Try this exercise: Grab a pen and a piece of paper and write down every asset you have. You might list your 401(k), individual retirement account (IRA), checking and savings accounts — and maybe even some property, such as your home. If you're like most people, however, you'll forget to list one of the most important assets you have: your ability to earn an income.
If you're not counting this among your assets, you probably haven't considered disability income insurance either. Here's how a policy could help protect your ability to create the financial future you want.
Protection for Peace of Mind
If you haven't thought about disability income insurance yet, you're not alone. Less than half of workers carry some form of disability insurance, according to the most recent available data from the Bureau of Labor Statistics. But this may be a problem. Why? According to the Council for Disability Awareness, your chances of developing a disability may be more significant than you realize.
What would you do if an injury prevented you from working? Your income is one of your most significant assets because it not only helps you pay for your living expenses, but it also provides you with the means to save and invest in growing your wealth. Without it, you might not be able to do either of those things.
No one wants to think about this worst-case scenario, and it's not fun to plan on living with a disability in the future. However, if something were to happen and you had the right coverage, your insurance could help replace your income. Therefore, it could help protect your ability to pay your living expenses — and even reach some of your long-term goals.
Disability Income Insurance: The Ins & Outs
There are a few types of disability income insurance that could help protect your income. The two most significant distinctions are between short- and long-term disability:
- Short-term disability: This policy type provides you with a benefit faster but covers you for less time. You could start receiving short-term benefits within a short period of time, but those benefits will likely end a few months after you become disabled.
- Long-term disability: This policy type could provide you with coverage for much longer than short-term disability, but your coverage may not kick in until a few months after your disability occurs.
These policy types rarely overlap — and may even create a gap in coverage between when short-term disability coverage ends and your long-term disability benefits begin. If you don't want to carry both types of disability insurance, consider creating an emergency fund. This is a savings account in which you keep cash for unexpected expenses. If something happens to you and you can't work, you could use your emergency fund to pay for what you need until your long-term disability policy begins.
You may also want to consider what kind of disability policy you need. There are two primary types, including any occupation or own occupation:
- Own occupation: This policy type provides coverage if you can't do your job — not just any job. It may not provide long-term benefits if you can perform a different job than the one you were originally trained to do. For example, you might not be able to work in a factory after a disability, but you may be able to start a job doing office work.
- Any occupation: This policy type provides coverage if you are ever unable to work in any reasonable position.
The Uncertainties of Life & the Value of Disability Income Insurance
Are you still not convinced disability income insurance is worthwhile? Consider this: How much are you worth? That's not a rhetorical question, and you can tangibly estimate this.
Take your existing salary and multiply it by the number of years you plan to continue working: Let's imagine you are 30 years old and make an annual salary of $60,000. Retirement might be about 35 years into your future, but you live on about half of your salary. Using this equation, $30,000 multiplied by 35 is $1,050,000. It might then be worth asking if you have a plan to eventually come up with $1 million if you were to become disabled tomorrow.
This is why insurance to replace potential income can be so valuable. You might consider getting a quote for disability income insurance, which could show you that relative to what you want to protect (yourself and your income), such coverage could be worthwhile.