The Most Important Insurance You Don’t Have

Updated: August 24, 2018 at 9:39 am

the most important insuranceThere’s a lot of insurances out there: health, homeowners, life insurance, etc. There’s so many, I am sure your eyes roll. As one of my clients said to me, “John, I don’t want to be insurance poor…” He’s right. No one has to. However, I bet there is one insurance you don’t have. I regard it as the most important insurance (after health insurance). Everyone needs it. I honestly can’t think of someone who would not. Even millionaires need it. What do you think it is? Dental insurance? No. Long-term care? Well, good answer, but that is not it. What? Pet insurance??? NO! Life insurance? You are close, but not quite. The most important insurance you don’t have (or enough of) is disability insurance. That is right. In this article, we discuss the truths and myths of disability insurance and why it is the most important insurance you don’t have.

What Is Disability Insurance?

Disability insurance is, simply, a policy that will pay you a percentage of your income upon a disability. It will give you money to pay for your mortgage, rent, groceries, medical bills, utilities, and so on when you have the inability to earn an income.

What did you say?

I said, ‘Thanks, John. I don’t plan on being disabled or in a wheelchair.’

Wow! No one does. But, how do you really know that?

(Crickets chirping…)

Be honest. You don’t. Even the healthiest person can end up in a wheelchair for various reasons.

But, as we will discuss later, the wheelchair isn’t the disability you need to worry about. This is a true and real stat: 90% of long-term disabilities are due to illnesses and sicknesses rather than injuries. That means cancer, heart disease, mental illness, and even drug abuse can and more often set you back than a car accident or an ACL tear.

Why You Need Disability Insurance?

Think of your assets. You have a house, right? Do you have things? You rent. You have a car. Likely, you have stuff. You have jewelry? Clothes? Do you like video games?

How do you buy all of this stuff?

With money, John. 

How do you get this money? It doesn’t come from the sky, right?

Ha. No, I work for the money so I can pay for these things. 

That is right. So, what would happen to your financial situation if yesterday was the last day you received your paycheck for 1.5 years? How would your family survive financially? (GoFundMe is not an option, let’s be serious now.)

(More crickets chirping…)

I really don’t know what I would do. I could tap into my retirement.

Really? You want to do that? Are you aware how much that will set you back when you do retire and need that money?

No.

Well, in our opinion, you are not unlike most people. We will go into the details next.

How Disability Insurance Stacks With Other Insurance

Most gainfully employed adults here in the United States understand they have 3 important insurances. They are:

(1) life insurance – to provide your family with a pot of money to live off from in case of your unexpected death

(2) property/casualty insurance  – in case of damage to your residence, to protect your belongings, and to protect your vehicle from damage or theft

(3) health insurance – to protect high medical bills in case of an illness or injury (we believe health insurance is the most important insurance. Remember, though, we are writing about the most important insurance you don’t have.)

Why do we carry these insurances, other than for state law?

Well, John, I want to protect my things. I don’t want anything to happen to my home or car. And, I want something left to my family in case I die so they don’t have to struggle financially. And, geez, if something bad happened and one of us needed to go to the hospital…

Illustrated, these 3 insurance look like the below. Let’s call everything around us “financial destruction”. Financial destruction happens at any time. Remember that. It is all around us, ready to strike when we aren’t looking or aren’t aware.

Do you see a problem with the below?

Financial Destruction – Illustrated

most important insurance you don't have

 

Yes, John. I see I am protected by health, life, and my homeowners/auto insurance. However, there is a piece of insurance I am missing which subjects me to financial destruction.

Do you know what that other piece of insurance is?

I would have to say disability insurance.

Yes, disability insurance, which will protect our income – everything we use to pay for our things: mortgage, utilities, food, vacations, and everything else.

Keep in mind that the probability of unexpectedly dying in a car accident is 1 in 102 (National Safety Council); the probability of your house burning down is 1 in 3,000 homes (National Fire Protection Association); and the probability of a car accident 1 claim every 18 years (Forbes, good driver). Yet, the probability of one of us developing a long-term disability in our working life is somewhere around 1 and 3 people.

And, a majority of us do not have adequate long-term disability insurance.

How do you know that, John?

We will discuss why disability insurance is the most important insurance you don’t have next.

No One Has Disability Insurance

Well, there are. There are people who do have disability insurance. However, there are many who do not and many who are not adequately covered. One website estimates that 50 million working Americans do not have adequate disability insurance. Or, in other words, 1 in 3 working Americans.

This is further underscored by the fact that between 2.0 million and 2.5 million Americans, or more, apply for social security disability benefits each year. Roughly 65% each year are denied benefits. I don’t know any other stat that furthers the case of people needing individual disability insurance. That isn’t some made up statistic. It is real people behind those unfortunate numbers. Just go on the social security website and you can read about social security disability applications and award percentages. Why would you put your faith in a program which, generally speaking, denies your application? Moreover, the average social security disability benefit is around $1,200 per month. While some coverage is better than none, do you still want to go through all of that?

Well, John, I have group employer coverage. That should help. Right?

While that is good. It is still likely not enough. Disability benefits from group coverage are taxable income. That means your benefit, in effect, is 30% to 50% of your gross monthly income. Can you live off of, say, 40% of your gross income? Likely not. Put it another way. You are comfortable with $3,500 of income every month. Now, it is reduced to $2,000. What will you do to make ends meet?

But, John, I heard that disability insurance is very expensive. I can’t afford it.

Look at the diagram above again. You understand why disability insurance is the most important insurance (you don’t have), right? Sometimes you have to make financial adjustments to protect the ones you love. Are your loved ones worth the extra protection? Only you can answer that.

