Protecting Your Largest Asset

For a person in their 20s or 30s, their ability to earn an income is likely to be their largest asset.  While those in this demographic may not have much saved for retirement, they are likely to earn a significant amount of money during their remaining working years.  For example, a 30 year old earning $50,000 per year will make more than $3 million between ages 30 and 65 if their income increases by 3% per year.

One of the greatest problems that I see with my young financial planning clients is their failure to properly protect against a potential loss of these earnings. 

What Are the Chances?

Disability may seem very unlikely in one’s 20s and 30s but what do the numbers say?

  • Just over 1 in 4 of today’s 20 year-olds will become disabled at some point before they retire, according to a U.S. Social Security Administration fact sheet from 2007.
  • In December of 2012, the U.S. Social Security Administration reported that there were more than 2.5 million disabled workers in their 20s, 30s, and 40s receiving Social Security disability benefits.
  • 90% of disabilities are due to illness such as cancer or heart disease according to Low Load Insurance.

How You Can Protect Your Income

The best way to protect against potential loss of income due to disability is by purchasing disability insurance.  In the event that you are unable to perform your job due to sickness or injury, you can still receive an income if you have a disability insurance policy in place.  Some companies provide short and long term disability insurance to their employees, but even then, the policy is likely to cover only up to 60% of the pre disability income.  And if the employer pays for the premiums, then any disability benefits are likely to be taxable income to the employee.

The bottom line is, if you or your family rely on your income to meet living expenses, then I highly recommend that you have disability insurance.  

How to Figure Out if Your Income is Protected

The best way to figure out if you and your family are protected in the event of disability is to research the following:

  1. Calculate how much you’d need to live on each month if you were disabled and unable to work tomorrow.
  2. Find out if your work provides you with disability insurance and if so, what monthly after tax benefit the policy would provide.
  3. If the dollar amount in #1 is greater than that of #2, you may need more disability insurance.

Disability insurance is somewhat complex and can be difficult to understand.  If you think that you might need more disability insurance or have additional questions, please let me know.  I don’t sell disability insurance (or any insurance) but I can help you to assess your needs and determine if you have your largest asset properly protected.  I can also refer you to reputable companies who can help you get this insurance.  

Photo courtesy of Dean Hochman

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