Insure Your Most Valuable Asset – Part One

If asked, most people would say their home or possibly their 401k was their most valuable asset.

The truth is that if they are still a ways away from financial independence. Their future income is far and away their most valuable asset.

As a Certified Financial Planner, a big part of my job is to create a plan for clients to accomplish their life dreams and goals. To align their money with their priorities and that’s all well and good with one HUGE assumption: That the main breadwinner(s) income will always be there to provide for the family and help fund the investments that align with each financial goal.

We have health/medical insurance to pay the doctors or hospitals, but what do we have to take the place of our income should it cease due to a disability?

Disability Statistics and Facts

If you literally had a Golden Goose in your bedroom that spit out your paycheck every month, wouldn’t you want to insure that if it broke down, you would get that same income if you could?

If your salary is $75,000/year and you are 35 years old that means your total expected income by age 65 is over $2,000,000!  With reasonable wage hikes assumptions it is probably over $3,000,000!

Yes, your income is your most valuable asset by a mile.

What would happen to your financial plan if you or your spouse were actually disabled?

For most people not only would your plan assets stop growing, but they would probably shrink as you took from savings to help pay your bills.

The solution is to insure that your family gets a paycheck if you are disabled. It’s called disability income insurance and you may have it offered through your employer or you may want to get some independently.

If offered through your employer there are a few things to make sure you understand in their insurance contract fine print:

1. The definition of disability – most employer/group policies insure you in your own occupation for ONLY two year, and after that they only pay the claim if you are unable to do any work that you could be trained to do. So you’d have to be in very bad shape to collect after 2 years.
2. What is the benefit based on? The benefit is often given as a percent of salary rather than total compensation. So that people that receive large bonuses don’t have those insured.
3. If on claim, does the benefit go up every year with inflation? This is important for a long-term disability.
4. Who pays for the insurance? If your employer pays the premium and you go on claim, the benefit is taxable like a salary to you. If you are paying the premium the benefit would be income tax-free.
5. How long is the waiting period before you actually receive an income replacement check? Better have an emergency found while you wait.
6. Does the policy pay a benefit is you are partially disabled? Maybe you can’t stand or drive all day and reduced hours cut your pay by 40%.  In that case can you get 40% of the benefit paid to you? Usually not with group policies.
7. Lastly the policy benefit is a percentage of salary, often around 60%. Be aware of this and especially if the employer is paying the premium (taxable benefit). You may want to supplement this on your own.

Employer provided policies are nice and much nicer than going without a parachute should you become disabled. They are a very inexpensive benefit for your employer, mostly because of the restricted (2 year own occupation) benefit. They are also, not portable if you change employers.

All that being said, you may want to supplement your group policy by purchasing your own individual portable policy. You can customize most of the factors I mentioned above: waiting period, length of benefit and inflation protection. The amount of income insurance you can purchase is limited. As insurance companies want you to have an incentive to get back to work. This is the case whether you are supplementing your employer policy or if you are buying your own stand-alone policy. Many individual policies do pay partial benefits if you lose more than 20% of your income. But are not fully disabled and are still working. You can also choose how much benefit up to the maximum the insurance company will allow based on your total income including bonuses.

What does a disability income policy cost?

Of course it varies and you have to be medically underwritten. My experience is roughly 2% of the insured income.

Given the exact same job description, which salary package would you choose:

In this illustration the cost of the disability income insurance is 2% or $2,000 per year.

Is the peace of mind worth it?

Remember you are really insuring your lifetime future income and as we looked at earlier that number is often in the millions. You are truly a Golden Goose!