Disability insurance has been labeled as another "necessary evil." However, many don't even feel it's necessary. They just see it as evil.
So why do I own disability insurance?
It's simple. Just like life insurance, I am transferring the risk from me to someone, or something, else.
"What is the point of the helmet? If that chute doesn't open, the helmet is wearing you for protection."
So why are so many individuals uninsured or not covered adequately? Here are some frequent responses:
You're probably right. You don't need it. But would you want it? By not having it, you are putting your assets at risk because they would have to cushion the financial blow. And remember, there is no such thing as self-insurance. You are either insured or not. Getting insurance allows you to enjoy your wealth without risk.
Studies show that a 20-year-old worker has a 3-in-10 chance of becoming disabled before reaching retirement age. Why carry that risk?
Per our federal government website: "Social Security pays only for total disability. No benefits are payable for partial disability or for short-term disability."
So what does that mean?
Let's say you are a doctor and you injure your right hand. The injury prohibits you from doing surgeries. You can't get disability via Social Security because you are able to adjust to other occupations, like car sales. (Let's face it, the history of Social Security shows that it was a bad idea from the beginning.)
"Disability" under Social Security is based on your inability to work. So if you can work in any capacity, chances are you won't get disability benefits. Also, they use "other" factors to determine if you even qualify for coverage. Your chances of becoming disabled may be greater than your chances of getting coverage.
The purpose of your emergency fund is for emergencies. But when it comes to disability, that's of a different kind. This fund is for things like immediate car repairs, air conditioner breaks down, temporary unemployment, etc.
Remember, an emergency fund is supposed to keep you afloat for only a few months (i.e. 3 months, 6 months, 12 months). Long term disability can deplete your savings in one fail swoop. An emergency fund is calculated using your current monthly expenses. But even with short term disability, your expenses have the potential to skyrocket.
A company's long term group disability coverage usually only covers 50% of your earnings. Can you and your family live on half of your current income? And even if you could, would you really want to? Again, your expenses are likely to increase because of your disability.
These plans typically exclude bonuses and overtime pay. Also, the benefits are generally taxable. This means that your half salary can shrink even more.
If you are still unsure, get more information. In the beginning, I got a little education from my financial planner. He showed me the importance of having disability insurance. He also showed me how my company's coverage was insufficient. So, I suggest meeting with your financial planner or a licensed agent in order to get better educated on the benefits of these policies.
I bought my first private disability insurance policy at age 24. I bought it at a young age so my insurability wouldn't be an issue. Be sure to have a long wait period. Along with buying the policy at an early age, this will make the premiums more affordable.
When you sign for your policy, ensure that your definition of disability is your "own occupation." This means that you are covered if you are not able to perform substantial duties of your occupation because of your disability. It doesn't matter if you are able to adjust to another job.
As long as you keep paying the premiums, you own the policy. It's portable. One of the drawbacks with group LTD at your employer is that coverage ends once you leave or the policy is terminated. With a private policy, you are covered no matter what your employment situation is.
If you become disabled, your benefits will be paid to you tax free. Why? Because you paid for the premiums with after tax dollars. So, it doesn't matter what your tax bracket is. Uncle Sam can't cash in on your disability income.
Private disability insurance is very important to our financial plan. It protects us and our assets.
So the question is, do you have a helmet or a parachute when going through the risks of life? Or, are your assets wearing you for protection?
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