Nevertheless, this is a good segue into the truths and myths of disability insurance.

Truths And Myths Of The Most Important Insurance – Disability Insurance

Let’s talk about the truths and myths of this important insurance. Once you realize and understand,  this insurance should be at the forefront of your next financial decision. We continually update this article with additional “truths” and “myths”.

Myth: Disability Insurance Is Expensive

We hear this a lot. Anything can be expensive. Disability insurance really isn’t one of them. Here is what drives your monthly premiums:

(1) your gender

(2) age

(3) occupation

(4) income

(5) health conditions

Females usually have a higher premium than males because of claim frequency (women have pregnancy risks, more susceptible to autoimmune disease are some of the reasons). As you age, premiums increase because predisposed to a greater chance of disability. Your occupation matters – those in a risky occupation such as carpentry will pay a higher premium than those working in an office. If you have a higher income, that is more to insure. Of course, if you have any significant health conditions, that could mean a higher premium.

While premiums may seem expensive, they usually cost about $0.50 to $5.00 per day. Maybe more depending on your situation. Considering that you are insuring your income (protecting your paycheck), that seems like a good deal to me?

Here is a question for you: do you buy coffee every day? Your lunch? Waste cable channels? I bet you have wasted expenses. All of these expenses are not as important as protecting your income and your family.

The moral of the story: there are many ways to pay for disability insurance. It is not expensive. The best time to purchase it is right now. As someone once told me, “if you feel it is important, you will find a way. If you don’t, you’ll find an excuse.”

Stop making excuses why you can’t afford disability insurance.

Myth: My Friend’s Carrier Never Paid, So They Won’t Pay!

If there is one myth we have heard over and over, it is the “I-have-heard-that-carriers-don’t-pay” myth. As we have said all along, the most important insurance you don’t have is disability insurance. These hearsay-type statements don’t hold water with us, considering many people don’t hold disability insurance at all.

Let’s examine closer, though. Certainly, there are cases when a carrier doesn’t pay. It could be an exclusion outlined in black-and-white on the contract. If you lie on an application, and the carrier finds out,  the carrier won’t pay. What you hear about carriers not paying may be from social security disability benefits (which may not pay if it feels you can work in any job). Or, maybe he has a policy with the “any” occupation definition rather than the desirable “own” occupation definition. Or, if your friend really didn’t receive a benefit, maybe it was from another type of policy. However, there is a reason for a carrier not paying.

Remember this: the carriers in the disability insurance industry would not exist if they did not pay. There would be so many formal complaints against them, their solvency and reputation would suffer. They would have the state insurance department on their back. Trust me – NO ONE wants that.

I am sorry to say this, but your friend could be wrong.

Myth: I’ll Just Invest My Money

That would be good…if you actually invest. What you may not know is that I am a CFP® Practioner, and I see the lack of emergency and retirement savings every day. Look in the mirror and be honest. Will you really invest the money? No, chances are very likely you won’t.

Even if you did, the results are poor.

Let’s say you do and you are 40, making $100,000 gross salary in a class 5 occupation, non-tobacco user. A 5 year benefit plan with a 90 day waiting period might cost $100 per month to insure $5,000 per month ($60,000 annually). Knowing a disability can happen anytime, how long do you think you can save $300,000 to equal your total disability benefit ($5,000 X 12 X 5)?

If you said 5 years, you are wrong.

Nope, not 10 years, either. And, no 15 is not the right answer.

The right answer is around 38 years! So, if you invested the $100 each month in the market which returned 8% each year, you would have your disability insurance fund somewhere around age 78!

Do you think the chances of a disability could occur before then? Yes, could happen according to the statistics.

With disability insurance, once you are covered, you are covered. You could have the policy for a year, get in a serious car accident, and the policy will pay.

Again, this is why disability insurance is the most important insurance. What happens if you are disabled? Would you tap into retirement savings? Put your home on the market? File for your state Medicaid? These are serious questions.

Truth: You Can Get Injured Doing Something Else And Still Get Paid

Yes, that is right. Let’s say you are working on a farm, and you injure your knee. Your regular occupation is a scientist. Even though you are working on a farm, you have 24/7 coverage. So, yes, if your knee injury is long-term, you will receive a disability benefit. How? You need the “own occupation” definition. If structured right, your disability payments are based on your occupation as a scientist, rather than a farmer.

Truth: You Can Receive Disability Benefits And Continue To Work

That is right. In order for this to happen, you need the “true” or “pure” own occupation definition. This will allow you to receive disability benefits based on your own occupation while receiving an income from another job. Need an example? Let’s say you are a nurse and developed a long-term problem in your wrists. You are on disability. You want to keep working and teach. With the true own occupation definition, you can do that. Without it, you can’t.

This article is an evolving article. We will continually update our truths and myths of disability insurance.

Conclusion

Hands down, disability insurance is likely the most important insurance you don’t have. Are you one of the 50 million working Americans without this important insurance? It’s time to protect your income and what you have worked so hard for. You would be surprised at how affordable disability insurance is. Don’t know what to do next? Contact us or use the form below. We work with many carriers, and as always, we work with your best interests first and foremost. That means if there is a better policy available than what we can offer, we tell you that and help you any way we can. We don’t need to promise that; it’s what we do.

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John

I am a CFP® Professional and have an MBA. I founded My Family Life Insurance to provide honest, trustworthy advice and economical insurance solutions to individuals, families, and business owners. Contact me if you have any questions. There is no risk! If I can't help you, you've learned a little more, and we'll part as friends. Seriously! Can your current agent say this?

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