How important is your income? Very important. Losing your income could lead to financial devastation. And we’re not talking about losing your income because you quit or were terminated from your job. What happens if you can’t work due to an illness or accident? Income allows you to pay for necessary everyday lifestyle expenses: housing, food, and transportation. It also pays for the fun things in life: going out to eat, travel, vacations, recreational activities, and hobbies. Income also funds retirement goals; as you save to accumulate wealth you can maintain your current lifestyle. Most people recognize their income is one of their most important assets, yet perceptions don’t match up with the risk. The Council for Disability Awareness (CDA) has done some great work to quantify these perceptions. To adequately assess whether or not you are prepared, ask yourself these three questions.
What is the likelihood of becoming disabled?
If you’re like most people, one in 100 is a popular guess. Statistics show the likelihood is higher with one in four experiencing a disability during their working years. The CDA and Social Security Administration (SSA) defines a disability as being unable to work for 90 days or longer. However averages show that once you haven’t been able to work, you’ll probably continue to be unable to work for several years. Recent data shows that one in eight of workers will experience a disability lasting at least five years.1
What causes disabilities during working years?
You may think a disability is caused by someone participating in a risky activity, having an accident, breaking bones, or becoming paralyzed. You are not alone with this thought—70% of workers believe an accident is the leading cause of disability. The actual rate of disability for accidents is about 10%, a fraction of what people imagine.
So, what does cause a majority of disabilities? Musculoskeletal and Connective Tissue disabilities—anything related to your back, spine, joints, and muscles—are the leading cause of disabilities at a ratio of three to one when compared to accidents. Other leading causes of disability include cancer, depression, anxiety, substance abuse (the latter three claims often fall under the mental disorders category), and issues related to your heart. With the exception of accidents, all these categories can effect even the most risk averse individual.
What is the value of my income and is it sufficiently covered?
Most workers agree that three major components of their life are health, income, and housing. When workers are asked what is most important to protect in their life, health, housing, and cars top their list. Less than one third of workers say protecting their income is important. It is commonly agreed that health is priceless and everyone acknowledges the importance of health insurance. For material possessions like our home or car, it’s easy to associate a value with the replacement cost.
Income value can be harder to quantify when evaluated in terms of an hourly wage, how much one is paid every two weeks, or an annual salary. The true value of an income is the cumulative future income stream you expect to earn until retirement. For example, if you are 35 and make $50,000 per year, the value of your future income is at least $1,500,000 assuming you work until age 65. If you make $100,000 per year, the value is at least $3,000,000. These numbers don’t include increases over time such as raises or bonuses.
These three questions may raise concerns, and they should. A financial plan that does not address income protection is an incomplete plan. The good news is many sources of disability insurance are available. Social Security disability may provide some benefits, but benefits are usually modest and qualification for benefits is difficult. Your employer may also provide or offer access to group coverage, as well as easily issued individual coverage with a few simple questions. There are many differences in the contracts and benefits these sources of income protection provide. An advisor can help analyze your income protection plan and address any gaps, ensuring that you’ll be prepared for whatever life throws at you and keep your financial goals on track.
1 Commissioner's Disability Insurance Tables A and C, assuming equal weights by gender and occupation class as cited by Council for Disability Awareness.