What’s your most valuable asset? Your 401(k)? Your home? Guess again.
While these two assets typically dominate most Millennials’ assets section on a net worth statement, there is an asset that is more valuable than both–your income. Without your income, there is no 401(k) and no home; your income provides for your family, allows you to save for the future, and enjoy life today. An asset this valuable should be protected, wouldn’t you agree? From what? I’m glad you asked.
Long term disability.
According to the Social Security Administration, Millennials have a 1-in-4 chance of becoming disabled before retirement: 1-in-41. Despite these odds, many Millennials do not have protection for their income from disability. I have some theories why this the case. First, the younger we are, the more invincible we feel–we are immune to accidents and disease. Why pay for protection from something that won’t happen? Second, life experience hasn’t shown many Millennials the devastating impact of a disability first hand. Witnessing a family member, or co-worker struggle because of a disability will often prompt action to be taken, but without it, the risk remains unaddressed. Third, it’s an additional expense. With many Millennials saddled with student loan debt, the thought of another expense prevents the addition of protection; it might be time to re-evaluate priorities to find room in the budget. And finally, no one is talking to Millennials about it. Hopefully, I can do my part to address my final theory, and this post will prompt a dialogue about disability insurance and how it fits into your financial plan.
If you are working, regardless of age, the impact of disability should be discussed and addressed when it comes to your financial plan. Single income households, households supporting children, individuals with specialized careers, and high-income households should make it a priority.
Let’s take a look at a few statistics regarding disability:
- Illnesses, not accidents, are responsible for nearly 90% of disability cases2.
- The average long term disability claim lasts nearly two and a half years3.
- 1-in-8 will become disabled for more than five years4.
- Less than 5% of disability claims result from a workplace accident, which means Workers’ Compensation is not an option.2
Next, let’s look at the main options for addressing loss of income due to disability.
1.) Social Security Disability Insurance: Don’t plan on SSDI coming to save the day. 70% of initial Social Security Disability Insurance claims are denied, and if you are able to collect SSDI, the average monthly benefit is $1,1462. As you can see, the benefit from Social Security is not enough to provide for a family, and most likely is a fraction of the income earner prior to disability.
2.) Employer Group Long Term Disability Insurance: Some employers offer a long term disability policy as a benefit, or elective for employees. This option will most likely be your cheapest option, but it may not be the best. With an employer sponsored plan, the definition of disability may be restrictive, and you could find yourself in a position where the disability prevents you from doing your job, but the policy will not pay because you are still able to work in another position. If the alternate position does not have the same income, there can still be a financial struggle without any assistance. Another disadvantage of an employer plan is the coverage is tied to the employer. Typically, termination of employment results in termination of the insurance. And, a final consideration is the taxation of benefits through an employer long term disability plan; if the employer pays all, or part of the premiums, all or part of the benefit is taxable to you–talk to you tax professional.
3.) Personal Long Term Disability Insurance: With a personal long term disability insurance policy you are in control. When selecting the a policy, you are able to choose the options you want and customize the policy to fit your needs. Control comes with a cost though; depending on the customization, the policy will vary in expense. This is where your financial advisor can help you determine the best options and weigh the benefits with the costs. Unlike an employer sponsored plan, if you have your own policy, you don’t lose it if you change jobs. It’s with you as long as you are paying your premiums. Finally, since you are paying the premiums with after tax dollars, the benefits are tax-free if you need to collect the benefit. Personally, I favor a personal long term disability insurance policy because I like control. I like to dictate the terms of my policy and know that I will have the policy as long as I feel it is needed.
There are a number of factors to be considered on whether, or not disability insurance is needed in your financial plan. Your financial advisor should be able to help you analyze your need, the best options for protection, and get you in touch with an insurance agent who can help you select the best plan.
Sources:
- Social Security Disability Factsheet, March 2016
- Council for Disability Awareness, Long-Term Disability Claims Review, 2014
- Gen Re, U.S. Individual DI Risk Management Survey 2011, based on claims closed in 2010
- Commissioner’s Disability Insurance Tables A and C, assuming equal weights by gender and occupation class
Disclaimer: I do not sell long term disability insurance. As a fee-only advisor, I don’t sell any products. But, as a part of the financial planning process, I do review clients needs for long term disability.
Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.
