Do You Have Insurance for Your Income?

I’ve recently mentioned disability insurance in a couple of posts, “Its a Scary Time of Year – Open Enrollment” and “Risk May Be Unavoidable, But It Doesn’t Have To Be Unmanageable“. However, its such an important topic that I thought it warranted digging into a little deeper.

Disability insurance provides income replacement if you are unable to work due to an accident or illness. It comes in two forms; short-term disability and long-term disability. Short-term disability insurance covers absenses of between 60 and 180 days and can pay as much as 80% of your gross salary. Long-term disability insurance picks up where short-term disability leaves off, and can provide benefits for years, depending on the policy and the nature of the disability. Long-term disability will typically replace about 60% of your salary. Many employers offer both forms of disability insurance. Often times employees will be automatically enrolled in short-term disability coverage, frequently at no cost to the employee. However, long-term disability insurance is generally a voluntary benefit, requiring the employee to pay for much of the premium, and many employees skip the coverage to save money. Less than one in three private sector workers is covered by long-term disability insurance.

In a survey, two thirds of respondents indicated that they would not be able to cover an unexpected expense of more than $500 with their current savings. That means that going without a paycheck for any extended time could be financially devastating to a family. Yet most people underestimate their chances of requiring an extended leave from work due to illness or injury. According to the Council for Disability Awareness, if you are an average 35 year old woman in good health and working in an office job, you have a one in four chance of becoming disabled for more than three months, and if that is you, you’ll have a 38% chance of being disabled for more than five years. For men, the chances of a disability lasting more than three months is one in five. You are more than twice as likely to have a disability than you are to file a claim against your homeowner’s insurance.

How will you pay your bills if this happens? Your rent or mortgage has to be paid on time every month. You need to heat your home and buy groceries. If you are like most Americans you have other outstanding debt like car loans and credit card balances that also need to be paid. If you are sick or injured for an extended time, you will have new medical bills to worry about as well. A Harvard Law School study found that nearly two thirds of bankruptcy cases were linked to medical causes. Forty percent of all individuals filing bankruptcy in the study had lost income due to illness or injury.

You may be thinking that you would be eligible for other support, such as workers compensation insurance or Social Security Disability Insurance. Only 5% of disabling illnesses or accidents are work related, which means that 95% would not be covered by workers compensation insurance. Social Security Disability Insurance, like the retirement benefit, is based on your average earnings. If you are our thirty five year old and making $60,000 per year, you could be eligible for as much as $1,800 per month, which is about one third of what you are currently making (the average benefit is $1,165). Will you be able to live on that much less income?

If long-term disability insurance isn’t available through your employer, you can buy an individual policy. You can expect to pay between 1% and 3% of your annual salary. If your employer offers the coverage it will likely cost less. Even at individual policy prices, the expense is well worth it given what you can expect to lose if you do become disabled. Your greatest asset is your ability to earn a living. Protect your family’s well being and insure your income from the disaster of a long-term disability.

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Risk May be Unavoidable, But It Doesn’t Have to be Unmanageable

Recently, Jeff and I had dinner with some friends, and the question “what is the biggest risk you’ve ever taken?” came up. As we went around the table, everyone told their stories. Jeff spent four years in Taiwan and China after college, in two separate trips, with the hope of making a living there. My friend had moved as a single mom with her young son back to Oregon with no job or prospects. When it was my turn, I really couldn’t think of anything.

I’ve always been the cautious type, and I’ve made decisions and changes methodically, always ensuring I had a safety net. I’ve never quit a job without having another to go to. I’ve never moved without being secure in a home and income. Heck, I rarely drive more than five miles per hour faster than the speed limit. Oh, I have risk in my investments. But even there, I only have money that I won’t need for ten years or more in risky stock mutual funds.

For some people, though, living a life fulfilled involves taking risks, and I admire these folks. Whether its following your passion, starting your own business or changing careers, risk is an unavoidable part of the picture. But that doesn’t mean you can’t mitigate the risks you face. All it takes is a little planning. Here are a few examples.

One of my friends is an avid cyclist. She does everything from 100 mile road races to cyclocross. It’s not uncommon for her to reach speeds exceeding 50 miles per hour on her bike. Of course she wears a helmet, but at these speeds, a small mishap could land her in the hospital facing a long period where she is unable to work. How can she mitigate the risk of not being able to work, potentially for months? Disability insurance. Many employers offer disability insurance to their employees, but many employees skip the coverage if they have to pay for it. The Bureau of Labor Statistics reports that at the end of 2014 only one third of workers participated in long term disability coverage. Your ability to earn an income is worth more than your car or home, which you don’t hesitate to insure. Employer sponsored disability insurance is inexpensive. No one should pass it up.

I have a few friends who are small business owners. Opening a small business comes with a whole host of risks. At the beginning there is usually at least a short term loss of income. Over time, income may increase but remain irregular, and of course there are many things that can cause a small business to fail. The Small Business Administration data indicates that only 55% of small businesses survive longer than five years. The business owners often don’t have the safety nets most of us are used to without an employer to offer a retirement plan or benefits. Here are some tips to mitigate these risks:

  1. Build up some savings before you open your business. This will allow you to avoid going into debt or at least reduce the amount, especially expensive credit card debt.
  2. Know your limits. Establish limits for how much debt you are willing to take on, how long you are willing to take losses and how much of your personal savings (or your family members’) you are willing to invest. Be disciplined about abiding by the limits, and have an exit strategy.
  3. Once your business starts to make money, have a plan for reinvesting in the business that takes into account taking care of yourself. No business can thrive without investment, but its important to provide for your eventual retirement and your family’s security with retirement savings and life insurance.

Similar advice applies to changing careers. Understand that you may have to take a step back in income to start in a new field, and prepare ahead of time by building up your savings. If you need additional education to make the switch, create a budget, and set money aside for this as well. If you have to take on debt for your education, take on as little as possible. Before you go into debt, set a limit and understand what your payments will be. Make sure your new career will allow you to meet these debt payments and your need to save for your long term financial security.

Risk is an inevitable part of life, and sometimes we have to take on extra risks to fulfill our dreams. But that doesn’t mean you have to work without a net. Patience and planning go a long way toward limiting the impact of risks that go against you.

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