Oct 27, 201510:55 AMFinancial Perspectives
with Michael Dubis, CFP
Protecting your human capital
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In July, I wrote a piece on how you might want to think about calculating and acquiring life insurance. If you’re married and/or have children, it is absolutely necessary to address this risk. There’s an even bigger risk to anyone who’s working that quite frankly has a higher probability of happening and doesn’t matter if you are married or not: getting disabled, whether temporarily or permanently.
Unless you’re already financially independent, your human capital, or your ability to earn an income, is likely your primary resource to achieve financial independence while also maintaining your current lifestyle. Yet for the most part almost every client or prospective client I’ve ever worked with has come in underinsured for the possibility of getting disabled. It’s one of the first things we address in their financial plan.
A disability can range from something like being laid up for a few weeks with a partially broken bone to a very serious diagnosis like cancer, which comes with treatment and a possible lifetime of never returning to “normal” — subsequently meaning you may be “permanently” disabled. I’ve worked with clients who’ve unfortunately experienced both. I can assure you in both cases “normal” simply doesn’t return and without the insurance they already had in place, things would be radically different. Without disability insurance, it’s entirely likely you’re financial life will be fundamentally altered. Even with disability insurance, your life will change if you do experience a long-term disability, but at least part of your financial picture will be hedged.
The basics: disability insurance generally replaces only part of your income for your working life. It is not in the interest of an insurance company to pay you 100% of your previous earnings if you get disabled. You can see the disincentive to go back to work. It’s likely you can get 60% to 70% of your earnings.
Most folks get disability insurance through work and there’s also some disability benefits provided through Social Security if your work record is long enough, although it’s very common for your disability insurance to be lowered by whatever amount of Social Security benefits you may be entitled to.