What are the Benefits of Having Coverage?
Buying disability insurance is the most important financial decision you can make. That’s a pretty big claim, but it’s true. There are benefits to having a policy that are not available through any other type of insurance or investment product.
We will look at those benefits, as well as see how disability insurance protects not only your income during your working years, but your retirement lifestyle as well. It is my hope that after understanding how a properly structured policy works, and it’s benefits to you, you will invest the time to talk with an agent about a policy.
What is your most valuable asset?
Most people will tell you it is their home. In my area of the country, just outside of Washington DC, the median home value in December 2014, was just over $408,0001. I’ve had some clients tell me that their most valuable asset is their retirement savings. Vanguard reported that in 2014, the median account balance in retirement plans they managed was only $31,3962.
Unless you happen to have a priceless piece of art, or a rare antique Ferrari, your most valuable asset isn’t something you own. In fact, for just about everyone in their working years, the most valuable thing they have is our income - the ability to get up each day and earn a living. To put this in perspective, let’s consider someone who’s age 35, and has an annual income of $100,000. Let’s assume that they will get a 3% increase in their salary every year, and they will retire at age 65.
During this 30 year working career, this individual will generate $4,757,542 in income! Over 4.7 million dollars will flow through this person’s personal balance sheet during this time – much more than any possession that we own. Some of it will go to taxes, some to savings, some will repay debt, and some will be used for lifestyle, but it all must be earned for any of that to happen.
What happens if you can’t work, and how likely is that to happen?
If you have a sickness or injury that prevents you from working, that $4,757,542 asset that we have, and all that it makes possible, is in jeopardy. How much jeopardy depends on what kind of disability you have, and how quickly you recover.
The 1985 Commissioner's Individual Disability Table A, states that our 35 year old has 19% chance of having a disability longer than 90 days before age 65 if male; and 27 % chance if female. Furthermore, almost 35% of these male individuals were still disabled after 2 years, while almost 22% were still disabled after 5 years. The percentages for females were similar, at approximately 32% and 22%, respectively.
|Probability of a Disability lasting at least 90 days between the age shown in the table and age 65|
|Disability based on 1985 CIDA, 90-day elimination period, occupation class 1. Statistics vary by occupation|
Occupation Class 1: includes professional, technical and managerial occupations that are generally office duties only 1985 CIDA is the most current morbidity table for individual disability claim incidence adopted by most State Departments of Insurance
The Chances of Remaining Disabled
Not all disabilities are short term in nature.
|Probability of remaining disabled after meeting a 90-day elimination period|
|Age when disabled for at least 90 days||Male||Female|
|Percentage still disabled after 2 years||Percentage still disabled after 5 years||Percentage still disabled after 2 years||Percentage still disabled after 5 years|
|Disability based on 1985 CIDC, 90-day elimination period, occupation class 1. Statistics vary by occupation Occupation Class 1: includes professional, technical and managerial occupations that are generally office duties only 1985 CIDC is the most current morbidity table for individual disability claim incidence adopted by most State Departments of Insurance|
The chances of being out of work for an extended period of time are real, and so are the financial consequences.
Remember that median home value in the Washington DC area - $408,000? The monthly mortgage payment on that, assuming a 4% 30 year fixed mortgage, is almost $2,000. The maximum that most people can put in their 401k plan for 2016 is $18,000 per year, or $1,500 per month. Right there, is $3,500 of income that is needed that won’t be available if you can’t work.
We can add to this things like living expenses, such as utilities, groceries, education expenses, debt payments, etc. You can find a comprehensive list of these things in your checkbook! The bottom line is that it’s not uncommon for our $100,000/year income earner to have upwards of $5,000/month in expenses.
If the asset we’re trying to protect is large ($100,000/yr or $4,757,542 over 30 years); and the risk is significant (19% for males, 27% for females); and the impact is high by not being able to make monthly expenses without income, then the solution should be obvious. The solution here is to protect this income with a good quality own occupation disability insurance policy.
The benefit to having a good quality policy that pays you if you can’t work in your own occupation is that you can continue to make the mortgage or rent payment; continue to pay down debt; continue to fund retirement, and generally continue to live your life without financial interruption.
What happens in retirement?
The benefits of having disability insurance to protect your income while you’re in your working years seem pretty obvious – pay for all the stuff you would have paid for with your income. There’s one major benefit to having coverage that isn’t obvious, however, and it happens in retirement.
If our hypothetical 35 year old happens to be one of the unfortunate 27% of women who suffer a disability before age 65, and then falls into that 22% who are still disabled after 5 years, having enough to retire on becomes very difficult.
Let’s assume this person is putting away the current maximum of $18,000 per year into her 401k, and she’s earning an 8% rate of return on her savings. She increases this savings amount by 3% each year.
If she does this every year until her age 65, she ends up with a little over $2,900,000 at age 65. Based on this level of savings, she’s able to take out $150,000 per year, increase that amount by 3% per year to keep pace with inflation, and not run out of money in retirement.
Now, let’s change the scenario, so that instead of working throughout her career, and saving money regularly into her retirement plan, she becomes disabled from age 45-49. Just 5 years of not being able to save money for retirement has a substantial impact on her savings.
You can see that now, at age 65, she has a little over $1,650,000 saved for retirement. If we take out the same $150,000 per year, inflate it at 3%, just as we did in the scenario above where she wasn’t disabled those 5 short years, you can see she runs out of money by age 81 – just 16 years after retiring.
The solution? Buy a disability insurance policy that protects your retirement contributions, as well as your income. If structured properly, a policy can provide income to meet existing living expenses, but also continue retirement funding, so that you don’t run out of money when you need it. Even with a relatively short disability that lasted 5 years, being able to retire on time, and not run out of money depends on protecting your ability to save regularly.
The benefits of protecting your income with a personal disability insurance policy are many. It will allow you the comfort of knowing that if something happens that prevents you from working, your lifestyle will be maintained. You will be able to make the mortgage or rent payment, keep the kids in school, and put food on the table. Daily living expenses will be met.
It also benefits you in retirement by continuing the savings you’re making while working. Even if you have a policy currently that provides coverage for living expenses, you should ask your agent about adding protection for retirement. Don’t protect today without thinking about tomorrow.
This is the only product that can protect what you spent years building. Without it, finances and futures can be erased in a matter of months. Whether or not you buy one, is truly the most important financial decision you can make!