Why Don’t You Have Disability Insurance?

I was talking with some folks in my office about why so many clients don’t have Disability Income Insurance.  We were going through various contacts, clients, etc. and trying to determine some of the reasons we’ve heard, and some reasons we’ve inferred.

First, I have to tell you what Disability Insurance does.  If you have DI, and you are too injured or sick to work for a long period of time, DI pays you the benefit amount.

Your ability to earn income is probably your greatest asset, and yet most people don’t cover it.  If you’re in your 20’s or 30’s, you are 8 times more likely to become disabled during your working career, than to die.  For the last 10 years, 93% of home foreclosures in this country were due to a long-term disability leading to an inability to work.

There are obviously different forms of DI – Short term, Long term, Retirement plan, Catastrophic, Partial, etc.  These are all additions or riders to be discussed with your financial advisor based on your situation.  Now, here are some of the reasons we came up with…where do you fit in?

1.  I have some Disability Insurance through work. This is great.  Fantastic that your employer is paying for this benefit.  There are some things you need to find out about this plan.

• What does it cover?  Most employer sponsored plans cover only 60% of your salary.  They do not cover bonuses or commissions.
• What is the waiting or elimination period?  This is the time you must be disabled before you start receiving benefits.
• How long will it pay benefits?  Most plans are 12-36 months.

Once you have those questions answered, you have to look at some of the numbers.  If you have a plan from your employer and you need the benefit, the benefit will be taxed as ordinary income.  Can you live on 70% of 60% of your salary?  If so, how long can you live on that amount?  What if you’re disabled for 10 years or even longer?

Another thing to remember about most employer sponsored DI plans is that, if you can do any type of work, even if it means a huge drop in pay, you no longer receive the benefit.  If you’re making $150,000 per year, and due to an injury, you can now only perform a job in which you make $60,000 a year, the benefit stops.

You certainly should not forego the plan graciously purchased by your employee, but you should definitely augment it with one of your own.  You can tailor a plan to your needs.

2.  Disability Plans are so expensive. This is a common one.  My question is…expensive compared to what?  If you’re 35 years old and you make $100,000 per year, and you have 30 more good working years, and we assume you’re never going to get a raise, you’ll make $3 million.  Now, if you are too sick or injured to work today and can never go back to work, was your DI premium too expensive?

OK…that might be a harsh example.  What if you’re sick for 3 years (83% of DI claims are for illness rather than injury), and you lose out on $300,000?  What if you also had a DI policy that, in addition to paying the benefit to you, would make regular payments to your retirement account?  If you were only putting in $5000 per year, that is $15,000.  However, imagine how much you would have lost had you not had that $15,000 invested for the next 30 years.  At 7% interest that is another $115,000.  Again, was the DI policy too expensive?

Part of a financial plan is providing yourself with the adequate protection to reach your goals even if unfortunate and unforseen things happen.  Your financial plan should not be a hope, it should be a path.

3.  I didn’t know anything about it. This reason is completely my fault.  I’m not doing a good enough job of informing my contacts and clients about the need for Disability Income Insurance.  I know I’m not a pushy person…this blog is about as pushy as I get in terms of talking about the needs for insurance.  I need to do a better job of helping my clients with their financial plans, and part of that is educating them as to all the scenarios, and all the vehicles available to protect their assets, as well as grow their wealth.

Everyone I know needs to be aware of the benefits of Disability Income insurance.  If you know me, and you don’t have DI, please ask.  If you think you might have it through work, talk to me and we’ll figure out if it would be enough.  If you don’t know me, please ask your financial advisor about DI.  There are so many ways to fit it into your budget, and make sure you and your family are protected.