is more than three times as high.
The financial impact of a disability can be huge and lead to all kinds of financial problems, including bankruptcy. In fact, over 50% of personal bankruptcies are caused by medical issues and related expenses.
A few other interesting facts about disabilities:
- The odds of becoming disabled are 84% lower for households with college degrees.
- Only 5% of disabling injuries and illnesses happen on the job, which means that 95% of such injuries and illnesses are not covered by workers’ compensation.
- 90% of disabilities are caused by illnesses, as opposed to injuries.
- The most likely people to have disability coverage are employees of large companies that offer a group plan, but only 33% of employees who are eligible opt to purchase the coverage.
One of the main principles of insurance is that you should transfer risks (to an insurance company) that are unlikely to occur but could be financially devastating. Disability certainly checks that box, yet it is one of the most under-insured risks. Do you or your loved ones need coverage? Let me know if I can help.