Disability Insurance Should be a Part of Your Financial Plan
The purpose of disability Insurance is protect your future earning potential. If you are a significant financial provider for your family, disability insurance should be something that you consider.
The reason why most don't get disability insurance is that it is extremely expensive. Insurance companies charge a lot for this vital insurance because of one very good reason. You are VERY likely to use it at some point in your life.
What is Disability Insurance
Disability insurance provides an income for yourself and your family in the event you are unable to work due to a qualifying disability. Similar to life insurance, disability insurance is there to insure against the risk that you are not able to provide for your family. Unlike life insurance, with disability insurance you are still alive to 'enjoy' it.
Why you need disability insurance
Think about the last time you were too ill to work. Not when you called in sick because you needed a "me day," but when you truly could not go into work. On that day, you had a disability that kept you from working.
Missing a few days of work probably won't be enough to cause you a problem at your job. But what if those few days turn into weeks or months of a disability? We've already identified that you have been disabled before and you're likely to be disabled from work again in the future. The only question is how long will you be disabled and how will that affect your employment.
1. The chances of being disabled are high
The likelihood of you being disabled is actually quite high. According to Social Security statistics, one out of every four 20-year-olds will become disabled before they retire. If you are female in good health and a normal lifestyle, there's a 24% chance that you will become disabled for three months or longer during your working career. For the average man, the chances are 21% of becoming disabled for three months or longer.
Three months may not seem like a lot, since you should have an emergency fund that woudl cover that amount of unemployment. The problem is, three months is the minimum length for being out of work. If you do become disabled, you have a 38% of being out of work for five years or longer due to the disability. I don't know about you, but my emergency fund is not deep enough to pay for me being out of work for five years or more.
2. Your future earnings are your biggest asset
Another reason to carry disability insurance is that it protects your biggest asset, your future wages. People commonly say that your home is your biggest asset. The truth is, the value of your home pales in comparison to the value of all your future paychecks.
If you own a $200,000 house, you would be financially devastated if a fire, hurricane, or earthquake came along and destroyed the house. You'd still have the $200,000 mortgage, but all you have is empty land and a pile of rubble to show for it. Financially responsible people carry insurance on their home to replace or rebuild the asset if something were to happen. You may even have insurance on your $600 iPhone, just in case your brand-new phone gets destroyed.
So what is the value of your current and future employment? If you are 35 years old, you have another 30 years worth of earning yet to come. Take your annual salary and multiply by 30 and you'll start to get an idea how large this asset is.
Take a person who earns $50,000 per year. The value of their future earnings is well over $1.5 million. The actual number is much higher than $50k x 30 years, because they'll get raises, promotions, and adjustments for inflation along the way.
Imagine you had a house or painting or anything worth $1.5 million. Now imagine you knew there was a 25% chance of it being damaged or taken away. Would you insure the asset?
3. You need your disability insurance
Unlike life insurance, you don't have to be dead to receive the benefit. Life insurance is there for those you leave behind, but disability insurance is there for you. If you are ever in a position where you can't work, you'll want to have disability insurance to make sure you still can pay for the roof over you head and food in your stomach.
Many people assume they will be able to use Social Security Disability if they are ever disabled, but there are a number of drawbacks to this strategy. First, Social Security Disability benefits are notoriously difficult to get. Second, even if you do get benefits you will likely have to wait a months before the check comes. The SSA has no deadline on when they need to decide. According to the legal resource NOLO, benefits can begin as quickly as 3-4 months, or it could take longer than four years to get your first check if you have to go through the entire appeals process.
Finally, when you use Social Security Disability benefits, they are subtracted from your retirement benefits. Effectively you are trading one financial difficulty for another bigger financial difficulty down the road.
4. Your family needs your disability insurance
Your family will be far more affected by you having a disability then by your premature death. It's harsh to say, but honestly your family would be better off if you die than if you were just disabled.
If you were to die, yes, your family would miss you and there would be both emotional and financial difficulty. But your family would be able to move on. Depending on the severity of the disability, not only would your family have to live without your income, but they may also have to take care of you.
Medical bills, home nursing expenses, physical therapy, and other expenses could place a dramatic drain on your family's resources at the very same time that your household income is cut. In addition to that, with you being disabled, your spouse would be unable to move on and possibly be able to find another partner to help them manage the household.
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