3 people who absolutely must have disability insurance, according to a financial planner

Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.

  • As a financial planner, I'm always surprised when clients don't list their income as one of their most valuable assets. 
  • If you or your household depend on your income, it's a key asset — and you should protect it with disability insurance.
  • You should also get disability insurance if you work in a high-risk profession, and if you are self-employed or a contractor.
  • Policygenius can help you compare disability insurance policies to find the right coverage for you, at the right price »

When sitting down with clients, I often ask them to tell me about their most cherished asset. 

Some individuals will list sentimental things, such as family, friends, or time. Others might list tangible possessions, like a family heirloom or financial assets.

Very rarely does anyone say "my income," which is shocking when you consider your earning power can be a multi-million dollar asset.

The power of your earning ability, and the importance of protecting it with disability insurance

Let's assume a 30-year-old worker earns the average American income of $45,000 per year. If this individual earns a 2% raise each year they work, their base annual salary provides the potential to amass over $2.4 million by their retirement age of 67.

That's the power your income has, and if you earn more than the average, the value of that asset is even greater. 

This is something that many people fail to recognize, much less protect against the loss of with a disability insurance policy.

While many people understand the need for life insurance, you may actually have a greater risk of being hurt or sick than dying prematurely. Indeed, one in four of today's 20 year olds will become disabled before reaching retirement age, and 96.5% of disability insurance claims are from illnesses (such as cancer, heart-related conditions, and mental health), not injury. About 95% of accidents and illnesses are not work-related, meaning workers' compensation will not cover them.  

If you're wondering about disability insurance, it might be a necessary piece of the puzzle if any of the following three scenarios applies to you and your life.

Your household depends on your income

Whether you're single, the breadwinner, or a one-income household, your household needs your income not only to manage expenses but also to keep pace with savings goals. While you may already have group long-term disability coverage through your employer, that may not completely cover your needs.

These policies typically cover 60% of your income. But group benefits usually only cover base salaries and do not include bonuses or commissions. Make sure you understand what forms of compensation your benefits protect. 

In addition, group disability benefits paid by your employer would be taxable if you ever received them. This lowers your true coverage amount, since it introduces an expense along with the benefit.

So, for example, say you made $200,000 per year — but only $75,000 of that compensation is salary — and your group policy covers 60% of base pay. Your disability insurance may only provide a benefit of $45,000 per year. Another 12% to 22% of that would be taken out for taxes.

Keep in mind, too, that you can't take a group disability insurance policy with you if you switch jobs every few years (something that 64% of professionals believe is a good thing for their careers). Leaving a job also means leaving your benefits, which could mean failing to protect against the risk of being sick or injured. 

It might be worth looking into a private or group policy you buy yourself (and pay for with after-tax dollars) so you can ensure you could still afford your family's current lifestyle if you were unable to work.

You're self-employed or a contractor

The need to protect your ability to earn an income doesn't change if you work for yourself rather than an employer — and in fact, it might be even more critical for you to get a disability insurance policy if you're self-employed as you don't have a company-provided group policy to fall back on.

You should shop around and consider purchasing a private long-term disability insurance policy. While you're at it, you may also need to shop for overhead expense insurance, too.

Disability insurance covers your income. Overhead expense insurance, meanwhile, provides a benefit the business can use to pay for fixed expenses, like employee salaries, business-related loans, rent or mortgages, and utilities, during the owner's recovery.

This policy's overarching goal is to keep the business healthy long enough for you to get back on your feet, find an alternative arrangement, or develop an exit strategy if you could no longer fully run the business. The benefit periods for these policies are short in nature and typically last 12 to 24 months. 

You work in a high-risk profession

When it comes to sustaining illness or injury, some professions pose greater risks than others. Some are obvious, like law enforcement, construction, or machine operation. 

But if your discipline depends on the working function of one body part (i.e. a surgeon and their hands), then disability insurance should be high on your priority list as well. Remember to account for mental wear-and-tear, too; a big mistake people make is assuming that disability insurance is only for physical issues. 

Disability insurance is a universal need for working professionals who need to earn an income to pay bills and add to savings. No matter how much or little you make, your earning power needs to be protected.

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

Source: Read Full Article