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With heavier debt burdens compared to even ten years ago and higher monthly debt obligations, people have started taking a closer look at two particular types of insurance: life insurance as well as disability insurance.
Both are considered necessary evils as far as protecting one's lifestyle and assets is concerned, but the concept of disability insurance is one that is often overlooked, so we want to look at this type here.
The reason why disability insurance is so important (in addition to the higher debt loads and servicing requirements) is that people are more than two times more likely to suffer a disability that will last between two years and two months to three years and sixmonths before they turn 45.
As one ages, the probability of disability versus death reduces, but even at 55, we are 33% more likely to suffer from a disability than we are to die.
Therefore, disability insurance should get considerably more of our attention than it does.
With these statistics in mind, individuals should sit down and look at the amount of insurance they need.
As we age, we will find that our disability and injury last longer than if we were younger.
For example, a 30 year old who suffers an injury at work will be disabled for two years and eight months, on average, versus a 45 year old who will need three years and eleven months to recover.
Planning for an average 3 years to 3.
5 years for disability coverage is ideal, although many programs will simply cover you up to a maximum as stipulated by their plan.
Since most disabilities are the result of work-related injuries disability, many employers endorse or offer insurance programs as part of a benefits package.
Since many disability insurance plans are based on a monthly income amount (e.
g.
your benefit is $x,xxx per month), the important calculation for the person seeking insurance is to determine how much of a shortfall they will suffer from should their income disappear.
In order to calculate what one's income needs are, an individual is best to complete a budget.
Here, they will use after-tax income on one side, and on the other, list all of their monthly obligations.
Unless someone is incurring debt every month, there should be a surplus, which allows for luxury items like dining out, entertainment, etc..
While some luxury items can be cut out in the event of a serious disability, many cannot, so keep that in mind.
Next, they will need to determine how much of a benefit they receive through their employer program in the event of an on-the-job injury that results in disability, if any.
Typically, using 60% of your income as a guestimate until you can confirm for certain is a safe bet.
Lastly, use this reduced amount (e.
g.
60% of $x,xxx monthly income) and use that to determine whether all of the monthly obligations that you previously listed will be covered.
If not, then you should seek disability insurance for the shortfall.
If so, then you do not need disability insurance.
Regardless, insurance is not something that individuals should use as a way to "get ahead" financially.
In fact, many insurers prohibit this and, realistically, the funds you exhaust on insurance as a "get ahead" tactic could be more tangibly used for savings or investments.
However, understanding the financial importance of insurance is a necessary evil, a part of life that individuals are getting better at acknowledging.
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