Disability Insurance

If you had a golden goose, would you insure the goose or the golden eggs? That is analogous to the many people who insure their homes, automobile, health and even their life, but fail to insure (or under insure) the thing that makes all those possible, namely their income.

For most people under 40 (and even for many into their 50s!), their most valuable asset is their potential earning power. A 35 year old earning $75,000/year has potential future earnings of $2,250,000, even if he never gets a raise! Barring an inheritance or lottery winnings, it is highly unlikely that by that age, he has amassed a net worth greater than his earning potential.

Viewed this way, there is no logical reason for not insuring this most valuable asset. If that's the case, why do so few individuals own disability income insurance? I can think of two primary reasons: 1) a majority of individuals cannot envision themselves suffering a disability, and 2) many corporate employees are covered under a group disability plan. Those actually aren't bad reasons, although upon closer inspection, they don't quite hold up.

When we are young (and our future earnings are at their highest), we are usually full of vim and vigor, and a disability is usually the farthest thing from our mind. Oh, we may see a colleague suffer a broken leg in a skiing accident, but nothing long-term. Unfortunately, statistics are not on our side. According to an article in Smart Money, a third of all Americans between the ages 35 and 65 will become disabled for more than 90 days, with one in seven workers being disabled for more than five years. So the reality doesn't match the perception when it comes to envisioning ourselves disabled.

As far as being covered under an employer's group plan, it's not that the coverage is worthless; any coverage is better than no coverage at all. The problem is that in many cases, especially for the higher wage earners, it doesn't provide sufficient coverage. Many plans have percentage caps as well as hard dollar caps.

Again, it just make sense to insure your most valuable asset. For a young professional just starting out, often with a significant student loan burden, this type of insurance should not be overlooked.

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