It would be hard these days to find anyone that owns a car, home, or business, that doesn’t have insurance on it. After all, these assets are extremely valuable, and the owner would be at a substantial financial loss if something were to happen to them. Surprisingly though, a large number of people fail to insure their most valuable asset: their own earnings potential.
Consider this: If someone is currently working making $75,000 per year and suddenly become disabled and unable to work for the next 20 years, they would be losing $1,500,000 in lost income over that time, not including inflation! That is a substantial risk to any family, no matter their current financial situation. While it may seem unlikely that you’ll become disabled, the Social Security Administration cites that “ Just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67”.
Luckily, the Social Security Administration provides some form of disability benefits, but it is hardly enough to replace one’s lost income earning potential. As of October 13, 2015, the average Social Security disability monthly benefit was just $1,165. In addition, there is a complex process to qualify for benefits, and applicants must be diagnosed with a medical condition that is expected to prevent them from working for at least 12 months.
Because of the low payouts, and complicated qualification process, private insurance companies now offer a wide variety of disability insurance policies to choose from. The most common form is an employer sponsored group disability plan, which will cover all qualified employees. It’s extremely affordable, but can also be very limited in the benefits it pays out. Typically, they will replace 50-80% of lost income, and may have caps on how much can be paid out per year, or a maximum timeframe that benefits can be collected on, such as 2 or 5 years. Increasingly, this is becoming a benefit that many employers are no longer providing. The Social Security Administration noted that “69% of the private sector workforce has no long-term disability insurance”.
If a group disability policy isn’t available, or doesn’t provide enough coverage, there are individual long-term disability policies that can be purchased. While typically being the most expensive, they will also be the most flexible, allowing the purchaser to select the amount and length of benefits. These policies can stand alone, or can be purchased as a supplement to provide additional benefits on top of one’s current group coverage. As you consider insuring your greatest assets in life, don’t forget to insure your own earning potential. Becoming disabled can prove financially disastrous for many people, and is often a large gap in a family’s overall financial planning.