When you think about your most valuable asset, your home, car or jewelry might come to mind. Losing one of these items could be financially and emotionally devastating. So you've probably taken every precaution necessary to protect it, such as buying insurance to reduce your risk exposure. However, you own something that's probably more valuable than any of these possessions, and you might have never considered protecting it- your future earnings from work.
Consider, for example, a 35 year-old earning $125,000 per year- the future value of her lifetime income stream is $3,750,000, assuming she works until age 65. Or what about a doctor towards the end of his career, earning $500,000 per year. The future value of his remaining income is $2,500,000 if he works for another five years. Simply put, your ability to earn income years into the future is often incredibly valuable.
The odds your house burning down are fairly low, but the odds of you becoming disabled at some point during your career are fairly high comparatively speaking. According to the Council for Disability Awareness (CDA), a 20 year-old today has just over a 1 in 4 chance of becoming disabled before they retire. An average disability will last for 34.6 months according to the CDA. That’s over two and a half years without income! Would your emergency fund last for 34 months? Or would you need to make some drastic choices about how to cover your expenses?
Most assume that accidents are the major source of long-term disabilities . But that's not the case. According to Employee Benefits News, the most common reason for a long-term disability is cancer, followed by back disorders, injuries, and heart issues.
How can you protect yourself should you become disabled? A good place to start is with your workplace benefits. Many employers offer optional group long-term disability coverage. However, you should research exactly what the policy covers and for how long. What definition of disability does the policy use and for what time periods? The broadest definition, and the best coverage, uses an “own occupation” definition meaning you are considered disabled if you cannot perform the functions of your own occupation. The worst definition, and the one used by Social Security, is “any occupation.” Which means that if you can do any paid work, then you are not considered disabled. Many of the workplace disability policies that I review for clients offer suboptimal protections and/or limited benefits periods.
If your benefits at work are not adequate, consider obtaining an individual policy. You should be able to choose an individual policy that uses the “own occupation” definition of disability and you should understand what protections you have from the insurance company canceling the policy. An additional benefit of a private policy is that the policy will be portable, meaning that it's not tied to your job, although some group policies can be converted to individual policies when you leave your employer. Private policies are not cheap. Expect to pay between 1% and 3% of your total annual income. If you are a member of a professional association, you should check to see if they offer group disability policies. These policies are sometimes less expensive but you'll still need to do your own due diligence on coverage amounts, terms, and conditions.
Often in our financial lives, the greatest risks we are exposed to are the ones that we are not aware of. It's much easier to see the worth and risks in owning a physical, valuable asset. It is harder to see when it's something as common as our income. I would urge you to take as much care in protecting your future income as you would any other asset that you own.
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment advice. If you have any questions regarding this Blog Post, please contact us.