Protecting your human capital

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.

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It is best to first find out what you can get at work. In my experience, most work-provided plans are very basic in definition and coverage levels. Also, many policies provided by your employer are paid by your employer, which on the surface sounds great but if you ever collect benefits they will likely be taxed as income. This is unfortunate because when writing coverage for your needs, you have to include your group insurance plans first. If the group plan lacks good protection, you simply are stuck with that plan no matter what your needs are and you are able to only “gap” any disability insurance needs above and beyond your group plans.

The “gap” coverage, though, is critical because if you can get it, it almost always offers a better policy structure than what you could get at work (assuming you are insurable). It usually includes better definitions for collecting benefits, offers the ability to take that plan with you if you lose or quit your job, and the sooner you get disability insurance, the less risk you face of becoming uninsurable as you age, while premiums generally are lowest the younger and healthier you are at application. Furthermore, assuming you pay for the insurance out of pocket, if you ever collect benefits, those benefits will be collected income tax free.

Subsequently, if you are working — no matter what your stage or age is — talk with a financial planner about appropriate disability insurance coverage. And don’t overcomplicate this. In my opinion, you simply want to obtain the most disability insurance coverage you can possibly get relative to your occupation and risks. A good planner and/or insurance agent should be able to take it from there.

As I mentioned in my life insurance article, I don’t have a dog in this fight. I don’t sell insurance and have no agency interests (i.e., commissions). It’s a big risk that I simply think everyone needs to address. A good planner can prescribe your needs and a good insurance agent can fill it. Finding both is hard, but together they can serve you as a good team.

So, get that disability insurance in place. All the good long-term planning and investment strategy design means nothing if tomorrow you get disabled and can’t ever work again.

MICHAEL DUBIS is a fee-only CERTIFIED FINANCIAL PLANNER™ and president of Michael A. Dubis Financial Planning, LLC. He also previously served as part-time lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

Disclaimers: This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s.

Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.

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