Protect Your Assets With Disability Insurance

Most of us think that our portfolio, home equity or business is our largest asset. But what about our ability to produce income?

Assume you and/or your business earns $200,000 per year:

The present value of making $200,000 a year for the next 5 years is $890,364. In other words, if you were given $890,364 today, and made 4.00% on that money, and withdrew $200,000 a year, you would run out of money in 5 years. So if you could not work for 5 years if you were disabled, the present value of that loss in earnings is $890,364. Please note that taxes are not taken into consideration here.

What if you become disabled to due an illness or accident, and could not earn any income for a considerable period of time? How does that affect your financial life? Could it wipe you out? Would you have to sell your home?

According to the American Council of Life Insurers, 1 in 3 Americans between the ages of 35-65 will be disabled for more than 90 days. 1 in 7 people will be disabled for more than 5 years. This is why disability insurance is usually more expensive than life insurance.

When applying for disability insurance, here is what you should keep in mind:

• Apply for a benefit that covers at least 60-70% of your income.

• What is the insurance company's definition of disability? Would they pay a claim if you could flip burgers but could not perform your job?

• If your employer pays the disability premiums for you, then the benefit will be taxable. If you use after tax dollars to pay the premiums, then the benefit will be tax free.

• Make sure your policy is non-cancellable and guaranteed renewable. This means your benefits will not change, and that the insurer can not raise your premiums.

• If you have short term disability at work, make sure the elimination period on your long term disability period is at least the same amount of days as your total period on short term disability

• If your employer offers a policy that replaces 60% of your income, that may not be enough to cover your living expenses. You may need to buy a supplemental disability policy.

• If you sign up for disability through your employer under the group plan, that policy may not be portable if your employment terminates. You would then have to buy a new policy and may not qualify for it.

• Make sure there is a cost of living adjustment

• Most benefit periods range from 2 years, 5 years, or to age 65