Most people insure everything but their income

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For most people, the ability to earn an income is their most important financial asset. If this is taken away, they will not be able to sustain their standard of living or repay their debts. While a person’s most important asset is their ability to earn an income, very few people have their income properly insured.

The most common concern about disability insurance (DI) is the cost. People don’t like paying for something that they might not use. This hesitance has always confused me. People pay for house insurance, car insurance and even trip cancellation insurance, but they won’t pay for disability insurance.

People who work for a company or institution may have group disability coverage through their employer. However, many people are self-employed, don’t have a group plan or don’t have a group plan that provides enough disability insurance. If you are one of these people and suffer from an illness that causes a prolonged disability, chances are around one in eight, you could easily lose everything that you’ve worked for.

Non-cancelable DI

Some disability plans can be cancelled by the insurer at any time. Make sure you avoid these. You want to make sure that the disability insurance policy you sign is a non-cancelable disability plan. Under this type of plan, as long as you are paying your premium the insurance company must renew your plan.

A non-cancelable disability insurance policy will pay out a monthly benefit if you suffer a disability. The payments do not start right away after the insured suffers a disability. Before payments are issued, the insured must satisfy the waiting period. The waiting period is the period of time between when you are classified as disabled and when you will begin to receive your monthly benefit. Waiting periods are usually 31, 61, 91 or 121 days and this can be adjusted when you are getting quotes on your policy. If you are concerned about cost, an easy way to lower your monthly premium is to extend your waiting period. A 91 day waiting period is typically the best bang for your buck.

How much is enough?

It is important to note that most insurers won’t cover 100% of your monthly income. The most an insurer will usually provide is 75%.

There are two ways to determine how much disability coverage you will need:

Determine your total amount of recurring monthly expenses and apply for that amount.
Determine how much money you make in a month and apply for 75% of that coverage.

Get the base model or upgrade?

There are several options that you can and should add to a DI policy.

Waiver of premium benefit – If you become disabled, the insurance policy’s premiums will be paid for by the insurance company.
Future purchase option benefits – If you are purchasing a DI policy at the beginning of your career you should look into a future purchase option. This option allows the insured to purchase additional monthly benefits on certain dates without provided any evidence of insurability.
Cost of living adjustment (COLA) – You can choose to have your monthly benefit increase with the Consumer Price Index (CPI) or you can have it increase at a fixed percent, for example, four percent per year. Some policies will allow you to switch back and forth between a fixed percent and the CPI options.
Return of premium – This is an excellent way to solve the problem that most people have with insurance. You pay a bunch of money to cover you in the event of a disability, but you might never suffer from one. With the return of premium option you will be eligible to receive a return of a percentage of your premiums at certain dates if you don’t make a claim. For example, my DI policy gives me back 50% of my premiums every seven years. If I get my premium back, I’ll use it to top off my investments.

Protect your most important asset

Disability insurance protects your most important asset, your ability to earn an income. If you are worried about the cost or that you’ll spend a lot of money you can solve those problems. A good DI policy is essential when you are building the foundation of your financial security plan.

Once you have life insurance and disability insurance, the next thing you need to look at is critical illness insurance. This will be the topic of tomorrow’s post.