Let me play out a scenario for you. You’re a 34-year-old registered nurse, working long hours helping patients in a local hospital. You go home to your husband and two kids, cook dinner, give baths, and play hide and seek. One morning you step wrong getting out of bed. Your foot is throbbing, but you get to work on time. You struggle through the day and decide to see your doctor. The ligament in your foot is completely torn. You must stay off it, but your job requires you to be on your feet. Now what? You stay home.
Fast forward eight weeks. Your foot is slowly healing, but there isn’t enough progress. Six months… nine months… you get the picture. You can’t work, and therefore, you aren’t earning an income. If this were you, what would happen? Would be able to pay your bills, or buy groceries? What about saving for retirement or a vacation? Would those things have to stop?
The thing is, that was not a hypothetical situation. It happened to my client. Thankfully, we had planned for that possibility and had made sure she had an adequate cash reserve and an individual disability policy, as her employer did not provide one. She called me 90 days into her nightmare, ready to use her benefits. In fact, her insurance policy paid her for 2 years after paying premiums for only five months.
Unfortunately, this is not always how it happens. Often people are unprepared for these unforeseen things. They decline the disability through work and don’t have enough in their savings account. Their savings disappears under the weight of daily living expenses and they must dip into retirement savings, or worse, go into debt or filing bankruptcy. The thing is, no one thinks of themselves as someone who could be “disabled.” That term doesn’t feel accurate, or maybe you don’t think it’s a possibility since you don’t work on your feet. Many people mistakenly think becoming disabled is something that happens to older people, not them. Yet younger people are more likely to be in the situation I described above than to die young. Approximately 30% of people age 35 to 65 will suffer a disability of at least 90 days. A 35-year-old person earning $50,000 has $1,500,000 or more in earning potential that could easily be lost in such a scenario. Making sure you adequately address that risk in your financial plan is critical.
- Review your budget for discretionary items, things you can stop doing or delay if put in this situation.
- Review your cash reserves. Ideally, you should have at least three to six months of your required expenses saved.
- Review employer benefits. If available, elect short-term and long-term disability insurance options as this is the most cost-effective way of getting coverage.
- Make sure all sources of income are covered under your disability policies. Some policies cover only base salary or limit the monthly benefit and do not cover bonuses or stock options. If you have a gap between coverage and your needs, investigate an individual policy.
- Consider diversifying your income sources to mitigate the risk associated with losing earned income, like owning a rental property or having your investment portfolio earn for you.
As wealth advisors, we plan for the worst-case scenario, best-case scenario and everything in between. We want you to feel confident that your plan can withstand any curveball life throws at it. Let us know if you need help determining the right amount of disability insurance for your situation.